Sahara Asset Management Company P. Ltd. ... vs Sebi

Order Reserved on: 27.06.2017

Date of Decision : 28.07.2017

Misc. Application No. 188 of 2017 And Appeal No. 428 of 2015

1.

Sahara Asset Management Company P. Ltd.

97-98, 9th Floor, Atlanta, Nariman Point, Mumbai - 400 021.

2. Sahara Mutual Fund 97-98, 9th Floor, Atlanta, Nariman Point, Mumbai - 400 021.

3. Sahara India Financial Corporation Limited 1, Kapoorthala complex, Lucknow - 226 024.

4. Shri S.R. Hegde 97-98, 9th Floor, Atlanta, Nariman Point, Mumbai - 400 021.

5. Dr. P.P. Shastri 97-98, 9th Floor, Atlanta, Nariman Point, Mumbai - 400 021. .....Appellants

Versus

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

Mr. Gaurav Joshi, Senior Advocate with Mr. Piyush Raheja, Mr. Sahil Gandhi and Ms. Vidhi Shah, Advocates i/b Markand Gandhi & Co. for the Appellant.

Mr. Kevic Setalvad, Senior Advocate with Mr. Mihir Mody and Mr. Nishant Upadhyay, Advocates i/b K Ashar & Co. for Respondents. 2

CORAM : Justice J.P. Devadhar, Presiding Officer Jog Singh, Member Dr. C.K.G. Nair, Member

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

1. Appellants are aggrieved by the order dated July 28, 2015 passed by

the Whole Time Member ('WTM' for short) of Securities and Exchange

Board of India ('SEBI' for short) thereby cancelling the certificate of

registration of the Sahara Mutual Fund ('Sahara MF' for short) with

consequential transitional directions stated therein. The impugned order has

been issued consequent to the findings by SEBI that Sahara India Financial

Corporation Ltd. ('Sahara Sponsor' for short) is not a 'fit and proper person'

because its Promoter-Director is not a fit and proper person and hence the

Sahara MF and Sahara Asset Management Company P. Ltd. ('Sahara AMC'

for short) are no longer fit and proper to carry on the business of mutual

fund. The legal question that, therefore, arises is if the Promoter-Director of

the Sponsor of a mutual fund is found to be not a fit and proper person

whether the sponsor itself becomes not fit and proper and if so whether it

would impact the fit and proper status of the mutual fund and the AMC

under the Mutual Fund Regulations.

2. Before coming to the relevant facts in the present appeal, it is useful

to explain the mutual fund framework under the SEBI (Mutual Funds)

Regulations, 1996. The structure of a mutual fund stands on three pillars (i)

An Asset Management Company, (ii) A Trust and (iii) A Sponsor. In the

present matter the structure of the Sahara mutual fund comprises the Sahara

AMC (Appellant No. 1), Sahara MF (Appellant No. 2), Sahara Sponsor

(Appellant No. 3) and Trustees (Appellant Nos. 4 and 5). According to this

framework a sponsor applies for a mutual fund license and SEBI grants a

certificate of registration if the eligibility criteria provided under the Mutual 3

Fund Regulations are satisfied. Among other conditions under Regulation 7,

the applicant is to be a fit and proper person as defined under 7A of Mutual

Fund Regulations, 1996 read with Schedule-II of the SEBI (Intermediaries)

Regulations, 2008 in order to get a certificate of registration from SEBI

which is granted subject to the terms and conditions stated under

Regulation 10.

3. For convenience of reference the relevant provisions of the SEBI

(Mutual Funds) Regulations, 1996 and the SEBI (Intermediaries)

Regulations, 2008 are reproduced below:-

" MUTUAL FUND REGULATIONS Eligibility criteria

7. For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely :--

(a) ...

(aa) the applicant is a fit and proper person;

(b) ...

