The Supreme Court has held that a violation of the SEBI (Mutual Funds) Regulations, 1996 cannot be justified on the ground that the breach ultimately benefited investors or that no complaint was received, dismissing appeals filed by Kotak Mahindra Asset Management Company, Kotak Mahindra Trustee Company, and the fund’s senior executives against penalties imposed by SEBI over the 2019 Fixed Maturity Plan (FMP) crisis linked to the Essel Group/Zee Entertainment default.

Fact

Six close-ended FMP schemes of Kotak Mahindra Mutual Fund had invested ₹266 crore in Zero Coupon Non-Convertible Debentures (ZCNCDs) issued by two Essel Group companies, secured by a pledge of Zee Entertainment shares. When the share cover fell below the required threshold following Zee’s disclosure of a stake sale, Kotak AMC, instead of enforcing the pledge, agreed to a bilateral restructuring extending the ZCNCDs’ maturity beyond the schemes’ own maturity dates — without obtaining unitholder or SEBI approval. Consequently, on maturity, a part of the redemption amount (₹376 crore of ₹2116 crore payable) was withheld for several months. SEBI’s Whole Time Member and Adjudicating Officer imposed penalties under Sections 15D(b) and 15HB of the SEBI Act, 1992, which were substantially upheld by the Securities Appellate Tribunal.

Legal Observations

The Bench of Justices Dipankar Datta and Satish Chandra Sharma clarified the scope of appellate jurisdiction under Section 15Z of the SEBI Act, holding that the Court cannot sit in judgment over the commercial wisdom of a bona fide business decision, and interference is warranted only where findings are manifestly perverse.

Relying on Chairman, SEBI v. Shriram Mutual Fund (2006) 5 SCC 361, the Court reiterated that penalty under Sections 15D(b) and 15E follows automatically once a statutory breach is established, and mens rea is irrelevant unless the statute expressly requires it.

On the core issue, the Court examined Regulation 33(4) of the 1996 Regulations, which mandates that a close-ended scheme “shall be fully redeemed at the end of the maturity period,” permitting roll-over only where unitholders’ written consent is obtained and disclosures are filed with SEBI — none of which occurred here. Read with Regulation 39 on winding up, the Court held the breach was “brazen and indefensible.”
Rejecting the argument that unwinding would have caused greater investor loss, the Court held that the 1996 Regulations are consequence-neutral: they draw no distinction between a breach causing loss and one fortuitously resulting in gain, since excusing profitable breaches would only “incentivize the next breach.” The Court also invoked Regulation 25(16) read with the Fifth Schedule on due diligence, upholding findings that the Investment Committee had failed to assess credit, liquidity, and interest-rate risk before investing.

Conduct and Costs

Expressing displeasure at selective non-disclosure of Investment Committee notes and an “incomplete and inaccurate” extract of Regulation 33 tendered during arguments, the Court imposed costs of ₹30 lakh on Kotak AMC and ₹20 lakh on Kotak Trustee, directing the amounts be distributed among accredited charitable organisations.


Case Title: Mr. Nilesh Shah & Ors. v. Securities and Exchange Board of India & Anr (2026 INSC 681)