Nilesh Shah v. SEBI
“Profit Is No Defence to a Regulatory Breach: Supreme Court Upholds SEBI Action Against Kotak Mutual Fund Over Essel Group FMP Investments”
TL;DR
The Supreme Court dismissed the appeals of Kotak Mahindra Asset Management Company, Kotak Mahindra Trustee Company and six of its senior executives, including Nilesh Shah, against the Securities Appellate Tribunal's order upholding SEBI's action over six Kotak close-ended Fixed Maturity Plans. Kotak had invested Rs. 266 crore in zero coupon debentures of Essel group companies, backed by a pledge of Zee Entertainment shares. When the share cover fell, it agreed to extend the debentures' maturity beyond the schemes' maturity dates instead of enforcing the pledge, and withheld part of the redemption money from unitholders. The Court held that Regulation 33(4) read with Regulation 39 of the SEBI (Mutual Funds) Regulations, 1996 required close-ended schemes to be fully redeemed on maturity unless validly rolled over, and that lack of due diligence, the extension and inadequate disclosure were established. It ruled that the absence of investor loss, or even investor gain, is no defence, since the regulatory scheme is consequence-neutral. Penalties on the Trustee Company and the executives were left undisturbed, and costs of Rs. 30 lakh and Rs. 20 lakh were imposed on the AMC and the Trustee respectively.
The Bottom Line
A mutual fund manager cannot break the rules and then say investors did not lose money. The Supreme Court held that a close-ended scheme has to be paid out on its maturity date unless it is properly rolled over with disclosure to unitholders and SEBI. Kotak did neither, so the penalties stand. The Court said that excusing a breach because it led to profit invites the next breach, and that compliance is mandatory even if following the law might have caused a loss.
Case Timeline
The journey from FIR to Supreme Court verdict
ZEEL Announces Intent to Divest 50% Stake
ZEEL publicly disclosed its intent to divest 50% of its shareholding. Along with invocation of pledges by other lenders, this reduced the share price and pushed the security cover below 1.5 times.
ZEEL Announces Intent to Divest 50% Stake
ZEEL publicly disclosed its intent to divest 50% of its shareholding. Along with invocation of pledges by other lenders, this reduced the share price and pushed the security cover below 1.5 times.
Debenture Trustee Issues Top-Up Notices
The debenture trustee asked Konti, Edison and Cyquator to create additional security or deposit money to restore the 1.5 times cover. This was not done.
Debenture Trustee Issues Top-Up Notices
The debenture trustee asked Konti, Edison and Cyquator to create additional security or deposit money to restore the 1.5 times cover. This was not done.
Lenders Meeting; Promoters Seek Moratorium
ZEEL promoters told lenders, including Kotak MF representatives, that they would not provide more shares or money and asked for a moratorium.
Lenders Meeting; Promoters Seek Moratorium
ZEEL promoters told lenders, including Kotak MF representatives, that they would not provide more shares or money and asked for a moratorium.
Kotak Trustee Informed and Concurs
Kotak AMC informed Kotak Trustee of the decision to restructure rather than sell the pledged shares. The Trustee concurred and advised obtaining a personal guarantee from the promoter.
Kotak Trustee Informed and Concurs
Kotak AMC informed Kotak Trustee of the decision to restructure rather than sell the pledged shares. The Trustee concurred and advised obtaining a personal guarantee from the promoter.
Multilateral Agreements and Guarantees Signed
Kotak AMC, Konti, Edison, Cyquator and a ZEEL promoter entered into multilateral agreements and deeds of guarantee.
Multilateral Agreements and Guarantees Signed
Kotak AMC, Konti, Edison, Cyquator and a ZEEL promoter entered into multilateral agreements and deeds of guarantee.
First Schemes Mature; Part of Money Withheld
FMP Series 127 matured on 8 April and FMP Series 183 on 10 April 2019. Part of the amount invested in Konti and Edison was withheld from unitholders.
First Schemes Mature; Part of Money Withheld
FMP Series 127 matured on 8 April and FMP Series 183 on 10 April 2019. Part of the amount invested in Konti and Edison was withheld from unitholders.
SEBI Seeks Explanation
SEBI wrote to Kotak AMC asking how the first two schemes were wound up. Kotak AMC replied on 12 April 2019 denying any violation.
