Appeal No. 111 of 2010
Date of decision: 3.5.2011
1) Subramanian R. Venkat
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
2) Anuradha Venkatasubramanian
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
……Appellants
Versus
1) Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
2) Board of Trustees of HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
3) HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
4) HSBC Asset Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
5) Chief Executive Officer of HSBC Asset
Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
…… Respondents
Mr. Zal Andhyarujina, Advocate with Mr. Joby Mathew and Mr. Deepak Dhane, Advocates for Appellants.
Mr. Kumar Desai, Advocate with Ms. Daya Gupta, Advocate for Respondent no. 1.
Mr. Iqbal Chagla, Senior Advocate with Mr. Riyaz Chagla, Mr. M. P. Bharucha and Mr. Charles De Souza, Advocates for Respondents no. 2 to 5.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
Whether the changes made by Respondents 2 to 5 in the Mutual Fund scheme had changed the fundamental attr ibutes 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.
- 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. Responde nt 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 Ma rkets (India) Privat e Limited as the
sponsors of the mutual fund. Responde nt no. 4 is a private limited company
promoted by HSBC Limited and appoint ed 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 (her einafter referred to as the scheme)
which sought to generate reasonable re turns through investments in government
securities. The scheme had two plans – Short Term Plan and Long Term Plan. The
short term plan was known as HS BC 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 re turns 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 3
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’ inve stment 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).
Sr.
No.
Date Amount
1
October 20, 2008
Rs. 2,00,69,000/- (Rupees Two Crore Sixty
Nine Thousand only).
2
November 7, 2008
Rs.29,98,000/- (Rupees Twenty nine lacs
ninety eight thousand only)
3
November 11, 2008
Rs. 10,00,000/- (Rupees Ten lacs only)
4
November 17, 2008
Rs.11,60,000/- (Rupees Eleven lacs sixty
thousand only).
Total
Rs. 2,52,27,000/- (Two Crores Fifty Two
lacs Twenty Seven Thousand only).
It is the case of the appellants that wh en 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 sh arply fallen (nearly 10 per cent in three
days) from January 6, 2009. The appellants ma de enquiries in this regard from the
distributor who reportedly informed the fo rmer 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 inve stment in government securities for a
period of 5 to 7 years was changed to a te rm investment not ex ceeding 15 years.
The respondents had also changed the na me 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
4
changes and without giving a reasonable oppo rtunity 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 respondent s 2 to 5 were under an obligation to
inform each unitholder 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 inve stment 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 fal ling and with a view to
avoid further continued losses in their i nvestments, 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.
- 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 a nd SEBI Circular dated May
23, 2008?
b. Whether the Board of Tr ustees and the Fund have
contravened Regulations 18(9) & 18(22) and Clauses 2, 6
and 9 of the Code of Conduc t prescribed under the Fifth
Schedule of the Mutual Funds Regulations?
c. Whether the AMC had c ontravened 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?” 5
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 “norma lly 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 fa ctor 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 Re gulation 18(15A) of
the Regulations but he did not record any adverse finding against Respondents 2 to
5 on the plea that there was no such allegation in the s how cause notice issued to
them. The whole time member also referr ed 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) a nd (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 provi sions 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 contravene d 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 Apr il 23, 2010 the whole time member warned 6
Respondents 2 to 5 to strictly comply with the law governing their conduct and
business of mutual fund in the securities ma rket. It is against this order that the
present appeal has been filed. - We have heard Mr. Zal Andhyarujina, Advocate on behalf of the appellants,
Mr. Kumar Desai, Advocate on behalf of the Board and Mr. Iqbal Chagla, Senior
Advocate on behalf of Respondents 2 to 5. The learned senior counsel appearing
for the respondents has, at the outset, raised a prelim inary objection regarding the
maintainability of the appeal. He contends that the appellants are not persons
aggrieved within the meaning of section 15T of the Securities and Exchange Board
of India Act, 1992 (hereinafter called the Act) as nothing has been said against
them in the impugned order and, therefore, they could not maintain the appeal. The
other leg of the argument is that since the appellants had exited the scheme on their
own volition in March, 2009 and ceased to be members thereof, they are not
entitled to any relief whatsoever. Shri Kumar Desai learned counsel appearing for
the Board has adopted the objections raised by the learned senior counsel. Having
given our thoughtful consideration to the preliminary objections raised on behalf of
the respondents, we are unable to accept the same. The grievance of the appellants
is that after they invested in the short term plan of the scheme, respondents 2 to 5
carried out material changes in the sc heme by winding up the long term plan and
converted the short term plan for investment for 5 to 7 years into a long term plan
for investment for 15 years. This, accord ing to them, affected the fundamental
attributes of the scheme and, in any case, modified the scheme affecting the interest
of unitholders and, theref ore, the respondents ought to have complied with the
provisions of Regulation 18(15A) of the Regulations whereunder every unitholder
on the date of the change including the appellants should have been given a right to
exit the scheme at the then prevailing NAV. Further grievance of the appellants is
that even though the Board on their complaint has found that material changes were
brought about in the scheme which affect ed the rights of the unitholders, it has
erred in not issuing directions to responde nts 2 to 5 to comply with the provisions
of Regulation 18(15A) and give a right to exit to every unitholder who on the date 7
of the change was a member of the scheme. The provisions of Regulation 18(15A)
of the Regulations shall be dealt with in detail while dealing with the merits of the
contentions raised before us and suffice it to mention that under the said provision,
if a change in the fundamental attribute of a scheme is carried out or the scheme is
modified affecting the interest of the unit holders, then every unitholder on the date
of the change ought to be gi ven a right to exit the sche me. If the appellants are
right in making the grievance that they have made before us then there is no
gainsaying the fact that they are persons aggrieved and would have a right to exit
from the scheme when the changes were made which right has been denied to
them. Admittedly, the pr ovisions of Regulation 18(15A ) were not complied with
by respondents 2 to 5 when the changes were made and no unitholder was given an
exit route. In this bac kground, we are satisfied that the appellants are persons
aggrieved by the impugned order as they are the ones who have lost the right to exit
and their legal rights have been infringed. We are of the considered opinion that if
the changes carried out in the scheme aff ect its fundamental attributes or modify
the scheme affecting the in terest of unitholders, then every unitholder of the
scheme as on the date of the change could feel aggrieved. If we were to conclude
that the changes do not affect the fundamental attributes of the scheme or they do
not affect the interest of the unitholders, the appeal in that event would be
dismissed. But it cannot be said that it is not maintainable. Moreover, it was the
complaint of the appellants that was being enquired into and we think that they
have a right to tell us that the orde r passed thereon by the Board was not in
accordance with law. In this view of the matter, we ca nnot agree with the learned
senior counsel for respondents 2 to 5 that the appellants are not persons aggrieved
or that they cannot maintain the present appeal. Section 15T of the Act enables a
“person aggrieved” to file an appeal ag ainst an order of th e Board. Although the
words “person aggrieved” have not been de fined in the Act, they have a specific
connotation and are well understood by courts and tribunals. In this context we are
tempted to refer to the observations of Lord Denning in Attorney General of the
Gambia vs. Pierre Sarr N’Jie 1961 AC 617 wherein he observed as under:- 8
“The words person aggrie ved are of wide import and shall not be
subjected to a restric tive interpretation. Th ey do not include, of
course, a mere busy body who is in terfering in things which do not
concern him; but they do include, a person who has a genuine
grievance because an order has been made which prejudicially
affects his interest.” (emphasis supplied)
In Jasbhai Motibhai Desai vs. Roshan Kumar & Ors. AIR 1976 SC 578, the learned
Judges of the Supreme Court were examini ng the question of locus standi of the
appellants therein and laid down tests to distinguish between persons aggrieved and
strangers and busy body of meddlesome interlopers. Persons in the last category
were said to be those who interfere in th ings which do not concern them and act in
the name of Pro Bono Publico though they have no interest of the public or even of
their own to protect. The learned Judges observed that distinction between persons
aggrieved and strangers was real and they laid down the following broad tests in
this regard :-
“Whether the applicant is a pe rson whose legal right has been
infringed? Has he suffered a legal wrong or injury, in the sense, that
his interest, recognized by law, has been prejudicially and directly
affected by the act or omission of the authority, complained of? Is
he a person who has suffered a legal grievance, a person “against
whom a decision has been pronounced which has wrongfully
deprived him of something or wrongfully refused him something, or
wrongfully affected his title to so mething? Has he a special and
substantial grievance of his own beyond some grievance or
inconvenience suffered by him in co mmon with the rest of the
public? Was he entitled to object and be heard by the authority
before it took the impugned action? If so, was he prejudicially
affected in the exercise of that right by the act of usurpation of
jurisdiction on the part of the authority? Is the statute, in context of
which the scope of the words “person aggrieved” is being
considered, a social welfare measure designated to lay down ethical
or professional standards of conduc t for the community? Or is it a
statute dealing with private rights of particular individuals?”
