2011 (5) TMI 1066 - AT - Companies Law

Summary

Issues Involved:
1. Whether the changes made in the Mutual Fund scheme altered its fundamental attributes or modified the same affecting the interest of unitholders, attracting the provisions of Regulation 18(15A) of the SEBI (Mutual Funds) Regulations, 1996.
2. Whether the Board of Trustees and the Fund contravened Regulations 18(9) & 18(22) and Clauses 2, 6, and 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations.
3. Whether the Asset Management Company (AMC) contravened Regulations 18(9), 18(22), 25(1) & 25(16) and Clauses 2, 6, and 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations.
4. Whether the Chief Executive Officer of the AMC failed to ensure compliance with all provisions of the Regulations, Guidelines, and Circulars, violating Regulation 25(6A) of the Mutual Funds Regulations.

Detailed Analysis:

Issue 1: Changes in Fundamental Attributes
The core question was whether the changes made by Respondents 2 to 5 in the Mutual Fund scheme altered its fundamental attributes or modified the scheme affecting the interest of unitholders, thus attracting Regulation 18(15A) of the SEBI (Mutual Funds) Regulations, 1996. The appellants argued that the changes, including extending the investment duration from 5-7 years to a period not exceeding 15 years, changing the scheme's name by dropping "SHORT TERM," and altering the benchmark index, significantly affected the scheme's fundamental attributes. The Tribunal concurred, noting that the duration of investment is a fundamental attribute, and altering it without informing unitholders or providing an exit option violated Regulation 18(15A).

Issue 2: Contravention by Board of Trustees and the Fund
The Board of Trustees and the Fund were found to have contravened Regulations 18(9) & 18(22) and Clauses 2, 6, and 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations. These provisions mandate that trustees must ensure compliance with all regulations and act in the best interest of unitholders. The Tribunal upheld the findings that the Board of Trustees and the Fund failed to adhere to these obligations.

Issue 3: Contravention by the AMC
The AMC was found to have violated Regulations 18(9), 18(22), 25(1) & 25(16) and Clauses 2, 6, and 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations. The Tribunal agreed with the findings that the AMC did not ensure compliance with the regulations and failed to act in the best interest of the unitholders, thereby breaching the code of conduct.

Issue 4: CEO's Failure to Ensure Compliance
The Chief Executive Officer of the AMC was found to have failed in ensuring that the Fund/AMC complied with all provisions of the Regulations, Guidelines, and Circulars issued from time to time, violating Regulation 25(6A) of the Mutual Funds Regulations. The Tribunal upheld the findings that the CEO did not fulfill his duty to ensure regulatory compliance.

Conclusion:
The Tribunal allowed the appeal, setting aside the findings of the whole time member on the first issue and holding that the changes in the scheme altered its fundamental attributes and modified the same affecting the interest of the unitholders. The Tribunal directed Respondents 2 to 5 to comply with Regulation 18(15A) of the Regulations concerning the appellants and provide them with an exit route. The appellants were also directed to furnish adequate proof of the price at which they exited the scheme. The Tribunal exercised its powers under Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000 to secure the ends of justice. Each party was left to bear its own costs.