Life Insurance Corporation Of India ... vs Sebi

State Bank of India A&S Dept., Corporate Centre, 4th Floor, State Bank Bhavan, Madam Cama Road, Mumbai - 400 021. ...Appellant Versus

Securities and Exchange Board of India. SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mrs. Rathina Maravarman, Advocate for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b K Ashar & Co for the Respondent.

WITH Appeal No. 306 of 2020

Life Insurance Corporation of India Limited Central Office, Yogakshema, Jeevan Bima Marg, Mumbai - 400 021. ...Appellant

Versus

Securities and Exchange Board of India. SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent 2

Mrs. Rathina Maravarman, Advocate for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b K Ashar & Co for the Respondent.

AND Appeal No. 307 of 2020

Bank of Baroda Treasury Branch, 4th Floor, Baroda Sun Tower, C-34, G Block, BKC, Bandra (East), Mumbai - 400 021. ...Appellant Versus

Securities and Exchange Board of India. SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mrs. Rathina Maravarman, Advocate for the Appellant.

Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b K Ashar & Co for the Respondent. .

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Dr. C.K.G. Nair, Member

1.

These three appeals have been challenged similar orders in

respect of each of the three entities / appellants passed by the

Adjudicating Officer ('AO' for short) of Securities and Exchange

Board of India ('SEBI' for short) dated August 14, 2020. By the 3

said orders a penalty of Rs. 10 lakh each have been imposed on

the appellants under Section 15HB of the Securities and Exchange

Board of India Act, 1992 ('SEBI Act' for short) for violation of

Regulation 7B of the SEBI (Mutual Funds) Regulations, 1996

('Mutual Fund Regulations' for short), inserted with effect from

March 13, 2018. As per the inserted Regulation 7B, a sponsor of a

mutual fund, its associates or group company etc. cannot have

10% or more shareholding or voting rights in the AMC or Trustee

Company of any other mutual fund or entities holding 10% or

more of such shareholding or voting rights. One year time, i.e

upto March 12, 2019 was also given to entities which exceed such

shareholding limit to comply with Regulation 7B.

2. All appellants are public sector banks/financial institutions

who have sponsored their own Mutual Funds, in addition to

holding stake in UTI Mutual Fund. Since the issue is the same, not

complying with Regulation 7B of Mutual Funds Regulations, all

appeals are heard and decided by this common decision.

3. Prior to the impugned order the appellants were issued a

show cause notice dated July 19, 2019 under Section 11(1), 11(4)

and 11B of the SEBI Act for non-compliance of Regulation 7B of

Mutual Fund Regulations and the Whole Time Member ('WTM' 4

for short) of SEBI passed an order dated December 6, 2019. This

WTM order directed the appellants as follows:-

"a. The shareholding and voting rights of the Noticees in UTI AMC and UTI Trustee shall be brought down 10% on or before December 31, 2020;

b. The Noticees shall take suitable steps to ensure compliance with Regulation 7B of MF Regulations as regards board composition, on or before December 31, 2020;

c. In the event of non-compliance with the aforesaid directions, the shareholding and voting rights of the Noticees in UTI AMC and UTI Trustee in excess of 9.99% and corporate benefits thereon shall stand frozen till such time the Noticees comply with the aforesaid directions;

d. The Noticees shall submit a compliance report to SEBI, with respect to compliance with the aforesaid directions, within a period of one month from such compliance.

e. This order shall be without prejudice to any other action including adjudication proceedings that SEBI may initiate against the Noticees for the non-compliance with the provisions of Regulation 7B of the MF Regulations."

4. Subsequently, on March 12, 2020 another show cause notice

was issued by the AO SEBI on the same issue / violation

which culminated in the impugned order dated August 14,

2020 and the imposition of penalty to the tune of Rs. 10 lakh

each. Hence these appeals.