Having regard to the aforesaid observati ons, we are of the firm view that the
appellants satisfy all the tests laid dow n by the Supreme Court and that they are
persons aggrieved entitling them to maintain the present appeal. - It was then argued by the learned seni or counsel that since the appellants
had exited the scheme in March, 2009 on their own volition, they have ceased to be
unitholders and any relief granted to them would be in the form of compensation
which is beyond the jurisdiction of this Tr ibunal and falls within the scope of a 9
Civil Court which alone can deal with such matters. Here again, we are unable to
agree with the learned senior counsel. If the grievance of the appellants is justified,
then a direction must issue to responde nts 2 to 5 to comply with Regulation
18(15A) of the Regulations as on the date of the change. In that event we will have
to hold that the Board erred in not issuing such a direction and that such a direction
would only mean compliance with the provi sions of the Regulations. If such a
direction results in the appellants being compensated, so it be. It is true that the
appellants have exited the scheme a nd that was because the NAV was steeply
falling and it appears that th ey did not have the capacity to take further risks and
bear further losses. Their conduct in exiting the sche me cannot, in the
circumstances of the case, be said to be unreasonable so as to disentitle them to
come up in appeal. It was pointed out by the learned counsel for the respondents
that large number of unitholders continued with the scheme and did not exit. That
may be so as they may be having a larger risk taking capacity. This fact also does
not make the appellants ineligible for claiming the relief which they may otherwise
be entitled to. In the result, we overrule the preliminary objection raised on behalf
of the respondents. - This brings us to the merits of the grievances made by the appellants. Mr.
Zal Andhyarujina, learned counsel for the appellants, strenuously contended that
when the scheme was floated in the year 2003, it had two plans – short term plan
and the long term plan and that the appellants consciously chose the short term plan
whereunder the investments in the scheme could be made for a period not
exceeding 7 years though the said period coul d be brought down to 5 years. It is
argued that after the appellants had invest ed their life’s savings in the scheme,
respondents 2 to 5 brought about substa ntial changes therein changing its
fundamental attributes and, therefore, it was incumbent upon them to have sent a
written communication about the proposed change to each unitholder including the
appellants and also to have given them an option to exit at the prevailing net asset
value without burdening them with any exit load. In other words, what is argued is
that because of the material changes made in the scheme, respondents 2 to 5 ought 10
to have complied with the provisions of Regulation 18(15A) of the Regulations and
not having done so they flouted the law. It is also the grievan ce of the appellants
that they made a complaint to the Boar d which enquired into the same and having
found that material changes had been ma de in the scheme which affected the
interest of the unitholders, it (the Board) failed to issue appropriate directions to
respondents 2 to 5 to comply with the Re gulations. The lear ned senior counsel
appearing on behalf of respondents 2 to 5 has, on the other hand, contended that the
scheme was launched with the investme nt objective of generating reasonable
returns through investment in government s ecurities of various maturities and that
the difference between the long term plan and the short term plan was not the
maturity of the government securities invested in but the investment horizon of the
investors in the scheme. He referred to the circular of February 4, 1998 issued by
the Board and strenuously argu ed that the fundamental attributes of the scheme
would have undergone a change only if it had ceased to be an open ended scheme
or if the investments therein were to be made in securities other than government
securities. The argument is that since neither of these attributes were changed in
the present case, the fundamental attributes of the scheme were not altered so as to
attract the provisions of Regulation 18(15A) of the Regulations. The learned senior
counsel also argued that it was the invest ment pattern in a scheme which is its
fundamental attribute and th at a modified duration or average maturity of an
investment made therein does not constitute a fundamental attribute. According to
the respondents, the fundamental attributes of the scheme would get altered if
investments therein were to be made in equity or money market instruments instead
of government securities as originally stip ulated. The respondents also referred to
the combined offer document wherein it is stipulated that the duration of the
investment could undergo a change in case the market conditions warrant and
according to the fund manager’s view. In short, the respondents pleaded that the
changes brought about in the scheme did not affect the fundamental attributes
thereof and, therefore, compliance with the requirements of Regulation 18(15A)
was not necessary. 11 - Before we deal with the respective contentions of the parties it is necessary
to refer to the changes that were brought about in the scheme after the appellants
had made investments therein. As alrea dy observed, the scheme as originally
formulated in the year 2003 was by the na me of HSBC Gilt Fund and it had two
plans, short term plan and long term plan. It is common case of the parties that the
long term plan was wound up in January 2009 and the short term plan under which
investments were to be made for a period from 5 to 7 years has been changed to a
term investment for a period not exceeding 15 years. The name of the scheme was
also changed and the words “SHORT TERM” appearing in the title of the scheme
were also dropped. Apart from changing the duration of the investments to be
made, the benchmark index of the scheme was also changed from ‘I sec Si-Bex’ to
‘I sec composite index’. It is pertinent to mention here that a benchmark index of a
scheme is a methodology adopted to meas ure the success and performance of a
scheme. It is, thus, clear that the name of the scheme was changed, the duration of
the investments to be made therein ha d undergone a substantial change and the
benchmark index to measure its performance was also altered. - We may now refer to the provisions of the Regulations. These were framed
by the Board with a view to regulate the mutual funds and the schemes operated by
them which have to be in accordance w ith the provisions of the Regulations. A
mutual fund is a fund established in the form of a trust to raise monies through sale
of units to the public or a section of the public in one or more schemes for investing
in different kinds of securities. Public is invited to invest in a scheme through an
offer document. Every mutual fund is required to be registered with the Board and
operate scheme(s) in accordance with the provisions of the Regulations.