SEBI Seeks Explanation
SEBI wrote to Kotak AMC asking how the first two schemes were wound up. Kotak AMC replied on 12 April 2019 denying any violation.
Show Cause Notice Issued
SEBI issued a show cause notice to Kotak AMC under Sections 11(1) and 11B of the SEBI Act; further notices followed, including to Kotak Trustee and senior executives.
Show Cause Notice Issued
SEBI issued a show cause notice to Kotak AMC under Sections 11(1) and 11B of the SEBI Act; further notices followed, including to Kotak Trustee and senior executives.
All Monies Paid to Unitholders
The remaining amounts concerning the six schemes were paid to unitholders.
All Monies Paid to Unitholders
The remaining amounts concerning the six schemes were paid to unitholders.
SEBI Whole Time Member Order
Directed refund of part of fees with 15% simple interest, imposed Rs. 50 lakh penalty on Kotak AMC and barred it from launching new FMP schemes for six months.
SEBI Whole Time Member Order
Directed refund of part of fees with 15% simple interest, imposed Rs. 50 lakh penalty on Kotak AMC and barred it from launching new FMP schemes for six months.
Adjudicating Officer Order
Imposed penalties on Kotak Trustee and six senior executives under Section 15HB (and 15D(b) for the Trustee).
Adjudicating Officer Order
Imposed penalties on Kotak Trustee and six senior executives under Section 15HB (and 15D(b) for the Trustee).
Securities Appellate Tribunal Order
The Tribunal set aside only the fee disgorgement direction against Kotak AMC and dismissed the Trustee and executives' appeal.
Securities Appellate Tribunal Order
The Tribunal set aside only the fee disgorgement direction against Kotak AMC and dismissed the Trustee and executives' appeal.
Supreme Court Dismisses Appeals
The Supreme Court dismissed all three appeals and imposed costs of Rs. 30 lakh on Kotak AMC and Rs. 20 lakh on Kotak Trustee.
Supreme Court Dismisses Appeals
The Supreme Court dismissed all three appeals and imposed costs of Rs. 30 lakh on Kotak AMC and Rs. 20 lakh on Kotak Trustee.
The Story
Kotak Mahindra Mutual Fund was sponsored by Kotak Mahindra Bank Limited. Its funds were held by Kotak Mahindra Trustee Company Limited (Kotak Trustee) in a fiduciary capacity, and Kotak Mahindra Asset Management Company Limited (Kotak AMC), a wholly owned subsidiary of the Bank, managed them. Between 2013 and 2016 the fund launched six close-ended schemes (FMP Series 127, 183, 187, 189, 193 and 194) which were to mature between 8 April 2019 and 15 May 2019. Under the 1996 Regulations the schemes had to be wound up at the end of the maturity period, and the AMC was to invest only in securities maturing on or before the scheme's maturity date.
Of Rs. 1,625 crore collected, Rs. 266 crore was invested in zero coupon non-convertible debentures (ZCNCDs) issued by Konti Infrapower & Multiventures Private Limited and Edison Utility Works Private Limited, part of the Essel group. The investments were backed by a pledge of 22.8% of the shares of Zee Entertainment Enterprises Limited (ZEEL) owned by Cyquator Media Services Private Limited, to the extent of 1.5 times the exposure, with a top-up obligation if the cover fell. The ZCNCDs were to mature on 8 April 2019, the maturity date of one scheme and earlier than the other five.
On 13 November 2018 ZEEL announced its intent to divest 50% of its shareholding. Together with invocation of pledges by other lenders, this reduced the share value and the security cover fell below 1.5 times. The debenture trustee issued notices on 25 January 2019 asking for additional security or money, which was not provided. At a meeting on 26 January 2019, in which Kotak representatives took part, the ZEEL promoters declined to provide more shares or money and sought a moratorium. Kotak AMC says it had two options, to sell the pledged shares or to agree with other lenders to restructure the redemption of the ZCNCDs, and chose the latter. Kotak Trustee was informed on 28 January 2019, concurred, and advised obtaining a personal guarantee from the promoter. On 5 April 2019 Kotak AMC emailed unitholders (these emails are not on record). On 6 April 2019 it entered into multilateral agreements and deeds of guarantee with the Essel entities and a promoter of ZEEL.