5

5. It is the stand of Mrs. Rathina Maravarman, the learned

counsel appearing on behalf of the appellants, that the

shareholding by appellants in UTI AMC had a long history

since the early 2000. These appellants have been directed by

the Government at the time of reorganization of the

erstwhile UTI to buy the shares of newly constituted UTI

AMC and with the subsequent direction that prior

Government approval is needed for transfer / alienation of

these shareholding rights. As such, it was not open to the

appellants to suo motu divest its shareholding from 18.2%

each as on February 13, 2018 to below 10% as per the

inserted Regulation 7B of Mutual Fund Regulations. Hence,

the appellants had taken up the matter with the Government

of India; Department of Financial Services (DFS) and

Department of Investment and Public Asset Management

(DIPAM) soon after the insertion of Regulation 7B was

notified. The appellants had repeatedly followed up with the

Government. However, an approval for disinvestment could

be obtained only in the month of April 2019 after which the

entire disinvestment process had to be completed and the

IPO process was floated on September 29, 2020. It is in this

context that the WTM had granted them time till December

31, 2020 and the appellants have divested their excess 6

holding to level of 9.9% each as on 12 October, 2020,

almost 3 months before the time limit granted by the WTM

and therefore as on today they are fully in compliance with

the Regulation 7B of Mutual Fund Regulations. Therefore, it

is the stand of the learned senior counsel for the appellants

that when the WTM, after considering the efforts made by

the appellants and the constraints under which the appellants

were operating in the divestment process, extended time till

December 31, 2020 no penalty should have been imposed on

the appellants. It was also emphasized by the learned

counsel that the appellants were in compliance of all other

directions, including the other directions of the WTM

regarding appointment of directors, role in day to day

management of all the affairs of UTI AMC etc. Therefore, a

delay of about 7 months in completing the divestment to

below 10% and that too for which the WTM had given time

till December 31, 2020 should not have resulted in any penal

orders and therefore the impugned order is liable to be

quashed and set aside in toto.

6. The learned counsel for the appellants relied on the orders of

this Tribunal in the matters of P.G Electroplast Limited vs

SEBI (Appeal No. 281 of 2017 decided on August 2, 2019),

Samrat Holdings Limited vs SEBI reported in 2001 SCC 7

OnLIne SAT 2 and M/s. Prrsaar vs NSE (Appeal No. 53

of 2017 decided on March 5, 2020) to press the contention

that a monetary penalty is not always need to be imposed for

at worst a technical violation. In addition the learned counsel

also emphasized that even if an inquiry was done by the AO

no penalty should have been ordered as the order of the

Supreme Court in Adjudicating Officer, SEBI vs. Bhavesh

Pabari (2019) 5 SCC 90 required the AO to consider the

mitigating factors beyond what is stated under Section 15J of

the SEBI Act which in the instant case was not done and the

penalty therefore imposed on the appellants cannot be

justified.

7. Mr. Shyam Mehta, the learned senior counsel appearing on

behalf of respondent SEBI, on the other hand, contended that no

exemption was provided under the regulations to public sector

undertakings etc; appellants were fully aware of the time

constraint of one year from the date of insertion of 7B in Mutual

Fund Regulations but took their own time even in approaching the

Government; the extension of time limit by the WTM was not an

exoneration of the appellants from their violation as violations

were factual and admitted and the WTM have considered all the

submissions made by the appellants vide paragraph 14 of the his 8

order. It was also submitted by the learned senior counsel that

considering the difficulties faced by the appellants as submitted by

them only a nominal penalty of Rs. 10 lakh each has been

imposed since once violation is admitted a penalty has to be

imposed following the order of the Hon'ble Supreme Court in the

matter of Chairman, SEBI vs Shriram Mutual Fund reported in

(2006) 5 SCC 361.