Regulation 18 deals with the rights and obligations of the trustees and sub-
regulation (15A) with which we are concer ned is reproduced hereunder for facility
of reference:-
“18. (1) ……………….
(2) ……………….
…………………..
………………….. 12
(15A) The trustees shall ensure that no change in the
fundamental attributes of any scheme or the trust or fees and
expenses payable or any othe r change which would modify
the scheme and affects the inte rest of unithol ders, shall be
carried out unless,-
(i) a written communication a bout the proposed change
is sent to each unitholde r and an advertisement is
given in one English daily newspaper having
nationwide circulation as well as in a newspaper
published in the language of region where the Head
Office of the mutual fund is situated; and
(ii) the unitholders are given an option to exit at the
prevailing Net Asset Value without any exit load.”
A reading of the aforesaid provision leav es no room for doubt that the trustees
cannot bring about a change in the fundame ntal attributes of any scheme or any
other change therein which would modify the scheme and affect the interest of
unitholders unless a written communication about the proposed change is sent to
each unitholder and an advertisement is given in the newspaper as prescribed in the
Regulation and the unitholde rs are given an option to exit the scheme at the
prevailing NAV without any exit load. - Having regard to the changes made in the scheme by which the duration of
the investments therein was altered from 5 to 7 years to a period not exceeding 15
years, we are of the considered opinion th at this change is one which affects the
fundamental attributes of the scheme a nd also modifies the same affecting the
interest of the unitholders. The words “fundamental attributes” have not been
defined in the regulations and, therefore, they have to be unde rstood according to
their ordinary dictionary meaning. Funda mental is something which is basic or
serves as a foundation or goes to the root of the matter. In the context of an
investment scheme, one of the important f actors that an investor looks at is the
duration for which the investments are going to be made in that scheme. In this
sense, the duration of the investment cons titutes one of the fundamental attributes
thereof. In the instant case when the scheme was launched it had two plans – short
term plan and long term plan the durati on of both was different and the investors
took an informed decision in investing in one or the other plan. As already
observed, the appellants chose the short term plan as, in their perception the said 13
plan would give better returns. It is the case of respondents 2 to 5 that the long
term plan which had a long average matur ity period had to be wound up as they
could not muster even a minimum of 20 inve stors so as to continue with the said
plan. It was on the winding up of the long term plan that the duration of
investments in the short term plan was altered from 5 to 7 years to a period not
exceeding 15 years. It is, thus, clear that there were no takers for the long term plan
and what respondents 2 to 5 did was after winding up the long term plan, they
increased the duration of the short term pl an to a long term without informing the
investors. This was most unfair. Si nce the duration of the investments was
substantially increased, we have no doubt in our mind that one of the fundamental
attributes of the scheme was altered. Even the whole time member has recorded a
finding in the impugned order that the change in the duration virtually modified the
short term plan into a long term plan and this is what he has observed :-
“The sudden change in investing substantial funds of the scheme in
long term gilt instruments from short term instruments had in turn
changed the average maturity an d the modified duration of the
scheme portfolio, drastically vary ing them, so as to modify the
scheme virtually into a Long Term Plan.”
Besides, the scheme got modified which a ffected the interest of the unitholders.
The name of the scheme was also cha nged and the words “short term” were
dropped. This is another indicator of the substantial change made in the scheme.
The fact that the bench mark index of the scheme was changed from “I sec Si-Bex”
to “I sec composite index” also supports our view that there was a fundamental
change in the attributes of the scheme which necessitated respondents 2 to 5 to
change the methodology to measure the su ccess of the modified scheme. The
whole time member himself has recorded a finding that the changes affect the
interest of the unitholders of the scheme. It is pertinent to refer to this finding in
his own words :-
“The change in the duration of the scheme is a change which
certainly affects the interest of the unitholders of the scheme. Any
fund house making any changes so as to modify the scheme which
affects the interests of the unitholders would be liable for the
contravention of Regulation 18(15A) of the Mutual Funds
Regulations, if they had effected such changes without complying
with the procedure mentioned therein.” 14
Having recorded the aforesaid findings, the whole time member holds that the
aforesaid changes in the scheme did not alter its fundamental attributes merely
because they did not fall within the clarif ications issued by the Board as per its
circular of February 4, 1998. We cannot ag ree with him. The circular was issued
giving clarifications in regard to some of the fundamental attributes of a scheme.
What is elaborated therein is only illustrative and in the very nature of things it
cannot be exhaustive. Apart from the attributes referred to in the circular, there
could be other fundamental attributes of a scheme like the duration of a scheme as
in the present case. We agree with the learned senior counsel for the respondents
that if the nature of the investments were to change, the fundamental attributes of a
scheme would get altered. He was right in contending that if investments were to
be made in equity or money market inst ruments instead of Government securities
as originally stipulated, th e fundamental attributes of a scheme would undergo a
change. But those could not be the only f undamental attributes of a scheme. As
already observed, there could be other attributes as well depending upon the nature
of the scheme. - We are really amazed that the whole time member after recording a
finding that respondents 2 to 5 had changed the scheme which affected the interest
of the unitholders without complying with Regulation 18(15A) of the Regulations
failed to issue directions to these res pondents for complying with the provision.
The finding recorded in this regard ha s already been reproduced above and we
agree with the whole time member that respondents 2 to 5 had brought about
changes in the scheme which affected the interest of the unitholders. This being so
they were obliged to comply with the provisions of Regulation 18(15A) which they
have not and the grievance of the appellants is justified that the Board failed to
issue appropriate directions in this re gard. The reason given by the whole time
member for not issuing the necessary directions is that there was no such allegation
in the show cause notice dated August 7, 2009 that was issued to the respondents.
