Profit to Investors Is No Defence for Regulatory Breach, Supreme Court Tells Kotak AMC

A bench of Justices Dipankar Datta and Satish Chandra Sharma dismisses Kotak AMC's appeals, holding that investor gain cannot justify flouting SEBI's mutual fund regulations.

The Supreme Court has dismissed civil appeals filed by Kotak Mahindra Asset Management Company Limited, Kotak Mahindra Trustee Company Limited, and six senior executives of those entities against penalties imposed by the Securities and Exchange Board of India. The Court held, in unambiguous terms, that a breach of the SEBI (Mutual Funds) Regulations, 1996 is not excused by the fact that unitholders ultimately made a profit, or that no investor filed a complaint. The judgment, authored by Justice Dipankar Datta and dated 13 July 2026, reinforces that the statutory scheme governing mutual funds is consequence-neutral: compliance is mandatory and non-negotiable, irrespective of outcome.

How the Dispute Reached the Supreme Court

Kotak Mahindra Mutual Fund, sponsored by Kotak Mahindra Bank Limited, launched six close-ended Fixed Maturity Plan schemes between 2013 and 2016. The schemes were designed to mature between April and May 2019. Kotak AMC, as the fund's asset manager, was required to invest only in securities maturing on or before those dates. An amount of Rs. 266 crore out of Rs. 1,625 crore collected under the schemes was invested in Zero Coupon Non-Convertible Debentures issued by Konti Infrapower & Multiventures Private Limited and Edison Utility Works Private Limited, both part of the Essel group. The investment was secured by a pledge over 22.8% shares of Zee Entertainment Enterprises Limited held by Cyquator Media Services Private Limited, at 1.5 times the exposure amount.

In November 2018, ZEEL publicly disclosed its intent to divest 50% of its shareholding. This, combined with pledge invocations by other lenders, caused ZEEL's share value to fall and the security cover to drop below 1.5 times. Notices were issued by the debenture trustee to Konti, Edison, and Cyquator on 25 January 2019, requiring additional security or cash. None was provided.

On 26 January 2019, a meeting was held among ZEEL's promoters and lenders, including representatives of Kotak MF. The promoters sought a moratorium rather than providing further collateral. Kotak AMC then decided to restructure the redemption of the ZCNCDs rather than invoke the pledge over ZEEL shares. On 28 January 2019, Kotak Trustee was informed and concurred. On 6 April 2019, multilateral agreements were executed with Konti, Edison, Cyquator, and a promoter of ZEEL.

When two of the six schemes matured on 8 and 10 April 2019, only a portion of the amount due was paid to unitholders; approximately 10–21% relating to the Konti and Edison investments was withheld. The remaining four schemes matured shortly after with similar partial withholding. In total, about Rs. 376 crore of the approximately Rs. 2,116 crore payable was paid after the maturity dates. All amounts were eventually paid to unitholders by 25 September 2019.

SEBI issued show cause notices to Kotak AMC on 10 May 2019, and subsequently to Kotak Trustee and its senior executives. After hearings, the Whole Time Member of SEBI passed an order on 27 August 2021 against Kotak AMC, directing refund of a proportionate share of investment management and advisory fees with 15% simple interest from the maturity dates, imposing a monetary penalty of Rs. 50 lakh under Sections 15D(b) and 15HB of the SEBI Act, and restraining the firm from launching any new FMP scheme for six months. The Adjudicating Officer, by order dated 30 June 2022, imposed penalties ranging from Rs. 10 lakh to Rs. 40 lakh on Kotak Trustee and the six senior executives.

Both orders were appealed before the Securities Appellate Tribunal. The SAT, by a common order dated 6 March 2026, partly allowed Kotak AMC's appeal by setting aside the disgorgement of advisory fees, but dismissed the appeal filed by Kotak Trustee and its senior executives. All three sets of appellants then approached the Supreme Court under Section 15Z of the SEBI Act, 1992.

The Central Question of Law

The appellants framed their primary question as whether there could be any breach of the 1996 Regulations where the actions complained of caused no loss to investors, actually resulted in gains to investors, were taken in good faith, and where compliance with the regulatory mandate would have caused investors a loss in the range of Rs. 376 crore.

The Court addressed this at the outset by limiting its own appellate role. Under Section 15Z, the Court's jurisdiction extends only to substantial questions of law. It observed that the commercial wisdom behind a bona fide risk resulting in loss, or a conscious breach of the regulatory framework fortuitously resulting in gain, is beyond appellate scrutiny under that provision. The Court drew on its earlier decision in Chairman, SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361, which held that once a contravention of a statutory obligation is established, penalty follows as a matter of course and the intention of the violator is irrelevant.

From that premise, the Court held that the only defence available to the appellants was to demonstrate that no breach had occurred at all and that the Tribunal's contrary finding was manifestly perverse. Nothing less would suffice.

Lack of Due Diligence in the Essel Group Investment

On the first allegation, the WTM had found that Kotak AMC's Investment Committee approved investment in the ZCNCDs without awareness of the issuer entities themselves, and that the due diligence documents did not show any analysis of credit risk, liquidity risk, or interest rate risk. The WTM had noted that the consistent losses of Konti and Edison were “quite alarming enough for any lender/investor to avoid investing” in their debt securities.