8. Having heard the learned counsel/ learned senior counsel for

the parties and having perused the documents we are of the view

that the appellants were facing excruciating factors in achieving

their stake dilution in UTI AMC. They were under orders when

investment had to be made and they had to take orders when

divestment had to be made and this procedure was long drawn as

we note from the various correspondence between the appellant

with departments in the Ministry of Finance. Though it is a fact

that DIPAM was approached only in January 2019, the appellants

were not free to approach DIPAM directly but had to go through

other departments in the Finance Ministry. We have noted

correspondence since March 2018 made by the appellants on the

need for complying with the new Regulation 7B inserted into

Mutual Fund Regulations and the need for expeditiously doing so.

Therefore, a full reading of the trajectory of investment of the 9

appellants in the UTI AMC as well as the steps taken by them in

implementing the directions issued by SEBI clearly show that the

appellants had been serious in their endeavor to achieve the

objective. They have been clearly prisoners of protracted

procedure thrust upon them by their own promoters, though this

need under not be an excuse for complying with the Regulations

in its letter and spirit. Therefore, though admittedly there is a

violation but in the face of excruciating factors in delaying full

compliance and therefore leading to a technical violation need not

always result in a penalty. The judgment of the Hon'ble Supreme

Court in the matter of Bhavesh Pabari (supra) is quite relevant

that factors under Section 15J of the SEBI Act is not exhaustive

and the adjudicating authorities can look beyond, wherever

genuine reasons/factors exist.

9. We also note that the appellants are in full compliance of

Regulation 7B with effect from 12 October 2020 by reducing their

stake in UTI MF below 10 per cent. They have been in

compliance with all other Regulations and the directions issued by

the WTM in avoiding conflict of interest; which again emphasize

the intention of the appellants in complying with the SEBI

directions. Further, there is no repetition of the violation.

Moreover, the appellants have been fully cooperating with SEBI

in terms of providing timely replies and details of progress made 10

in their divestment efforts etc. As such, SEBI was kept fully

informed of the developments, which among others, have been

noted by the WTM in his order while granting extension of time

for compliance upto December 31, 2020.

10. In our Judgment in National Highway Authority of India vs

SEBI (Appeal No. 232 of 2020 decided on August 27, 2020)

recently we have noted similar constraints under which the

governmental agencies/ public sector undertakings operate which

need to be factored in while imposing penalty on such entities,

whenever the violations are not deliberate.

11. Given the above facts and reasons, we do not find any

justifiable reason to impose any monetary penalty in the present

matters, as every technical violation need not be visited with

monetary penalty. In these matters a warning is sufficient. Further,

SEBI is at liberty to impose penalty for similar violations in

future.

12. All 3 appeals are partly allowed by substituting the monetary

penalty of Rs.10 lacs each imposed on the appellants with that of a

warning. No order on costs.

13. Before parting with, it is also important to emphasize that

ownership neutrality is a highly desirable objective since all rules 11

and regulations should be equally applicable to every legal entity

irrespective of its ownership. Only such an approach would bring

in clarity and certainty to laws and regulations and a predictable

rule of law regime. In the light of this, it is necessary that

governmental entities, including public sector undertakings, need

to develop protocols for coming out from being prisoners of

protracted procedures for complying with applicable laws and

regulations timely, because as legal entities accountability falls on

them. This is of paramount importance to entities operating in

financial/corporate sectors where changes in the applicable laws

and regulations are frequent in order to respond to fast changing,

dynamic environment of the domestic and global markets.

14. The present matter was heard through video conference due

to Covid-19 pandemic. At this stage it is not possible to sign a

copy of this order nor a certified copy of this order could be issued

by the registry. In these circumstances, this order will be digitally

signed by the Private Secretary on behalf of the bench and all

concerned parties are directed to act on the digitally signed copy

of this order. Parties will act on production of a digitally signed

copy sent by fax and/or email.

Justice Tarun Agarwala RAJALAKS Digitally signed by RAJALAKSHMI H NAIR Presiding Officer HMI H NAIR Date: 2021.01.07 15:39:04 +05'30' 12

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member 07.01.2021 msb