This reason, to say the least, is most untenable. The details of the changes made in
the scheme have been elaborated in th e show cause notice a nd there is a clear 15
allegation in para 16 thereof that the respondents had viol ated, among others,
Regulation 18(15A) of the Regulations. It is this Regulation which required the
respondents to give an exit route to all th ose who were the unitholders on the date
of the change including the appellants. We are satisfied that the whole time
member grossly erred in not issuing the appropriate directions in this regard. - Before concluding, we may notice yet another argument raised on behalf
of the respondents. It wa s urged that the combined offer document issued by
respondents 2 to 5 itself cont ained a stipulation that a change could be made if
warranted by the market conditions and according to the fund manager’s view. The
argument is that since the changes were ma de as per the stipulation in the offer
document, the appellants could possibly have no grievance. We cannot accept this
contention either. The power of the fund manager to bring about changes in any
scheme as stipulated in the combined offer document cannot be disputed but if such
changes alter the fundamental attributes of a scheme or modify the same affecting
the interest of the unitholders as in the present case, the fund and its mangers would
have to comply with the provisions of Regulation 18(15A) of the Regulations. It is
the non compliance with this provision which is the root cause of the grievance
made by the appellants. - Respondents 2 to 5 have al so been found guilty of violating the code of
conduct prescribed in the fifth schedule to the Regulations for which they have
been appropriately warned. Since they have not come up in appeal, it is not
necessary for us to go into the merits of those findings.
For the reasons recorded above, we allow the appeal, set aside the findings
of the whole time member on issue (a) as formulated in para 4 of the impugned
order and hold that the changes brought about in the scheme altered the
fundamental attributes thereof and also modified the same affecting the interest of
the unitholders. In view of these findings, we would have normally issued a
direction to respondents 2 to 5 to co mply with Regulation 18(15A) of the
Regulations and give an exit route to all those who were unitholders on the date of 16
the change. We are refraining from issuin g such a direction as we were informed
by the respondents during the course of the hearing that NAV of the scheme has
now substantially increased and that no un itholder shall like to exit at the then
prevailing NAV which was much lower. Moreover, no other unitholder/investor
has come up in appeal before us. This, how ever, does not mean that the appellants
who have been agitating the matter can be deprived of their right to exit the scheme
as on the date of the change at the then prevailing NAV. A direction is, therefore,
issued to respondents 2 to 5 to comply with Regulation 18(15A) of the Regulations
qua the appellants and provide them with an exit route. The appellants are also
directed to furnish adequate proof of the price at which they exited the scheme. We
are issuing this direction in exercise of our powers under Rule 21 of the Securities
Appellate Tribunal (Procedure) Rules, 2000 in order to secure the ends of justice.
Parties are left to bear their own costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
3.5.2011
Prepared & Compared by
rhn/ptm
1) Subramanian R. Venkat
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
2) Anuradha Venkatasubramanian
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
……Appellants
Versus
1) Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
2) Board of Trustees of HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
3) HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
4) HSBC Asset Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
5) Chief Executive Officer of HSBC Asset
Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
…… Respondents
Mr. Zal Andhyarujina, Advocate with Mr. Joby Mathew and Mr. Deepak Dhane,
Advocates for Appellants.
Mr. Kumar Desai, Advocate with Ms. Daya Gupta, Advocate for Respondent no. 1.
Mr. Iqbal Chagla, Senior Advocate with Mr. Riyaz Chagla, Mr. M. P. Bharucha
and Mr. Charles De Souza, Advocates for Respondents no. 2 to 5.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
Whether the changes made by Res pondents 2 to 5 in the Mutual Fund
scheme had changed the fundamental attr ibutes thereof or modified the same
2
affecting the interest of unitholders so as to attract the provisions of Regulation
18(15A) of the Securities and Excha nge Board of India (Mutual Funds)
Regulations, 1996 (hereinafter referred to as the Regulations) is the short question
that arises for our considerat ion in this appeal. Facts gi ving rise to the appeal are
these.
- 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. Responde nt 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 Ma rkets (India) Privat e Limited as the
sponsors of the mutual fund. Responde nt no. 4 is a private limited company
promoted by HSBC Limited and appoint ed 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 (her einafter referred to as the scheme)
which sought to generate reasonable re turns through investments in government
securities. The scheme had two plans – Short Term Plan and Long Term Plan. The
short term plan was known as HS BC 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 re turns 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 3
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’ inve stment 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).
Sr.
No.
Date Amount
1
October 20, 2008
Rs. 2,00,69,000/- (Rupees Two Crore Sixty
Nine Thousand only).
2
November 7, 2008
Rs.29,98,000/- (Rupees Twenty nine lacs
ninety eight thousand only)
3
November 11, 2008
Rs. 10,00,000/- (Rupees Ten lacs only)
4
November 17, 2008
Rs.11,60,000/- (Rupees Eleven lacs sixty
thousand only).
Total
Rs. 2,52,27,000/- (Two Crores Fifty Two
lacs Twenty Seven Thousand only).
It is the case of the appellants that wh en 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 sh arply fallen (nearly 10 per cent in three
days) from January 6, 2009. The appellants ma de enquiries in this regard from the
distributor who reportedly informed the fo rmer 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 inve stment in government securities for a
period of 5 to 7 years was changed to a te rm investment not ex ceeding 15 years.
The respondents had also changed the na me 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
4
changes and without giving a reasonable oppo rtunity 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 respondent s 2 to 5 were under an obligation to
inform each unitholder 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 inve stment 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 fal ling and with a view to
avoid further continued losses in their i nvestments, 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.
- 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 a nd SEBI Circular dated May
23, 2008?
b. Whether the Board of Tr ustees and the Fund have
contravened Regulations 18(9) & 18(22) and Clauses 2, 6
and 9 of the Code of Conduc t prescribed under the Fifth
Schedule of the Mutual Funds Regulations?