When the first two schemes matured on 8 and 10 April 2019, a part of the money (about 10 to 21%) invested in the two issuers was withheld; the same happened as the remaining four schemes matured. About Rs. 376 crore was paid after the maturity dates out of roughly Rs. 2,116 crore payable. SEBI wrote to Kotak AMC on 11 April 2019 and received a reply on 12 April 2019 denying any violation. SEBI issued a show cause notice on 10 May 2019, followed by supplementary notices, to Kotak AMC, Kotak Trustee and the senior executives. All monies were paid to unitholders by 25 September 2019.
By order dated 27 August 2021 the SEBI Whole Time Member directed Kotak AMC to refund a part of the fees collected with 15% simple interest, imposed a penalty of Rs. 50 lakh under Sections 15D(b) and 15HB, and barred it from launching new FMP schemes for six months. By order dated 30 June 2022 the Adjudicating Officer imposed penalties on Kotak Trustee (Rs. 40 lakh) and on the senior executives Nilesh Shah (Rs. 30 lakh), Lakshmi Iyer (Rs. 25 lakh), Deepak Agarwal (Rs. 20 lakh), Jolly Bhatt (Rs. 10 lakh), Abhishek Bisen (Rs. 15 lakh) and Gaurang Shah (Rs. 20 lakh). By a common order dated 6 March 2026, the Securities Appellate Tribunal set aside only the fee disgorgement direction (para 127.1) and dismissed the Trustee and executives' appeal. The appellants then came to the Supreme Court under Section 15Z of the SEBI Act, 1992.
Legal Issues
Click each question to reveal the Supreme Court's answer
Arguments
The battle of arguments before the Supreme Court
Petitioner
Vihaan Kumar
No loss to investors; actions bona fide and beneficial
The appellants proposed the question whether there could be any breach of the 1996 Regulations where the actions caused no loss or harm to investors, resulted in gain to them, were bona fide with no monetary gain to the appellants, and where taking the steps SEBI postulated would have caused loss in the range of Rs. 376.05 crore. Kotak AMC submitted that no unitholder complained.
Due diligence was based on collateral and group reputation
Kotak AMC argued that the ZCNCDs were structured obligations, so it did not give weight to the cash flow statements and invested on the basis of the Essel group's reputation, its repayment history and the strength of the ZEEL share collateral. It added that 22 other persons, including 8 other mutual funds, had invested in the group.
SEBI singled out Kotak; the 2018 segregated portfolio circular saves the action
The appellants said SEBI acted arbitrarily by singling out Kotak AMC when other funds had also invested in Essel securities. In the written submissions before the Supreme Court Kotak AMC also relied on the SEBI circular dated 28 December 2018 permitting segregated portfolios, saying the partial redemption was saved by it.
Senior executives sought waiver of penalty
Counsel for Kotak Trustee and the senior executives argued that although a beneficial outcome cannot justify a regulatory infraction, absence of investor prejudice should be treated as a mitigating factor for waiving the penalty on the executives.
Respondent
State of Haryana
Breach of the close-ended scheme maturity regime
SEBI, through the Additional Solicitor General, defended the orders: the allegations were lack of due diligence in investing in Essel group companies, extension of maturity dates of the ZCNCDs, and inadequate disclosures to investors and to SEBI. Regulation 33(4) read with Regulation 39 required full redemption at maturity unless the scheme was rolled over with disclosure and unitholder consent.
Penalty follows breach irrespective of intent or outcome
SEBI relied on the settled position that penalty under the SEBI Act follows once contravention is established, without need to prove mens rea or investor loss, and that the Tribunal's concurrent findings called for no interference in an appeal limited to substantial questions of law.
