SUBRAMANIAN R. VENKAT AND ANURADHA VENKATASUBRAMANIAN Vs. SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS.
LAWS(SB)-2011-5-2
SECURITIES APPELLATE TRIBUNAL
Decided on May 03,2011

Subramanian R. Venkat And Anuradha Venkatasubramanian Appellant
VERSUS
Securities And Exchange Board Of India And Ors. Respondents

JUDGEMENT

N.K. Sodhi, J. (Presiding Officer) - (1.) WHETHER the changes made by Respondents 2 to 5 in the Mutual Fund scheme had changed the fundamental attributes thereof or modified the same affecting the interest of unitholders so as to attract the provisions of Regulation 18 (15A) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereinafter referred to as the Regulations) is the short question that arises for our consideration in this appeal. Facts giving rise to the appeal are these.
(2.) THE Appellants before us are husband and wife and they claim that they regularly invest in shares and mutual fund schemes through market intermediaries duly registered with the Securities and Exchange Board of India (the Board) and/or recognized by the stock exchanges. Respondent No. 2 is the Board of Trustees of HSBC Mutual Fund. Respondent No. 3 is the HSBC Mutual Fund set up in the year 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsors of the mutual fund. Respondent No. 4 is a private limited company promoted by HSBC Limited and appointed by Respondent No. 3 to manage the mutual funds and operate the schemes of such funds in accordance with the provisions of the Regulations. Respondent No. 5 is the Chief Executive Officer of the fourth Respondent. Respondents 2 to 4 had launched an open ended Gilt scheme by the name of HSBC Gilt Fund during the year 2003 (hereinafter referred to as the scheme) which sought to generate reasonable returns through investments in government securities. The scheme had two plans - Short Term Plan and Long Term Plan. The short term plan was known as HSBC GILT FUND - SHORT TERM PLAN (HGF -ST). In the offer document it was mentioned that the short term plan was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 7 years and modified duration of the portfolio normally not exceeding 5 years. The long term plan was intended to suit investors with surpluses for medium to long periods and the plan was to invest in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 20 years and modified duration of the portfolio normally not exceeding 12 years. The Appellants chose the short term plan as against the long term plan as, according to them, they wanted to invest their personal savings in the short term plan of the scheme and considering the fund's objective, the fund's previous years' investment pattern and having regard to the reputation and brand of HSBC, they agreed to entrust a large portion of their life's savings to this fund and made the following investments through DSP Merrill Lynch Limited (for short the distributor). JUDGEMENT_2_LAWS(SB)5_2011.htm It is the case of the Appellants that when they received the monthly statement for their account around the third week of February 2009, they noticed a sharp erosion in the value of their account compared to the previous month and also observed that Net Asset Value (NAV) of the fund had sharply fallen (nearly 10 per cent in three days) from January 6, 2009. The Appellants made enquiries in this regard from the distributor who reportedly informed the former that Respondents 2 to 5 had made changes in the scheme on January 5, 2009. The long term plan was wound up. The short term plan which was meant for investment in government securities for a period of 5 to 7 years was changed to a term investment not exceeding 15 years. The Respondents had also changed the name of the scheme by dropping the words "SHORT TERM" from its name. They also changed the benchmark index of the scheme from 'I sec Si -Bex' to 'I sec composite index'. According to the Appellants, the fall in the NAV was as a consequence of the changes made in the scheme and their grievance is that the Respondents had changed the fundamental attributes of the scheme without informing the unitholders or the distributor of the changes and without giving a reasonable opportunity to the unitholders to exit the scheme as required under the Regulations. The Appellants also allege that they were completely unaware of the changes until March 2009. It is their case that mutual funds are required to follow the guidelines and procedures laid down by the Board under the Regulations and Respondents 2 to 5 were under an obligation to inform each unit holder including the Appellants of any changes in the policy, whether fundamental or otherwise, which would affect the interest of the investors. According to the Appellants, the laid down procedure was not followed by Respondents 2 to 5 and the short term plan for investment for 5 -7 years was converted into a long term plan for investment for a period not exceeding 15 years. The Appellants claim that since the NAV was steeply falling and with a view to avoid further continued losses in their investments, they exited the scheme and lodged a complaint with the distributor and the Respondents. A complaint dated April 4, 2009 was also filed with the Board with a request to intervene in the matter and direct the asset management company to make good the losses suffered by the Appellants.
(3.) THE matter was investigated by the Board. While investigating the complaint the Board formulated the following issues for its consideration: a. Whether the impugned changes made in the scheme amounted to changes in the fundamental attributes of the scheme in contravention of Regulation 18(15A) of the Mutual Funds Regulations and SEBI Circular dated May 23, 2008? b. Whether the Board of Trustees and the Fund 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? c. Whether the AMC had contravened Regulations 18(9), 18 (22), 25(1) & 25(16) and Clauses 2, 6 & 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations? d. Whether the Chief Executive Officer of the AMC had failed to ensure that the Fund/AMC complied with all the provisions of the Regulations, Guidelines and Circulars issued in this regard from time to time, in violation of Regulation 25(6A) of the Mutual Funds Regulations? On the first issue, the whole time member observed that "After the Long Term Plan was wound up, only the Short Term Plan was continued. Subsequently, the said plan underwent certain changes, the major change being the change of the modified duration from "normally not exceeding 5 years" to "not exceeding 15 years". He further observed that even though the fund/asset management company had cited liquidity crisis and the corresponding volatility of the assets under management as the reasons for increasing the duration, "the same according to me is a very important factor which could have influenced the decision of the investors/unitholders on whether to remain invested in the scheme or to exit. Regulation 18 (15A) of the Mutual Funds Regulations provides for the communication about the proposed changes to the unitholders and giving them an exit option". Having said this, he goes on to hold that the changes did not fall within the clarifications issued by the Board as per its circular of February 4, 1998 and, therefore, they did not alter the 'fundamental attributes' of the scheme so as to attract Regulation 18(15A). He also observed that the changes in the scheme did fall within "any other change which would modify the scheme and affects the interest of unitholders" and thereby attract Regulation 18(15A) of the Regulations but he did not record any adverse finding against Respondents 2 to 5on the plea that there was no such allegation in the show cause notice issued to them. The whole time member also referred to the change in the benchmark index and concluded that such a change did not affect the 'fundamental attributes' of the scheme. As regards issues (b), (c) and (d) referred to in paragraph 4 of the impugned order, the whole time member found that the Board of trustees of the fund and the fund had contravened the provisions of Regulation 18(9) and 18(22) of the Regulations and clauses 2, 6 and 9 of the code of conduct prescribed in the fifth schedule to the Regulations. He also found that the asset management company (Respondent No. 4) had contravened Regulations 25(1) and 25(16) and clauses 2, 6 and 9 of the code of conduct. Since the fifth Respondent had failed to ensure that the mutual fund complied with all the relevant provisions of law, he had, according to him, contravened Regulation 25 (6A) of the Regulations. Accordingly, by his order dated April 23, 2010 the whole time member warned Respondents 2 to 5 to strictly comply with the law governing their conduct and business of mutual fund in the securities market. It is against this order that the present appeal has been filed.;


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