c. Whether the AMC had c ontravened 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?” 5
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 “norma lly 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 fa ctor 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 Re gulation 18(15A) of
the Regulations but he did not record any adverse finding against Respondents 2 to
5 on the plea that there was no such allegation in the s how cause notice issued to
them. The whole time member also referr ed 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) a nd (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 provi sions 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 contravene d 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 Apr il 23, 2010 the whole time member warned 6
Respondents 2 to 5 to strictly comply with the law governing their conduct and
business of mutual fund in the securities ma rket. It is against this order that the
present appeal has been filed. - We have heard Mr. Zal Andhyarujina, Advocate on behalf of the appellants,
Mr. Kumar Desai, Advocate on behalf of the Board and Mr. Iqbal Chagla, Senior
Advocate on behalf of Respondents 2 to 5. The learned senior counsel appearing
for the respondents has, at the outset, raised a prelim inary objection regarding the
maintainability of the appeal. He contends that the appellants are not persons
aggrieved within the meaning of section 15T of the Securities and Exchange Board
of India Act, 1992 (hereinafter called the Act) as nothing has been said against
them in the impugned order and, therefore, they could not maintain the appeal. The
other leg of the argument is that since the appellants had exited the scheme on their
own volition in March, 2009 and ceased to be members thereof, they are not
entitled to any relief whatsoever. Shri Kumar Desai learned counsel appearing for
the Board has adopted the objections raised by the learned senior counsel. Having
given our thoughtful consideration to the preliminary objections raised on behalf of
the respondents, we are unable to accept the same. The grievance of the appellants
is that after they invested in the short term plan of the scheme, respondents 2 to 5
carried out material changes in the sc heme by winding up the long term plan and
converted the short term plan for investment for 5 to 7 years into a long term plan
for investment for 15 years. This, accord ing to them, affected the fundamental
attributes of the scheme and, in any case, modified the scheme affecting the interest
of unitholders and, theref ore, the respondents ought to have complied with the
provisions of Regulation 18(15A) of the Regulations whereunder every unitholder
on the date of the change including the appellants should have been given a right to
exit the scheme at the then prevailing NAV. Further grievance of the appellants is
that even though the Board on their complaint has found that material changes were
brought about in the scheme which affect ed the rights of the unitholders, it has
erred in not issuing directions to responde nts 2 to 5 to comply with the provisions
of Regulation 18(15A) and give a right to exit to every unitholder who on the date 7
of the change was a member of the scheme. The provisions of Regulation 18(15A)
of the Regulations shall be dealt with in detail while dealing with the merits of the
contentions raised before us and suffice it to mention that under the said provision,
if a change in the fundamental attribute of a scheme is carried out or the scheme is
modified affecting the interest of the unit holders, then every unitholder on the date
of the change ought to be gi ven a right to exit the sche me. If the appellants are
right in making the grievance that they have made before us then there is no
gainsaying the fact that they are persons aggrieved and would have a right to exit
from the scheme when the changes were made which right has been denied to
them. Admittedly, the pr ovisions of Regulation 18(15A ) were not complied with
by respondents 2 to 5 when the changes were made and no unitholder was given an
exit route. In this bac kground, we are satisfied that the appellants are persons
aggrieved by the impugned order as they are the ones who have lost the right to exit
and their legal rights have been infringed. We are of the considered opinion that if
the changes carried out in the scheme aff ect its fundamental attributes or modify
the scheme affecting the in terest of unitholders, then every unitholder of the
scheme as on the date of the change could feel aggrieved. If we were to conclude
that the changes do not affect the fundamental attributes of the scheme or they do
not affect the interest of the unitholders, the appeal in that event would be
dismissed. But it cannot be said that it is not maintainable. Moreover, it was the
complaint of the appellants that was being enquired into and we think that they
have a right to tell us that the orde r passed thereon by the Board was not in
accordance with law. In this view of the matter, we ca nnot agree with the learned
senior counsel for respondents 2 to 5 that the appellants are not persons aggrieved
or that they cannot maintain the present appeal. Section 15T of the Act enables a
“person aggrieved” to file an appeal ag ainst an order of th e Board. Although the
words “person aggrieved” have not been de fined in the Act, they have a specific
connotation and are well understood by courts and tribunals. In this context we are
tempted to refer to the observations of Lord Denning in Attorney General of the
Gambia vs. Pierre Sarr N’Jie 1961 AC 617 wherein he observed as under:- 8
“The words person aggrie ved are of wide import and shall not be
subjected to a restric tive interpretation. Th ey do not include, of
course, a mere busy body who is in terfering in things which do not
concern him; but they do include, a person who has a genuine
grievance because an order has been made which prejudicially
affects his interest.” (emphasis supplied)
In Jasbhai Motibhai Desai vs. Roshan Kumar & Ors. AIR 1976 SC 578, the learned
Judges of the Supreme Court were examini ng the question of locus standi of the
appellants therein and laid down tests to distinguish between persons aggrieved and
strangers and busy body of meddlesome interlopers. Persons in the last category
were said to be those who interfere in th ings which do not concern them and act in
the name of Pro Bono Publico though they have no interest of the public or even of
their own to protect. The learned Judges observed that distinction between persons
aggrieved and strangers was real and they laid down the following broad tests in
this regard :-
“Whether the applicant is a pe rson whose legal right has been
infringed? Has he suffered a legal wrong or injury, in the sense, that
his interest, recognized by law, has been prejudicially and directly
affected by the act or omission of the authority, complained of? Is
he a person who has suffered a legal grievance, a person “against
whom a decision has been pronounced which has wrongfully
deprived him of something or wrongfully refused him something, or
wrongfully affected his title to so mething? Has he a special and
substantial grievance of his own beyond some grievance or
inconvenience suffered by him in co mmon with the rest of the
public? Was he entitled to object and be heard by the authority
before it took the impugned action? If so, was he prejudicially
affected in the exercise of that right by the act of usurpation of
jurisdiction on the part of the authority? Is the statute, in context of
which the scope of the words “person aggrieved” is being
considered, a social welfare measure designated to lay down ethical
or professional standards of conduc t for the community? Or is it a
statute dealing with private rights of particular individuals?”
Having regard to the aforesaid observati ons, we are of the firm view that the
appellants satisfy all the tests laid dow n by the Supreme Court and that they are
persons aggrieved entitling them to maintain the present appeal. - It was then argued by the learned seni or counsel that since the appellants
had exited the scheme in March, 2009 on their own volition, they have ceased to be
unitholders and any relief granted to them would be in the form of compensation
which is beyond the jurisdiction of this Tr ibunal and falls within the scope of a 9
Civil Court which alone can deal with such matters. Here again, we are unable to
agree with the learned senior counsel. If the grievance of the appellants is justified,
then a direction must issue to responde nts 2 to 5 to comply with Regulation
18(15A) of the Regulations as on the date of the change. In that event we will have
to hold that the Board erred in not issuing such a direction and that such a direction
would only mean compliance with the provi sions of the Regulations. If such a
direction results in the appellants being compensated, so it be. It is true that the
appellants have exited the scheme a nd that was because the NAV was steeply
falling and it appears that th ey did not have the capacity to take further risks and
bear further losses. Their conduct in exiting the sche me cannot, in the
circumstances of the case, be said to be unreasonable so as to disentitle them to
come up in appeal. It was pointed out by the learned counsel for the respondents
that large number of unitholders continued with the scheme and did not exit. That
may be so as they may be having a larger risk taking capacity. This fact also does
not make the appellants ineligible for claiming the relief which they may otherwise
be entitled to. In the result, we overrule the preliminary objection raised on behalf
of the respondents. - This brings us to the merits of the grievances made by the appellants. Mr.