Court's Analysis
How the Court reasoned its decision
The Court began by limiting its role: under Section 15Z of the SEBI Act it answers only substantial questions of law and does not pronounce on the economics of the securities market. Relying on Chairman, SEBI v. Shriram Mutual Fund, it reiterated that penalty follows as soon as contravention is established and that intention is irrelevant, so the only defence is to show that no breach occurred or that the Tribunal's finding is manifestly perverse. It then took up SEBI's three allegations. On due diligence, the Whole Time Member had found that the Investment Committee's approval note suggested it did not know the issuers, that no credit, liquidity or interest rate risk analysis was done, that the issuers had alarming consistent losses, and that the later circular of 1 October 2019 mandating 4 times cover was not complied with; these findings were unchallenged and the expert regulator's reasoning deserved deference. On the extension of maturity, the Court read Regulation 33(4) and Regulation 39: a close-ended scheme must be fully redeemed at maturity unless rolled over after disclosure to unitholders and filing with SEBI, and with written consent of unitholders. No roll over was notified, so there was none. The pleas that other funds also invested in Essel, that investors suffered no loss and in fact gained, and that following the rules would have caused a loss of Rs. 376.05 crore were each rejected: negative equality cannot be claimed, a breach resulting in profit is still a breach because excusing it incentivises the next, and investors who invest despite the statutory risk disclaimer do so at their own risk, so committing a breach to protect them has no legal justification. The reliance on the segregated portfolio circular of 28 December 2018 was found inconsistent with Kotak AMC's earlier stand and unsupported by the Scheme Information Documents and the procedure. On disclosure, SEBI was informed only on 12 April 2019 after being asked, unitholders had no choice, and the Trustee had abdicated its independent fiduciary assessment. The Court also criticised the non-production of Investment Committee notes that had been before the Tribunal and a one-page note tendered at the Bar that omitted the two provisos to Regulation 33(4). It found the senior executives, as domain experts, undeserving of relief, dismissed all appeals and imposed costs.
the statutory scheme is consequence-neutral and the regulatory regime has been designed to enforce compliance, irrespective of the outcome.
Para 7
Sets the basis of the ruling: regulatory liability does not depend on whether investors gained or lost.
The focus should, therefore, have been on diligence, not dividends.
Para 18
Summarises the due diligence finding under Regulation 25(16) and the Fifth Schedule.
Illegality is not cured by numbers; a collective wrong remains illegal, regardless of majority.
Para 28
Rejects the argument that SEBI singled out Kotak when other funds had invested in the Essel group.
Market integrity being the paramount consideration, profit or loss to investors is immaterial to determine whether a regulatory infraction has occurred.
Para 32
Core holding that gain to investors is not a shield against penalty.
Compliance with the regulatory mechanism being mandatory and non-negotiable, it is no valid defence that compliance with law would have resulted in loss.
Para 34
Rejects the plea that the breach was committed to avoid loss to investors.
As the trustee company holding the funds of unitholders in a fiduciary capacity, KOTAK TRUSTEE was bound to independently assess whether the course was, first, in adherence with the extant regulations, and secondly, whether the course was in the interest of the unitholders.
Para 41
Defines the independent fiduciary duty of a mutual fund trustee company.
MANDATE FIRST, GAINS LATER; SEBI COMPLIANCE, NEVER FALTER.
Para 57
The Court's closing warning to managers of asset management companies.
The Verdict
Relief Granted
No relief was granted to the appellants. The Tribunal's setting aside of the fee disgorgement direction (para 127.1 of the Whole Time Member's order) was not disturbed by the Supreme Court in this judgment, and the remaining penalties and restrictions stood. The appellants were additionally saddled with costs payable to charitable organisations.
Directions Issued
- The appeals of Kotak AMC, Kotak Trustee and the Senior Executives were dismissed
- The penalties imposed on Kotak AMC and Kotak Trustee called for no interference, nor did the penalties on the Senior Executives
- Kotak AMC to bear costs of Rs. 30 lakh and Kotak Trustee to bear costs of Rs. 20 lakh
- The costs to be deposited with the Secretary General of the Supreme Court within two months
- The Secretary General to identify ten accredited organisations across the country working for destitute children, children with cancer, orphans, women in distress, victims of crime, mental patients, elderly persons without family and persons needing prosthetics, and distribute the costs equally among them
- Pending applications disposed of
Key Legal Principles Established
Under Section 15Z of the SEBI Act the Supreme Court hears appeals only on substantial questions of law and does not pronounce on the economics of the securities market.
Penalty under the SEBI Act and the Mutual Fund Regulations follows as soon as the contravention is established; the intention of the violator and the presence of mens rea are irrelevant unless the statute requires them.
The regulatory scheme is consequence-neutral: profit or loss to investors is immaterial to whether a regulatory infraction has occurred.
