Supreme Court Reserves Verdict On Kotak AMC Plea Against SAT Ruling On Essel Group-Linked Mutual Fund Investments

The Supreme Court on Thursday reserved its verdict on appeals challenging a Securities Appellate Tribunal ruling that upheld findings of regulatory violations against Kotak Mahindra Asset Management Company in Essel Group-linked mutual fund investments while setting aside disgorgement ordered by SEBI.

A bench of Justices Dipankar Datta and Satish Chandra Sharma reserved the judgment after hearing the parties.

SAT in its order held that Kotak AMC failed to adequately assess the financial strength of the Essel Group issuer entities and instead relied largely on pledged shares of Zee Entertainment Enterprises Ltd. as collateral, which proved insufficient after the price crash.

It found that the AMC did not exercise the due diligence expected of a professional fund manager, thereby upholding regulatory violations, while noting SEBI's case that there was improper risk assessment and failure to safeguard investor interests. However, it set aside disgorgement on the ground that no wrongful gain was established.

Appearing for Kotak AMC, Senior Advocate Mukul Rohatgi, at the outset, submitted that the extension of maturity of Kotak's close ended debt schemes beyond April and May 2019 was a bona fide decision taken in investors' best interests, as an immediate redemption would have led to significant losses due to the fall in value of Zee group securities.

He also submitted that investors suffered no loss and, in fact, earned higher returns (around 9.9% annually) and that the action was protected under SEBI regulations permitting decisions taken with due diligence and in good faith, despite the technical requirement of redemption at maturity.

Senior Advocate Shyam Diwan, appearing for Kotak Trusteeship, submitted and argued that the appeal under Section 15Z of the SEBI Act raises substantial questions of law, particularly whether a technical breach of SEBI Mutual Fund Regulations can be found when investors suffered no loss and instead earned higher returns.

He submitted that regulations must be read harmoniously, while a close-ended scheme “shall be fully redeemed” at maturity, trustees and AMCs are also bound to act with due diligence and in the best interest of unit holders. A short delay of less than six months, which resulted in higher realisation, falls within this duty and reflects a bona fide, industry-consistent decision taken at the board level.

He further argued that trustees are protected under regulation for acts done in good faith, and that imposing penalties, particularly on individual employees, is unsustainable in the absence of any mala fide intent, personal gain, or independent wrongdoing, especially when the decision was collective.

On the other hand, appearing for SEBI, ASG Venkatraman submitted, appearing for the Securities and Exchange Board of India, it was argued that the penalty under Sections 15D(b) and 15HB of the SEBI Act is triggered once a regulatory breach is established, irrespective of investor loss or gain. Disgorgement under Section 11B is separate (and already set aside), but that does not affect liability for contravention.

Relying on precedent, it was submitted that mens rea and absence of loss are irrelevant; failure to comply with Regulation 33(4) (full redemption at maturity), along with non-disclosure to SEBI and investors, constitutes a clear violation.