Zal Andhyarujina, learned counsel for the appellants, strenuously contended that
when the scheme was floated in the year 2003, it had two plans – short term plan
and the long term plan and that the appellants consciously chose the short term plan
whereunder the investments in the scheme could be made for a period not
exceeding 7 years though the said period coul d be brought down to 5 years. It is
argued that after the appellants had invest ed their life’s savings in the scheme,
respondents 2 to 5 brought about substa ntial changes therein changing its
fundamental attributes and, therefore, it was incumbent upon them to have sent a
written communication about the proposed change to each unitholder including the
appellants and also to have given them an option to exit at the prevailing net asset
value without burdening them with any exit load. In other words, what is argued is
that because of the material changes made in the scheme, respondents 2 to 5 ought 10
to have complied with the provisions of Regulation 18(15A) of the Regulations and
not having done so they flouted the law. It is also the grievan ce of the appellants
that they made a complaint to the Boar d which enquired into the same and having
found that material changes had been ma de in the scheme which affected the
interest of the unitholders, it (the Board) failed to issue appropriate directions to
respondents 2 to 5 to comply with the Re gulations. The lear ned senior counsel
appearing on behalf of respondents 2 to 5 has, on the other hand, contended that the
scheme was launched with the investme nt objective of generating reasonable
returns through investment in government s ecurities of various maturities and that
the difference between the long term plan and the short term plan was not the
maturity of the government securities invested in but the investment horizon of the
investors in the scheme. He referred to the circular of February 4, 1998 issued by
the Board and strenuously argu ed that the fundamental attributes of the scheme
would have undergone a change only if it had ceased to be an open ended scheme
or if the investments therein were to be made in securities other than government
securities. The argument is that since neither of these attributes were changed in
the present case, the fundamental attributes of the scheme were not altered so as to
attract the provisions of Regulation 18(15A) of the Regulations. The learned senior
counsel also argued that it was the invest ment pattern in a scheme which is its
fundamental attribute and th at a modified duration or average maturity of an
investment made therein does not constitute a fundamental attribute. According to
the respondents, the fundamental attributes of the scheme would get altered if
investments therein were to be made in equity or money market instruments instead
of government securities as originally stip ulated. The respondents also referred to
the combined offer document wherein it is stipulated that the duration of the
investment could undergo a change in case the market conditions warrant and
according to the fund manager’s view. In short, the respondents pleaded that the
changes brought about in the scheme did not affect the fundamental attributes
thereof and, therefore, compliance with the requirements of Regulation 18(15A)
was not necessary. 11 - Before we deal with the respective contentions of the parties it is necessary
to refer to the changes that were brought about in the scheme after the appellants
had made investments therein. As alrea dy observed, the scheme as originally
formulated in the year 2003 was by the na me of HSBC Gilt Fund and it had two
plans, short term plan and long term plan. It is common case of the parties that the
long term plan was wound up in January 2009 and the short term plan under which
investments were to be made for a period from 5 to 7 years has been changed to a
term investment for a period not exceeding 15 years. The name of the scheme was
also changed and the words “SHORT TERM” appearing in the title of the scheme
were also dropped. Apart from changing the duration of the investments to be
made, the benchmark index of the scheme was also changed from ‘I sec Si-Bex’ to
‘I sec composite index’. It is pertinent to mention here that a benchmark index of a
scheme is a methodology adopted to meas ure the success and performance of a
scheme. It is, thus, clear that the name of the scheme was changed, the duration of
the investments to be made therein ha d undergone a substantial change and the
benchmark index to measure its performance was also altered. - We may now refer to the provisions of the Regulations. These were framed
by the Board with a view to regulate the mutual funds and the schemes operated by
them which have to be in accordance w ith the provisions of the Regulations. A
mutual fund is a fund established in the form of a trust to raise monies through sale
of units to the public or a section of the public in one or more schemes for investing
in different kinds of securities. Public is invited to invest in a scheme through an
offer document. Every mutual fund is required to be registered with the Board and
operate scheme(s) in accordance with the provisions of the Regulations.
Regulation 18 deals with the rights and obligations of the trustees and sub-
regulation (15A) with which we are concer ned is reproduced hereunder for facility
of reference:-
“18. (1) ……………….
(2) ……………….
…………………..
………………….. 12
(15A) The trustees shall ensure that no change in the
fundamental attributes of any scheme or the trust or fees and
expenses payable or any othe r change which would modify
the scheme and affects the inte rest of unithol ders, shall be
carried out unless,-
(i) a written communication a bout the proposed change
is sent to each unitholde r and an advertisement is
given in one English daily newspaper having
nationwide circulation as well as in a newspaper
published in the language of region where the Head
Office of the mutual fund is situated; and
(ii) the unitholders are given an option to exit at the
prevailing Net Asset Value without any exit load.”
A reading of the aforesaid provision leav es no room for doubt that the trustees
cannot bring about a change in the fundame ntal attributes of any scheme or any
other change therein which would modify the scheme and affect the interest of
unitholders unless a written communication about the proposed change is sent to
each unitholder and an advertisement is given in the newspaper as prescribed in the
Regulation and the unitholde rs are given an option to exit the scheme at the
prevailing NAV without any exit load. - Having regard to the changes made in the scheme by which the duration of
the investments therein was altered from 5 to 7 years to a period not exceeding 15
years, we are of the considered opinion th at this change is one which affects the
fundamental attributes of the scheme a nd also modifies the same affecting the
interest of the unitholders. The words “fundamental attributes” have not been
defined in the regulations and, therefore, they have to be unde rstood according to
their ordinary dictionary meaning. Funda mental is something which is basic or
serves as a foundation or goes to the root of the matter. In the context of an
investment scheme, one of the important f actors that an investor looks at is the
duration for which the investments are going to be made in that scheme. In this
sense, the duration of the investment cons titutes one of the fundamental attributes
thereof. In the instant case when the scheme was launched it had two plans – short
term plan and long term plan the durati on of both was different and the investors
took an informed decision in investing in one or the other plan. As already
observed, the appellants chose the short term plan as, in their perception the said 13
plan would give better returns. It is the case of respondents 2 to 5 that the long
term plan which had a long average matur ity period had to be wound up as they
could not muster even a minimum of 20 inve stors so as to continue with the said
plan. It was on the winding up of the long term plan that the duration of
investments in the short term plan was altered from 5 to 7 years to a period not
exceeding 15 years. It is, thus, clear that there were no takers for the long term plan
and what respondents 2 to 5 did was after winding up the long term plan, they
increased the duration of the short term pl an to a long term without informing the
investors. This was most unfair. Si nce the duration of the investments was
substantially increased, we have no doubt in our mind that one of the fundamental
attributes of the scheme was altered. Even the whole time member has recorded a
finding in the impugned order that the change in the duration virtually modified the
short term plan into a long term plan and this is what he has observed :-
“The sudden change in investing substantial funds of the scheme in
long term gilt instruments from short term instruments had in turn
changed the average maturity an d the modified duration of the
scheme portfolio, drastically vary ing them, so as to modify the
scheme virtually into a Long Term Plan.”
Besides, the scheme got modified which a ffected the interest of the unitholders.
The name of the scheme was also cha nged and the words “short term” were
dropped. This is another indicator of the substantial change made in the scheme.