Criteria for fit and proper person 7A. For the purpose of determining whether an applicant or the mutual funds is fit and proper person the Board may take into account the criteria specified in schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. Terms and conditions of registration

10. The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions--

(a) the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;

(b) the mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;

(c) the mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;

(d) payment of fees as specified in the regulations and the Second Schedule.

Eligibility criteria for appointment of asset Management Company

21. (1) ...

(a) ...

(aa) the asset management company is a fit and proper person;

(b) ... ...

Terms and conditions to be complied with

22. The approval granted under sub-regulation (2) of regulation 21 shall be subject to the following conditions, namely:--

(a) ...

(b) the asset management company shall forthwith inform the Board of any material change in the information or particulars previously furnished, which have a bearing on the approval granted by it;

(c) no appointment of a director of an asset management company shall be made without prior approval of the trustees; 4

(d) the asset management company undertakes to comply with these regulations;

(e) no change in the controlling interest of the asset management company shall be made unless,--

(i) prior approval of the trustees and the Board is obtained;

(ii) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated; and

(iii) the unitholders are given an option to exit on the prevailing Net Asset Value without any exit load;

(f) the asset management company shall furnish such information and documents to the trustees as and when required by the trustees.

INTERMEDIARIES REGULATIONS SCHEDULE II Criteria for determining a 'fit and proper person' For the purpose of determining as to whether an applicant or the intermediary is a 'fit and proper person' the Board may take account of any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer and the key management persons by whatever name called -

(a) integrity, reputation and character;

(b) absence of convictions and restraint orders;

(c) competence including financial solvency and networth."

4. Basic facts in this appeal are not disputed. However, for giving a

comprehensive background relevant facts are stated as follows:-

(a) On the basis of a Memorandum of Understanding between the

Sahara India Financial Corporation Ltd. (Sahara Sponsor) and

an existing mutual fund namely First India Mutual Fund,

Sahara Sponsor applied to respondent SEBI for becoming

sponsor of First India Mutual Fund on March 11, 2003. The

appellants submitted all relevant details as per Mutual Fund

Regulations. On November 13, 2003 SEBI granted approval to

Sahara Sponsor for sponsoring First India Mutual Fund. On

March 19, 2004 the Sahara Sponsor acquired 100% of

shareholding of First India Asset Management Pvt. Ltd. and

subsequently the name of the company was changed to Sahara

Asset Management Company P. Ltd. Similarly, on April 1, 5

2004 on the basis of the request of the Sahara Asset

Management Company the name of First India Mutual Fund

was changed to Sahara Mutual Fund. Following these

organizational changes the appellants herein have been

carrying on the activities of the mutual funds as per the

provisions of Mutual Fund Regulations.

(b) SEBI passed an order dated June 23, 2011 against two Sahara

group entities namely Sahara India Real Estate Corporation

Ltd. (SIRECL), Sahara Housing Investment Corporation Ltd.

(SHICL) and some of their Directors to refund the money

collected through the issue of Optionally Fully Convertible

Debentures (OFCDs) and restrained those Directors from

associating themselves with any listed public company and

any public company which intends to raise money from the

public till such time the money is refunded to the investors to

the satisfaction of SEBI. This order was upheld by this

Appellate Tribunal on October 18, 2011. The Hon'ble

Supreme Court in its order dated August 31, 2012, inter alia,

directed these companies and Mr. Subrata Roy Sahara to

refund the monies. Subsequently the Apex Court passed

several orders / directions in the matter against Mr. Sahara on

account of delay in refunding the money.

(c) Following these orders against the two Sahara group

companies and their Directors SEBI initiated proceedings by

appointing a Designated Authority under the Intermediaries

Regulations on June 9, 2014. This Designated Authority was

to enquire into whether there was any violation of the 6

provisions of Regulation 21 read with Regulation 22 of the

Mutual Fund Regulations, 1996 as well as related SEBI

Circulars by the Sahara Mutual Fund, Sahara Sponsor, Sahara

AMC and its Trustees. The Designated Authority submitted

the report on October 14, 2014 holding that these entities are

no longer fit and proper persons to carry on the business of

mutual fund and recommended cancellation of certificate of

registration of Sahara MF. Along with a copy of this report by

the Designated Authority SEBI issued a common Show Cause

Notice to these entities on November 11, 2014 asking why the

certificate of registration of Sahara MF should not be

cancelled.

