2012 (6) TMI 66 - HC - Companies Law

Power of SEBI to issue circular - petitioners, all of whom are distributors and sell mutual funds to investors have challenged a policy circular laying down guidelines Held that - powers conferred upon SEBI vide section 11 of the Securities Exchange Board of India, Act, 1992, Section 11(1) of the Act is very widely worded and casts a duty on the Board to protect the interest of the investors; promote, develop and regulate the securities market by such measures as it deems it. circular has brought in transparency by prohibiting entry load for all mutual fund schemes. It means that the investor who subscribes Rs. 100 would be issued mutual fund units equivalent in value to Rs. 100, depending upon the prevailing unit rate of the unit of the fund. If the distributor so desires, he can negotiate with a customer and settle the commission which he would be receiving. those who render service to a large number of people would be able to cut down on overhead expenses and those who operate individually would have to incur higher expense to maintain their establishment. Being inherent to every business, it would not render the policy circular violative of any law. Appeal dismissed

Summary

Issues:
Challenge to SEBI circular on mutual fund guidelines.

Analysis:
The petitioners, distributors selling mutual funds, challenged a SEBI circular dated 30-6-2009 laying down guidelines for mutual fund schemes. The challenge was based on the argument that SEBI did not have the power to issue such circulars. The learned Single Judge dismissed the challenge, citing SEBI's powers under section 11 of the Securities Exchange Board of India Act, 1992. Section 11 empowers SEBI to protect investors' interests and regulate the securities market by taking necessary measures. The circular in question prohibited entry load for all mutual fund schemes and required disclosure of commissions payable to distributors. The Single Judge held that SEBI had the authority to regulate distributors, including unregistered ones, under section 11. The High Court concurred with this interpretation, emphasizing SEBI's power to regulate the securities market to protect investors.

The circular aimed to bring transparency by eliminating entry loads and ensuring that investors receive mutual fund units equivalent to their subscription amount. It prohibited the practice where investors paid more than the actual value of allotted units, with the excess used as commission for distributors. The judgment highlighted the positive impact of the circular in ensuring fair treatment for investors and promoting transparency in mutual fund transactions. The court also noted that the argument of discrimination between LIC agents and mutual fund distributors, regarding commission structure, was not raised during the appeal. Additionally, an argument about small distributors being disadvantaged compared to institutional service providers due to negotiated commissions was presented but deemed inherent to business dynamics and not a violation of the law. Ultimately, the appeal was dismissed without imposing any costs, upholding the validity of the SEBI circular and its regulatory authority over mutual fund distributors.

This detailed analysis of the judgment showcases the legal basis for SEBI's regulatory powers, the rationale behind the circular's provisions, and the court's interpretation of the issues raised by the petitioners.