Kotak AMC argued that because the ZCNCDs were structured obligations backed by ZEEL shares, it was entitled to rely on the reputation of the Essel group, its repayment history, and the strength of the collateral. It also pointed out that 22 other entities, including eight other mutual funds, had similarly invested in the Essel group.

The Court rejected both contentions. On the argument that other market participants were similarly situated, the Court held that negative equality cannot be claimed: an illegality is not cured by numbers, and a collective wrong remains illegal regardless of majority. The findings of the WTM, affirmed by the Tribunal, were cogent and deserved deference given the expert regulatory context. Regulation 25(16) read with the Fifth Schedule of the 1996 Regulations expressly demands due diligence. The Court said the focus should have been “on diligence, not dividends.”

Extension of Maturity Dates: The Core Breach

This issue formed what the Court described as the core of the dispute. Regulation 33(4) of the 1996 Regulations provides that a close-ended scheme shall be fully redeemed at the end of the maturity period. A roll-over is the only permitted exception, requiring prior disclosure to unitholders, their written consent, and intimation to SEBI. Regulation 39 requires winding up at the expiry of the fixed duration unless a lawful roll-over occurs.

Kotak AMC did not dispute that no roll-over was carried out. The Court found the breach plain on the face of the regulations.

The appellants' principal justification was that compliance with the regulatory mandate would have required invoking the pledge over ZEEL shares, which would have depressed ZEEL's share price further and caused losses to other mutual funds and investors. By restructuring the debt instead, they preserved value. The Court rejected this entirely. It held that investors in mutual funds are put on notice from inception about market risks through the statutory Risk Disclosure Statement and Due Diligence Advisory. Those willing to invest despite that disclaimer do so at their own risk. Committing a breach to save investors from that risk is no justification for departure from the regulatory mandate.

The Court was equally dismissive of the argument that no investor suffered and no investor complained. It held that the 1996 Regulations make no distinction between a breach resulting in profit and one resulting in loss. Excusing a breach that led to investor profit would incentivise the next breach. The Court observed that progression from profit to greed, from greed to regulatory breach, and from breach to systemic failure is not unfamiliar. Market integrity is the paramount consideration; whether investors gained or lost is immaterial to whether a regulatory infraction occurred.

On the argument that a SEBI circular dated 28 December 2018, permitting creation of a segregated portfolio, would save Kotak AMC's conduct, the Court found this position irreconcilable with the stand Kotak AMC had taken before the WTM, where it had specifically maintained that the partial winding up did not amount to creation of a segregated portfolio. In any event, the procedure mandated by the 2018 circular — including a provision in the Scheme Information Documents, a press release, trustee approval, unitholder intimation, and allotment of segregated units — was admittedly not followed.

Inadequate Disclosures to Investors and SEBI

Regulation 33(4) also imposes a statutory duty of disclosure to unitholders and to SEBI. The Court found a complete failure on both counts.

During the hearing, the Court asked Kotak AMC's senior counsel when SEBI was first informed of the course of action. The answer was 12 April 2019, in response to SEBI's own letter of inquiry, which came a few days after the maturity of the first two schemes. Every step Kotak AMC had taken — the decision to extend the ZCNCDs, the execution of multilateral agreements with Konti, Edison, and Cyquator, and the decision not to invoke the pledge — was carried out without any prior intimation to SEBI.

As for the unitholders, the Court observed that the decision to extend the ZCNCD maturity dates was not a choice offered to them. It was not a contingency they could foresee. They had been assured that, even in the event of default, their investments were protected through the pledged shares. Kotak Trustee was found to have followed Kotak AMC without exercising any independent assessment of its own, despite its duty as a fiduciary to independently evaluate whether the course of action adhered to the regulations and served the unitholders' interests.

Observations on Conduct

Before dismissing the appeals, the Court made pointed observations about the appellants' conduct. It noted that several crucial documents, including the Investment Committee notes, were not placed on the Supreme Court's record, although they had formed part of the appeals before the Tribunal. The Court said it was “not too impressed by the selective non-disclosure.”

The Court also took issue with a one-page note tendered during oral arguments by Kotak AMC's senior counsel, which purported to set out the relevant provisions of the 1996 Regulations for the Court's convenience. The note reproduced Regulation 33(4) in truncated form, omitting both provisos — which the Court noted were directly relevant to the controversy. The Court said the omission could be deliberate or a mistake, and cautioned the appellants to be more vigilant in future.

On the question of the senior executives' penalties, the Court declined to interfere. It held that as domain experts well-versed in securities law, they could not claim ignorance of the consequences of regulatory infraction. The future of unitholders had been put at immense risk, and their conduct went beyond condonable limits.

Order

The Court dismissed all three civil appeals. Kotak AMC was directed to bear costs of Rs. 30 lakh and Kotak Trustee costs of Rs. 20 lakh, both to be deposited with the Secretary General of the Supreme Court within two months. The Secretary General was directed to identify ten accredited organisations across the country engaged in caring for destitute children, children battling cancer, orphans, women in distress, victims of crime, mental patients, elderly people without family, and individuals requiring prosthetics, and to distribute the amounts equally among them. All pending applications were disposed of.

The Court concluded its judgment with a phrase directed at AMC and fund house managers: “Mandate first, gains later; SEBI compliance, never falter.”