(d) The impugned order was passed by the WTM of SEBI on July

28, 2015 after considering the report of the Designated

Authority, the reply to the Show Cause Notice, submissions

made during personal hearing and other material on record.

5. Shri Gaurav Joshi, Learned Senior Counsel for the appellants made

the following submissions:-

(a) The sole reason for the impugned order against the appellants

was on account of the proceedings by SEBI against two

Sahara Group Companies namely SIRECL and SHICL. But

these proceedings were pending since 2010 before SEBI and

no action was contemplated or initiated against the appellants

herein. There has been no allegation of any violation of

Mutual Fund Regulations by the appellants except an alleged

non-reporting of an action taken by SEBI against the said two 7

group companies. Since action was taken by SEBI itself, this

information was available with SEBI.

(b) The appellants herein and the two group entities viz. SIRECL

and SHICL are separate legal entities and as such SEBI should

not have pierced the corporate veil in proceedings against the

appellants herein. Piercing the corporate veil is against the

canons of law and only constitutional courts have the power to

do so. Settled legal position is that distinct corporate

personality of a company can be disregarded only in a

situation where the incorporation of the company itself is to

perpetuate fraud or to carry out a fraudulent objective. Since

no such allegation has been made in the present matter, SEBI

could not have disregarded the corporate identity of Sahara

Sponsor or Sahara AMC and lifted the corporate veil to look at

their shareholders / promoters.

(c) Under the Mutual Fund Regulations, the requirement of the

sponsor being a fit and proper person is limited to the stage of

application for the registration of mutual fund. The role of the

sponsor company who is the applicant thereafter is very

limited. Once the trust and the AMC are setup the sponsor

does not play any major role and therefore the continuing

liability of the sponsor is very limited. In any case it is the

applicant company who acts as the sponsor and who is to be

fit and proper not its Promoters or Directors as provided under

Mutual Fund Regulations.

(d) The sponsor is a separate legal entity as distinct from its

shareholders and therefore just because one of the 8

shareholders is allegedly not a fit and proper person it cannot

result in the sponsor being declared as not a fit and proper

person. The relevant regulations make a distinction between

the Company (Sponsor / AMC), its Whole Time Directors,

Key Managerial Personnel and other Directors by providing

different and independent requirements for each of them under

the Regulations.

(e) Mr. Subrata Roy Sahara who is alleged to be not a fit and

proper person by SEBI consequent to the order by SEBI dated

June 23, 2011 (supra) is a Non-Executive Director of Sahara

Sponsor and did not involve in the day-to-day management of

either Sahara Sponsor or in any matter relating to Sahara

AMC or Sahara Mutual Fund. He was never a Trustee nor a

Director of Sahara Mutual Fund. He resigned from the Sahara

Sponsor on September 2, 2014 though subsequently he was

reappointed as an Additional Director on November 3, 2014.

He was not a KMP or an Officer on default or played any

significant role in the management of Sahara Sponsor even

while being on the Board of the Sahara Sponsor.

(f) The information submitted to SEBI in March 2003 at the time

of application for mutual fund registration or in March 2004 as

bio-data of Mr. Subrata Roy Sahara could not have been relied

on by SEBI in the impugned order without any reference to

that in the show cause notice. Even otherwise though in 2003

and 2004 Mr. Subrata Roy Sahara claimed management

responsibility as Managing Director (Worker) and Chairman

of Sahara Sponsor, SEBI was subsequently informed on

September 8, 2014 that he ceased to be a Director of Sahara 9

Sponsor w.e.f. September 2, 2014. Though subsequently he

was reappointed as an Additional Director it was as a Non-

Executive Director. Thus over the years Mr. Subrata Roy

Sahara ceased to play any role in the management of Sahara

Sponsor.