The fact that the bench mark index of the scheme was changed from “I sec Si-Bex”
to “I sec composite index” also supports our view that there was a fundamental
change in the attributes of the scheme which necessitated respondents 2 to 5 to
change the methodology to measure the su ccess of the modified scheme. The
whole time member himself has recorded a finding that the changes affect the
interest of the unitholders of the scheme. It is pertinent to refer to this finding in
his own words :-
“The change in the duration of the scheme is a change which
certainly affects the interest of the unitholders of the scheme. Any
fund house making any changes so as to modify the scheme which
affects the interests of the unitholders would be liable for the
contravention of Regulation 18(15A) of the Mutual Funds
Regulations, if they had effected such changes without complying
with the procedure mentioned therein.” 14
Having recorded the aforesaid findings, the whole time member holds that the
aforesaid changes in the scheme did not alter its fundamental attributes merely
because they did not fall within the clarif ications issued by the Board as per its
circular of February 4, 1998. We cannot ag ree with him. The circular was issued
giving clarifications in regard to some of the fundamental attributes of a scheme.
What is elaborated therein is only illustrative and in the very nature of things it
cannot be exhaustive. Apart from the attributes referred to in the circular, there
could be other fundamental attributes of a scheme like the duration of a scheme as
in the present case. We agree with the learned senior counsel for the respondents
that if the nature of the investments were to change, the fundamental attributes of a
scheme would get altered. He was right in contending that if investments were to
be made in equity or money market inst ruments instead of Government securities
as originally stipulated, th e fundamental attributes of a scheme would undergo a
change. But those could not be the only f undamental attributes of a scheme. As
already observed, there could be other attributes as well depending upon the nature
of the scheme. - We are really amazed that the whole time member after recording a
finding that respondents 2 to 5 had changed the scheme which affected the interest
of the unitholders without complying with Regulation 18(15A) of the Regulations
failed to issue directions to these res pondents for complying with the provision.
The finding recorded in this regard ha s already been reproduced above and we
agree with the whole time member that respondents 2 to 5 had brought about
changes in the scheme which affected the interest of the unitholders. This being so
they were obliged to comply with the provisions of Regulation 18(15A) which they
have not and the grievance of the appellants is justified that the Board failed to
issue appropriate directions in this re gard. The reason given by the whole time
member for not issuing the necessary directions is that there was no such allegation
in the show cause notice dated August 7, 2009 that was issued to the respondents.
This reason, to say the least, is most untenable. The details of the changes made in
the scheme have been elaborated in th e show cause notice a nd there is a clear 15
allegation in para 16 thereof that the respondents had viol ated, among others,
Regulation 18(15A) of the Regulations. It is this Regulation which required the
respondents to give an exit route to all th ose who were the unitholders on the date
of the change including the appellants. We are satisfied that the whole time
member grossly erred in not issuing the appropriate directions in this regard. - Before concluding, we may notice yet another argument raised on behalf
of the respondents. It wa s urged that the combined offer document issued by
respondents 2 to 5 itself cont ained a stipulation that a change could be made if
warranted by the market conditions and according to the fund manager’s view. The
argument is that since the changes were ma de as per the stipulation in the offer
document, the appellants could possibly have no grievance. We cannot accept this
contention either. The power of the fund manager to bring about changes in any
scheme as stipulated in the combined offer document cannot be disputed but if such
changes alter the fundamental attributes of a scheme or modify the same affecting
the interest of the unitholders as in the present case, the fund and its mangers would
have to comply with the provisions of Regulation 18(15A) of the Regulations. It is
the non compliance with this provision which is the root cause of the grievance
made by the appellants. - Respondents 2 to 5 have al so been found guilty of violating the code of
conduct prescribed in the fifth schedule to the Regulations for which they have
been appropriately warned. Since they have not come up in appeal, it is not
necessary for us to go into the merits of those findings.
For the reasons recorded above, we allow the appeal, set aside the findings
of the whole time member on issue (a) as formulated in para 4 of the impugned
order and hold that the changes brought about in the scheme altered the
fundamental attributes thereof and also modified the same affecting the interest of
the unitholders. In view of these findings, we would have normally issued a
direction to respondents 2 to 5 to co mply with Regulation 18(15A) of the
Regulations and give an exit route to all those who were unitholders on the date of 16
the change. We are refraining from issuin g such a direction as we were informed
by the respondents during the course of the hearing that NAV of the scheme has
now substantially increased and that no un itholder shall like to exit at the then
prevailing NAV which was much lower. Moreover, no other unitholder/investor
has come up in appeal before us. This, how ever, does not mean that the appellants
who have been agitating the matter can be deprived of their right to exit the scheme
as on the date of the change at the then prevailing NAV. A direction is, therefore,
issued to respondents 2 to 5 to comply with Regulation 18(15A) of the Regulations
qua the appellants and provide them with an exit route. The appellants are also
directed to furnish adequate proof of the price at which they exited the scheme. We
are issuing this direction in exercise of our powers under Rule 21 of the Securities
Appellate Tribunal (Procedure) Rules, 2000 in order to secure the ends of justice.
Parties are left to bear their own costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
3.5.2011
Prepared & Compared by
rhn/ptm
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 111 of 2010
Date of decision: 3.5.2011 1) Subramanian R. Venkat
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
2) Anuradha Venkatasubramanian
6 Nugget, 18th Road,
Khar (West), Mumbai – 400 052.
……Appellants
Versus
1) Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
2) Board of Trustees of HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
3) HSBC Mutual Fund
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
4) HSBC Asset Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
5) Chief Executive Officer of HSBC Asset
Management (India) Private Limited
Having address at 314, D. N. Road,
Fort, Mumbai – 400 001.
…… Respondents
Mr. Zal Andhyarujina, Advocate with Mr. Joby Mathew and Mr. Deepak Dhane,
Advocates for Appellants.
Mr. Kumar Desai, Advocate with Ms. Daya Gupta, Advocate for Respondent no. 1.
Mr. Iqbal Chagla, Senior Advocate with Mr. Riyaz Chagla, Mr. M. P. Bharucha
and Mr. Charles De Souza, Advocates for Respondents no. 2 to 5.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
Whether the changes made by Res pondents 2 to 5 in the Mutual Fund
scheme had changed the fundamental attr ibutes thereof or modified the same
2
affecting the interest of unitholders so as to attract the provisions of Regulation
18(15A) of the Securities and Excha nge Board of India (Mutual Funds)
Regulations, 1996 (hereinafter referred to as the Regulations) is the short question
that arises for our considerat ion in this appeal. Facts gi ving rise to the appeal are
these.
- 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. Responde nt 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 Ma rkets (India) Privat e Limited as the
sponsors of the mutual fund. Responde nt no. 4 is a private limited company
promoted by HSBC Limited and appoint ed 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 (her einafter referred to as the scheme)
which sought to generate reasonable re turns through investments in government
securities. The scheme had two plans – Short Term Plan and Long Term Plan. The
short term plan was known as HS BC 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 re turns 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 3
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’ inve stment 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).
Sr.
No.
Date Amount
1
October 20, 2008
Rs. 2,00,69,000/- (Rupees Two Crore Sixty
Nine Thousand only).
2
November 7, 2008
Rs.29,98,000/- (Rupees Twenty nine lacs
ninety eight thousand only)
3
November 11, 2008
Rs. 10,00,000/- (Rupees Ten lacs only)
4
November 17, 2008
Rs.11,60,000/- (Rupees Eleven lacs sixty
thousand only).