A close-ended mutual fund scheme must be fully redeemed at the end of its maturity period, the only exception being a roll over carried out with the disclosure, filing and written unitholder consent required by Regulation 33(4).
Negative equality cannot be claimed: a regulated entity cannot shelter behind the violations of others.
Breaching the regulations to avert a possible loss to investors is not a valid defence; investors are warned of market risk by the statutory disclaimer.
A mutual fund trustee company holds funds in a fiduciary capacity and must independently assess legality and unitholder interest rather than follow the asset management company.
The regulator must be informed in advance of a proposed course of action that departs from the regulations.
Selective non-disclosure of documents and incomplete or truncated extracts of regulations tendered to the Court attract disapproval.
Key Takeaways
What different people should know from this case
- A mutual fund that promises to pay you on a fixed maturity date must do so, unless it properly rolls the scheme over with your written consent.
- Even if a fund manager later says you ended up better off, breaking the rules is still punished.
- The trustee of a mutual fund is meant to protect unitholders and cannot simply go along with what the fund manager decides.
- The line printed on mutual fund advertisements, that investments are subject to market risks, does not allow a fund to bypass SEBI rules to protect you.
- Fund houses are expected to tell SEBI and unitholders about major departures from the plan before acting, not after the regulator asks.
Legal Framework
Applicable laws and provisions
Statutory Provisions
Section 15Z
Securities and Exchange Board of India Act, 1992
“Provides for an appeal to the Supreme Court from any decision or order of the Securities Appellate Tribunal on any question of law arising out of such order.”
Relevance: The basis of the appeals before the Supreme Court, which limited its role to answering substantial questions of law.
Sections 15D(b) and 15HB
Securities and Exchange Board of India Act, 1992
“Penal provisions under which monetary penalties were imposed on Kotak AMC, Kotak Trustee and the senior executives. Section 15D(b) concerns failure of a mutual fund or its trustees to comply with prescribed requirements; Section 15HB is a residuary penalty for contravention of the Act or regulations.”
Relevance: The Court applied the principle that penalty follows once breach is established, whatever the intention.
Sections 11(1) and 11B
Securities and Exchange Board of India Act, 1992
“Empower SEBI to issue directions in the interest of investors and the securities market.”
Relevance: Provisions under which the show cause notice of 10 May 2019 sought to justify directions.
Regulation 33(4)
SEBI (Mutual Funds) Regulations, 1996
“A close ended scheme shall be fully redeemed at the end of the maturity period. A scheme may be rolled over only if the purpose, period and other terms of the roll over and other material details are disclosed to unitholders and a copy filed with the Board, and only for unitholders who consent in writing; others must be allowed to redeem in full at net asset value based price.”
Relevance: The central provision. Since no roll over was notified, the extension of the ZCNCD maturity and withholding of redemption proceeds breached it.
Regulation 39(1)
SEBI (Mutual Funds) Regulations, 1996
“A close ended scheme shall be wound up on the expiry of the duration fixed in the scheme on the redemption of the units unless it is rolled over for a further period under Regulation 33(4).”
Relevance: Read with Regulation 33(4) to hold that the schemes had to be wound up on their respective maturity dates.
Regulation 25(16) and Fifth Schedule
SEBI (Mutual Funds) Regulations, 1996
“Require an asset management company to exercise due diligence and care in all its investment decisions.”
Relevance: The Court held that Kotak AMC failed the due diligence standard when investing in the Konti and Edison ZCNCDs.
SEBI/HO/IMD/DF2/CIR/P/2018/160
SEBI Circular dated 28 December 2018
“Permits creation of a segregated portfolio, subject to a provision in the Scheme Information Document and compliance with the procedure, including trustee approval, press release, unitholder intimation and allotment of segregated units.”
Relevance: Kotak AMC could not invoke it as it had denied creating a segregated portfolio and had not followed the circular's procedure.
Related Cases & Precedents
Chairman, SEBI v. Shriram Mutual Fund
followed(2006) 5 SCC 361
Held that penalty is attracted as soon as contravention of the statutory obligations under the SEBI Act and Regulations is established, and that mens rea is not required unless the statute says so. Relied upon to hold that intention and absence of loss are irrelevant.
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