(g) The findings of the Hon'ble Supreme Court relied on by the

respondent SEBI relating to the offence of Mr. Subrata Roy

Sahara in the case of the two group companies is restricted to

the facts in that particular case. The appellants herein were not

even parties to those matters and are independent legal entities

and hence Mr. Sahara's involvement in the two group

companies cannot be transfixed on to the companies in the

present appeal. In any case there is no order against

Mr. Sahara finding him to be guilty of any offence involving

moral turpitude or any economic offence. His detention order

by the Hon'ble Supreme Court is only in relation to the issue

of non-refund of the amounts ordered to be repaid by SIRECL

and SHICL having no bearing in the present matter.

(h) In conclusion, the Learned Senior Counsel for the appellants

stated that the appellants are separate legal entities distinct

from the two Sahara Group entities against whom certain

orders were passed by SEBI. Those two Sahara Group entities

have no shareholding in the appellant entities herein. Being

separate legal entities SEBI could not have enquired into the

private actions of one of the Directors in the group companies

thereby lifting the corporate veil which is against canons of

justice. There is no allegation that the appellants herein have 10

ever violated any of the provisions of Mutual Fund

Regulations. The role of the sponsor is similar to that of a

'settlor' of a Trust and thereby the fit and proper criteria

applicable to the sponsor is limited to the time of application

for registration of Mutual Fund. The Sponsor has no major

continuing liability once the mutual fund framework in terms

of the Asset Management Company and the Trustees are put

in place. There is no case that the Trustees are not fit and

proper. In any case Mr. Sahara who is allegedly not a fit and

proper person has resigned from the Board of the Sahara AMC

as well as from the Board of Sahara Sponsor though he was

subsequently reappointed as the Non-Executive Director in the

latter. He was neither a KMP nor has any day-to-day

management functions in Sahara Sponsor. Thus while the

Applicant Company for sponsorship of a Mutual Fund is to be

fit and proper the same is not extended to its Non-Executive

Directors who are not included amongst the officials / entities

to be fit and proper as per Regulation 7 of the Mutual Fund

Regulations. Thus, the charge levelled against the appellants

herein just because one of the Promoters / Directors of

Appellant No. 3 was found to be involved in the matter of two

group companies who are not related to the appellant

companies in any way cannot be justified and the impugned

order needs to be quashed and set aside.

(i) In order to substantiate their submissions the Learned Senior

Counsel for the appellants, apart from distinguishing the

judgments relied on by SEBI in the impugned order, cited a 11

number of judgments, details of which will be dealt with in a

subsequent section of this order.

6. Shri Kevic Setalvad, Learned Senior Counsel for SEBI, defending the

impugned order, submitted as follows:-

(a) The impugned order draws its mandate from Section 12(3) of

the SEBI Act, 1992 which empowers SEBI, by order to

suspend or cancel a certificate of registration in such manner

as may be determined by the Regulations. Accordingly, the

relevant provisions of Mutual Fund Regulations, 1996 and

Intermediaries Regulations 2008 have been invoked in

deciding whether the appellants are fit and proper.

(b) The Appellant No. 3 as the Sponsor of Sahara Mutual Fund

(Appellant No. 2) holds 40.12% of the equity in Sahara AMC

which along with preference shareholding becomes 46%. The

remaining equity in the Sahara AMC is held by other Sahara

Group Companies. Preferential shares of Sahara AMC are also

held by Sahara group entities.

(c) Mr. Subrata Roy Sahara holds 79.80% of the equity in the

Sahara Sponsor and 53.34% of its preference shareholding.

An additional 8.78% of equity is held by the wife of Mr.

Subrata Roy Sahara thereby making the total shareholding of

Mrs. and Mr. Subrata Roy Sahara more than 87% in Sahara

Sponsor.