Total
Rs. 2,52,27,000/- (Two Crores Fifty Two
lacs Twenty Seven Thousand only).
It is the case of the appellants that wh en 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 sh arply fallen (nearly 10 per cent in three
days) from January 6, 2009. The appellants ma de enquiries in this regard from the
distributor who reportedly informed the fo rmer 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 inve stment in government securities for a
period of 5 to 7 years was changed to a te rm investment not ex ceeding 15 years.
The respondents had also changed the na me 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
4
changes and without giving a reasonable oppo rtunity 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 respondent s 2 to 5 were under an obligation to
inform each unitholder 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 inve stment 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 fal ling and with a view to
avoid further continued losses in their i nvestments, 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.
- 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 a nd SEBI Circular dated May
23, 2008?
b. Whether the Board of Tr ustees and the Fund have
contravened Regulations 18(9) & 18(22) and Clauses 2, 6
and 9 of the Code of Conduc t prescribed under the Fifth
Schedule of the Mutual Funds Regulations?
c. Whether the AMC had c ontravened 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?” 5
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 “norma lly 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 fa ctor 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 Re gulation 18(15A) of
the Regulations but he did not record any adverse finding against Respondents 2 to
5 on the plea that there was no such allegation in the s how cause notice issued to
them. The whole time member also referr ed 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) a nd (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 provi sions 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 contravene d 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 Apr il 23, 2010 the whole time member warned 6
Respondents 2 to 5 to strictly comply with the law governing their conduct and
business of mutual fund in the securities ma rket. It is against this order that the
present appeal has been filed. - We have heard Mr. Zal Andhyarujina, Advocate on behalf of the appellants,
Mr. Kumar Desai, Advocate on behalf of the Board and Mr. Iqbal Chagla, Senior
Advocate on behalf of Respondents 2 to 5. The learned senior counsel appearing
for the respondents has, at the outset, raised a prelim inary objection regarding the
maintainability of the appeal. He contends that the appellants are not persons
aggrieved within the meaning of section 15T of the Securities and Exchange Board
of India Act, 1992 (hereinafter called the Act) as nothing has been said against
them in the impugned order and, therefore, they could not maintain the appeal. The
other leg of the argument is that since the appellants had exited the scheme on their
own volition in March, 2009 and ceased to be members thereof, they are not
entitled to any relief whatsoever. Shri Kumar Desai learned counsel appearing for
the Board has adopted the objections raised by the learned senior counsel. Having
given our thoughtful consideration to the preliminary objections raised on behalf of
the respondents, we are unable to accept the same. The grievance of the appellants
is that after they invested in the short term plan of the scheme, respondents 2 to 5
carried out material changes in the sc heme by winding up the long term plan and
converted the short term plan for investment for 5 to 7 years into a long term plan
for investment for 15 years. This, accord ing to them, affected the fundamental
attributes of the scheme and, in any case, modified the scheme affecting the interest
of unitholders and, theref ore, the respondents ought to have complied with the
provisions of Regulation 18(15A) of the Regulations whereunder every unitholder
on the date of the change including the appellants should have been given a right to
exit the scheme at the then prevailing NAV. Further grievance of the appellants is
that even though the Board on their complaint has found that material changes were
brought about in the scheme which affect ed the rights of the unitholders, it has
erred in not issuing directions to responde nts 2 to 5 to comply with the provisions
of Regulation 18(15A) and give a right to exit to every unitholder who on the date 7
of the change was a member of the scheme. The provisions of Regulation 18(15A)
of the Regulations shall be dealt with in detail while dealing with the merits of the
contentions raised before us and suffice it to mention that under the said provision,
if a change in the fundamental attribute of a scheme is carried out or the scheme is
modified affecting the interest of the unit holders, then every unitholder on the date
of the change ought to be gi ven a right to exit the sche me. If the appellants are
right in making the grievance that they have made before us then there is no
gainsaying the fact that they are persons aggrieved and would have a right to exit
from the scheme when the changes were made which right has been denied to
them. Admittedly, the pr ovisions of Regulation 18(15A ) were not complied with
by respondents 2 to 5 when the changes were made and no unitholder was given an
exit route. In this bac kground, we are satisfied that the appellants are persons
aggrieved by the impugned order as they are the ones who have lost the right to exit
and their legal rights have been infringed. We are of the considered opinion that if
the changes carried out in the scheme aff ect its fundamental attributes or modify
the scheme affecting the in terest of unitholders, then every unitholder of the
scheme as on the date of the change could feel aggrieved. If we were to conclude
that the changes do not affect the fundamental attributes of the scheme or they do
not affect the interest of the unitholders, the appeal in that event would be
dismissed. But it cannot be said that it is not maintainable. Moreover, it was the
complaint of the appellants that was being enquired into and we think that they
have a right to tell us that the orde r passed thereon by the Board was not in
accordance with law. In this view of the matter, we ca nnot agree with the learned
senior counsel for respondents 2 to 5 that the appellants are not persons aggrieved
or that they cannot maintain the present appeal. Section 15T of the Act enables a
“person aggrieved” to file an appeal ag ainst an order of th e Board. Although the
words “person aggrieved” have not been de fined in the Act, they have a specific
connotation and are well understood by courts and tribunals. In this context we are
tempted to refer to the observations of Lord Denning in Attorney General of the
Gambia vs. Pierre Sarr N’Jie 1961 AC 617 wherein he observed as under:- 8
“The words person aggrie ved are of wide import and shall not be
subjected to a restric tive interpretation. Th ey do not include, of
course, a mere busy body who is in terfering in things which do not
concern him; but they do include, a person who has a genuine
grievance because an order has been made which prejudicially
affects his interest.” (emphasis supplied)
In Jasbhai Motibhai Desai vs. Roshan Kumar & Ors. AIR 1976 SC 578, the learned
Judges of the Supreme Court were examini ng the question of locus standi of the
appellants therein and laid down tests to distinguish between persons aggrieved and
strangers and busy body of meddlesome interlopers. Persons in the last category
were said to be those who interfere in th ings which do not concern them and act in
the name of Pro Bono Publico though they have no interest of the public or even of
their own to protect. The learned Judges observed that distinction between persons
aggrieved and strangers was real and they laid down the following broad tests in
this regard :-
“Whether the applicant is a pe rson whose legal right has been
infringed? Has he suffered a legal wrong or injury, in the sense, that
his interest, recognized by law, has been prejudicially and directly
affected by the act or omission of the authority, complained of? Is
he a person who has suffered a legal grievance, a person “against
whom a decision has been pronounced which has wrongfully
deprived him of something or wrongfully refused him something, or
wrongfully affected his title to so mething? Has he a special and
substantial grievance of his own beyond some grievance or
inconvenience suffered by him in co mmon with the rest of the
public? