Case Note & Summary
The case involves appeals by Kotak Mahindra Asset Management Company Limited (Kotak AMC), Kotak Mahindra Trustee Company Limited, and several senior executives (including Nilesh Shah, Lakshmi Iyer, Deepak Agarwal, Jolly Bhatt, Abhishek Bisen, and Gaurang Shah) against a common order of the Securities Appellate Tribunal (SAT) dated 6th March 2026. The SAT had upheld the orders of the Whole Time Member (WTM) of SEBI dated 27th August 2021 and 30th June 2022, which found that Kotak Mutual Fund had violated the SEBI circular dated 28th December 2018 regarding the creation of segregated portfolios (side pockets) for debt securities. The facts are that Kotak Mutual Fund held debt securities of certain companies (including Vodafone Idea and others) which experienced credit rating downgrades. Instead of selling the securities within 30 days as required by the circular, the fund created a segregated portfolio without complying with the conditions precedent. The WTM held that the creation of the segregated portfolio was invalid and directed the appellants to compensate the investors who exited the scheme before the segregation, as they suffered losses. The SAT affirmed this decision. The Supreme Court considered the legal issues of whether the conditions in the SEBI circular were mandatory, whether the trustees were liable, and whether the fund managers were individually liable. The Court held that the conditions were mandatory and that all appellants were liable for the losses. The Court dismissed the appeals and upheld the directions to compensate the investors.
Headnote
A) Securities Law - Mutual Fund Regulations - Segregated Portfolio - Conditions Precedent - SEBI Circular dated 28.12.2018 - The circular mandated that a segregated portfolio could be created only if the credit rating of the debt security is downgraded to below investment grade and the asset management company (AMC) has not been able to sell the security within 30 days. The Court held that these conditions are mandatory and must be strictly complied with. (Paras 10-15) B) Securities Law - Mutual Fund Regulations - Liability of Trustees - Duty of Care - The trustee company is liable for failure to ensure compliance with SEBI regulations and circulars. The Court held that the trustees cannot escape liability by claiming that they relied on the AMC's actions. (Paras 20-25) C) Securities Law - Mutual Fund Regulations - Liability of Fund Managers - Individual Liability - Fund managers and senior executives who were involved in the decision to create a segregated portfolio without complying with the conditions are personally liable for the losses. The Court held that they acted in violation of their fiduciary duties. (Paras 30-35) D) Securities Law - Mutual Fund Regulations - Compensation to Investors - The Court upheld the direction of SEBI to compensate the investors who exited the scheme before the segregation, as they suffered losses due to the non-compliance. (Paras 40-45)
Issue of Consideration
Whether the creation of a segregated portfolio (side pocket) by Kotak Mutual Fund in respect of debt securities of certain companies was in compliance with the SEBI circular dated 28th December 2018, and whether the appellants (Kotak AMC, Trustee Company, and senior executives) were liable for the losses suffered by investors.
Final Decision
The Supreme Court dismissed all the appeals and upheld the order of the Securities Appellate Tribunal dated 6th March 2026, which had affirmed the orders of the Whole Time Member of SEBI. The Court directed the appellants to compensate the investors who exited the scheme before the creation of the segregated portfolio, in accordance with the directions of SEBI.
Law Points
- Mutual Fund Regulations
- Segregated Portfolio
- Side Pocketing
- SEBI Circular dated 28.12.2018
- Conditions Precedent
- Liability of Trustees
- Liability of Asset Management Company
- Liability of Fund Managers
- Securities and Exchange Board of India Act
- 1992
- Section 15Z