(d) The Hon'ble Supreme Court in its order dated May 5, 2014

while dealing with the list of properties belonging to the 12

Sahara Group Companies and furnished by the Petitioner Mr.

Subrata Roy Sahara in the matter of SIRECL and SHICL

observed that "nothing can move without his (Mr. Sahara)

active involvement in the affairs of the Sahara Group

Mr. Subrata Roy Sahara is the only person that matters."

(e) As stated by the Hon'ble Supreme Court nothing moves in the

Sahara Group Companies without the consent of Mr. Subrata

Roy Sahara and therefore he has full and complete control of

the Group Companies. This is despite the fact that in the case

SIRECL and SHICL, shareholding of Mr. Subrata Roy Sahara

is not high as in the case of Sahara Sponsor in the present

appeal.

(f) The arguments made by Learned Senior Counsel for the

appellants that the refund order passed by the Hon'ble

Supreme Court is against the two Sahara Group Companies

and not against Mr. Subrata Roy Sahara himself is not correct

because the said order sets out that the refund has to be made

jointly and severally by these Companies and Mr. Sahara.

(g) Citing various provisions in the Mutual Fund Regulations it

was argued that the sponsor's liability and responsibility for

operations and activities of the mutual fund is continuous.

(h) According to Regulation 7(aa) of the Mutual Fund

Regulations, the applicant (sponsor) is required to be a fit and

proper person. Both the applicant company as well as its

Directors are to be fit and proper because of the fact that the

Directors have to file certain proforma giving their full details 13

and they are under obligation to file any change in their status

as and when it happens. While filing such proforma in 2003

and 2004 Mr. Subrata Roy Sahara had stated that he was the

Managing Worker and Chairman of the Sahara Sponsor, with

substantive powers over the management of the Company.

(i) Fit and proper criteria is to be taken from Schedule II of SEBI

(Intermediaries) Regulations, 2008 which provides that the

applicant or intermediary, the principal officer and key

management persons by whatever name called should have:

(i) Integrity, reputation and character;

(ii) Absence of convictions and restrain orders;

(iii) Competence including solvency and net worth

and under Regulation 11 of Mutual Fund Regulations if the

sponsor does not satisfy the stated eligibility criteria the

application is liable to be rejected.

(j) The orders passed by Hon'ble Supreme Court (cited earlier)

clearly indicates that Mr. Subrata Roy Sahara's integrity,

reputation and character are of doubtful nature and there are

restraint orders against him and his Group Companies.

Therefore the findings in the impugned order that he is not a

fit and proper person cannot be faulted. Mr. Sahara owns 80%

of the equity capital and 53% of the preference capital of the

Sahara Sponsor and is in an absolute position to control the

Sahara Sponsor which makes the Sahara Sponsor also not a fit

and proper person. Though subsequent to receiving the Show

Cause Notice in the present matter Mr. Sahara resigned from

the Board of Directors of Sahara Sponsor on September 2,

2014, he rejoined the Board of Sahara Sponsor on November 14

3, 2014. He was also a Director of Sahara AMC till September

8, 2014.

(k) Though Mr. Sahara was obliged to file changes in his status as

provided in Mutual Fund Regulations subsequent to the orders

of SEBI and the judgments of the Hon'ble Supreme Court

cited above, he did not submit this information to SEBI. The

argument that this fact was known to SEBI cannot be accepted

because it is mandated on the Sahara Sponsor to file returns

and affidavits, as per the Regulations.

(l) Citing various judgments it was submitted that lifting of

corporate veil is allowed when it is intended to find out who is

acting on behalf of the company to judge whether the

company satisfies the fit and proper criteria in the interest of

justice. Being mandated to secure the interest of investors

SEBI is statutorily empowered to lift the corporate veil if

required to establish real corporate identity in terms of

ownership and control.

(m) The belated resignation of Mr. Subrata Roy Sahara from the

Board of Directors of the Sahara Sponsor on March 22, 2017

as per an undertaking given to this Appellate Tribunal does

not alter the position with respect to his control over the

Sahara Sponsor, since his shareholding continues to be as high

as it was at the time of the impugned order.

(n) Though subsequent to the impugned order, the Reserve Bank

of India (RBI) vide its order dated September 3, 2015

cancelled the certificate of registration of Sahara Sponsor to 15

function as an NBFC and has also initiated action to wind up

this company. Accordingly, the Lucknow Bench of the

Allahabad High Court vide its order dated September 16, 2015

restrained the Sahara Sponsor from alienating its assets.

(o) The Learned Senior Counsel for SEBI also opposed the Misc.

Applications No. 188 of 2017 moved by the appellants

seeking time to fulfill the requirement of raising its net worth

from Rs. 10 crore to 50 crore pending the outcome of this

appeal stating that when appellants are not a fit and proper

person this issue does not even deserve any consideration.

(p) Learned Senior Counsel for the SEBI also relied on a number

of judgments in support of his contentions.

7. We have considered the submissions of both the parties, various

judgments and other records placed before us.

8. We do not agree with the contentions of the Learned Senior Counsel

for the appellants. The argument that the requirement of being fit and proper

for the sponsor of a mutual fund is limited to the stage of application for

registration is devoid of any merit. Various provisions of the Mutual Fund

Regulations, 1996 clearly spell out the continuing obligation of the sponsor.

This is emphasized by Regulations 25(20), 28(4), 18(24), 38(a), 52, 58(1)

etc. whereby the continued liability of compensating the affected investors,

stake-holding in new fund offers, guaranteeing guaranteed return schemes,

liability on expenses exceeding certain limits and periodic disclosures to be

made to SEBI etc. are mandated on the Sponsor. All these provisions

indicate clear and continued action and obligation of the sponsor in the

Mutual Fund.

16

9. The argument that only the Applicant Company as a sponsor is to be

fit and proper and the requirement that the Promoter / Director need not be

fit and proper cannot be accepted. Regulation 7A of the Mutual Fund

Regulations, 1996 read with Schedule-II of the SEBI (Intermediaries)

Regulations, 2008 specify that the fit and proper criteria applies to the

Principal Officer and the key managerial persons of the sponsor by whatever

name called and should possess integrity, reputation and character; absence

of any convictions and restraint orders and competence including solvency

and net worth. We note that the documents submitted by Mr. Subrata Roy

Sahara at the time of filing applications on behalf of the Sahara Sponsor for

the mutual fund registration clearly indicated his designation as the

Managing Director (Worker) and Chairman against the Key Managerial

Personnel of the Applicant. In the absence of any further documentation this

position continued till he resigned from the Board of the Sahara Sponsor on

September 2, 2014. He was also in the Board of Directors of the Sahara

AMC till September 8, 2014. Therefore, the argument of the appellants that

Mr. Subrata Roy Sahara is not a Principal Officer or key managerial

personnel of the Sahara Sponsor is devoid of any merit.

10. It is an admitted fact that Mr. Subrata Roy Sahara holds 79.80% of

the equity capital of Sahara Sponsor and 53.34% of its preference capital.

Even after the resignation of Mr. Subrata Roy Sahara there is no change in

this equity / preference holding. It is also a fact that the full equity /

preference holding in the Sahara AMC is also held by the Sahara Sponsor

and other Sahara Group Companies together though two of its group

companies SIRECL and SHICL are not holding any equity in the Sahara

AMC. It is also on record that Mr. Sahara was a Director in all the Group

Companies which hold the shares of Sahara AMC. Such high shareholding 17

in the sponsor by one promoter and in the AMC by the same promoter group

companies clearly establish the capability of that one Promoter / Director to

control the affairs of the Sahara Sponsor and thereby that in the Sahara

AMC and Sahara Mutual Fund. Therefore, even if Mr. Sahara ceases to be a

Director in the Sahara Sponsor, given the facts of the present matter, his

ability to control the activities of the Sahara Mutual Fund cannot be

doubted. This is made abundantly clear by the order of the Hon'ble Supreme

Court dated May 6, 2014 wherein it is stated that:-

"The list of properties furnished to this Court, could not be have been so furnished, without the petitioner's express approval. There can be no doubt about the aforesaid inference, because the stance now adopted by the petitioner shows, that the petitioner is in absolute charge of all the affairs of the companies. And nothing can move without his active involvement. During the course of hearing of the present petitioner, learned counsel have repeatedly emphasized that further deposits will be possible, only after the petitioner is released from judicial custody. This stance shows, that in the affairs of the Sahara Group, Mr. Subrata Roy Sahara, is the only person that matter. And therefore, the other individual directors, may have hardly any say in the matter."

Therefore, the findings in the impugned order that Mr. Subrata Roy

Sahara exercises full and complete control of the Sahara Sponsor and Sahara

AMC cannot be disputed. In view of this, Mr. Sahara's resignation from the

Board of Directors of the Sahara Sponsor on March 22, 2017 does not alter

the ground reality regarding his control over the Sahara Sponsor in which he

continue to hold about 80% of the equity capital.

11. We find no merit in the arguments of the appellants that the Sahara

Sponsor need not have to make separate declarations under the Mutual Fund

Regulations on account of the orders against the group companies and their

Promoters / Directors as applicable to Mr. Subrata Roy Sahara since these

facts were known to SEBI. Fact that SEBI may be knowing is not a ground 18

for not filing the periodic statements / declarations as and when status of the

sponsor changes as provided for under the relevant regulations. Since

Mutual Fund Regulations state that change in status must be informed it has

to be done as and when required. Accordingly, the finding in the impugned

order that the Sahara Sponsor did not file the correct position relating to the

fit and proper status of its lead Promoter and Director consequent to the

SEBI order dated June 23, 2011 on the two group companies cannot be

faulted.

12. The requirement that the fit and proper criterion of an entity is

continuous as long as its obligation continues has been upheld in a number

of judgments. Further, under Regulation 7A of the Mutual Fund

Regulations, 1996 apart from the sponsor / applicant it is stated that the

mutual fund also needs to be fit and proper person which makes it clear that

the fit and proper criteria needs to be complied with by all the three pillars

of the mutual fund framework during the existence of the mutual fund.

13. The Learned Counsel for the appellant stated that there was no

suppression of facts by the appellants. It was argued that circulars dated

December 20, 2001 and August 29, 2002 show that the bio-data

requirements were applicable to independent directors only and hence there

was no requirement for filing fresh bio-data in respect of Mr. Sahara. We do

not agree with this argument since the details of the circular clearly indicate

that the circulars were applicable to all directors, not only to independent

directors though the title of the circular mentioned independent directors.

14. The appellants have cited several orders such as (i) Heavy

Engineering Mazdoor Union vs. State of Bihar and Ors. [(2004) 9 SCC

407], (ii) Bacha F. Guzdar vs. Commissioner of Income Tax, Bombay [AIR 19

1955 S.C. 74 (vol. 42. CN.18)], (iii) Electronics Corporation of India Ltd.

and Others vs. Secretary, Revenue Department, Govt. of Andhra Pradesh

and Others [(1999) 4 Supreme Court Cases 458], (iv) [Court of Appeal]

Adams and Others vs. Cape Industries Plc. And Another (1984 A. No.

2597), (v) Balwant Rai Saluja and Anr. vs. Air India Ltd. and Ors. [(2014) 9

SCC 407] (vi) Western Coalfields Ltd. vs. Special Area Development

Authority, Korba & Ors. [(1982 1 SCC 125], (vii) Delhi Development

Authority vs. Skipper Constructions Co. Pvt. Ltd. and Anr. [(1996) 4 SCC

125] and (viii) Digital Radio (Mumbai) Broadcasting Ltd. and Ors. vs.

Union of India [222 (2015) DLT 243]. Citing these orders it was argued that

a company is a separate juristic person distinct from the promoters /

directors; corporate veil cannot be lifted except in matters of fraud etc. The

impugned order does not state that the company is not a distinct juristic

person nor corporate veil can be lifted arbitrarily. The facts relating to the

cited judgments and the facts in the present appeal are distinguishable. The

order in Heavy Engineering Mazdoor Union (supra) is in the context of the

application of holidays under the Industrial Disputes Act. Bacha F. Guzdar

(supra) is in the context tax liability of an ordinary shareholders dividend.

Order in respect of Electronics Corporation of India Ltd. (supra) is regarding

the power of the State Government to levy tax on the company land etc; the

order of the Court of Appeals is on lifting the corporate veil except where

corporate identity is a mere facade concealing the true facts. Balwant Rai

Saluja (supra) is in the context of Air India's responsibility to the employees

hired by its subsidiaries; Order on Western Coalfields Ltd. (supra) in the

context of taxation powers of the Special Area Authority and the order of

Delhi Development Authority (supra) is in the context of willful

disobedience of the court orders which specifically states that 'lifting veil is

not allowed except where protection of public interest is of paramount

importance'.

20

15. The present appeal before us is regarding the fit and proper status of a

Promoter / Director of Sahara Sponsor who holds about 80% of its capital

and who controls all Sahara Group Companies and hence on the fit and

proper status of Sahara Sponsor to continue as Sponsor of a mutual fund in

the context of SEBI / Supreme Court Orders against Mr. Sahara and two

Sahara Group Companies. The Mutual Fund Regulations state that the

Sponsor Company as well as its Key Managerial Persons or Key Person

who controls the Company is to be fit and proper. No cited judgments are

issued in the context of the securities market wherein the SEBI Act, 1992

and Regulations under this Act were examined. In the securities market,

SEBI Act empowers SEBI to take actions in the interest of protecting the

interests of the investors and hence lifting the corporate veil to the extent to

identify who controls a regulated entity cannot be faulted. Without such a

power SEBI will be a mute spectator to many of the corporate misdeeds

which may jeopardize the interests of investors. Given the mandate of SEBI

to protect the interests of the investors in the securities market SEBI is

statutorily empowered to lift the corporate veil and find out the truth

whenever interests of the investors are affected or likely to be affected. In

the instant case SEBI itself found that two group companies of Sahara and

its Directors were not conducting their business following the rules relating

to public issue and were restrained from associating themselves with any

listed Company or Company which intends to raise money from the public.

It was also found that one of the Promoters / Directors is prima facie holding

absolute control over the group companies. Given these facts and

circumstances, lifting the corporate veil to the extent of identifying the role

of the Promoter / Director in the impugned order cannot be faulted. In this

context, the order of this Appellate Tribunal in the matter of Financial

Technologies India Ltd. vs. SEBI upholding the order of the WTM of SEBI 21

holding the appellant company and directors therein not a fit and proper

person solely based on the decision of the Forward Markets Commission is

relevant. We also note that, though subsequent to the impugned order, the

RBI has cancelled the certificate of registration granted to the Sahara

Sponsor to carry on the activities of NBFC and has initiated steps to wind up

the Sahara Sponsor under the RBI Act, with the Allahabad High Court

(Lucknow Bench) restraining the Company from alienating its assets.

16. In the result, we find no merit in the appeal. Accordingly, appeal is

dismissed with no order as to costs. Consequently, Misc. Application No.

188 of 2017 becomes infructuous and the same is also disposed of

accordingly.

17. After the order was pronounced, the Learned Senior Counsel for the

appellants made an oral prayer for staying the operation of the order for a

period of 6 weeks to enable the appellants to approach the Hon'ble Supreme

Court. Accordingly, 6 weeks stay is granted.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member 28.07.2017 Prepared and compared by:

msb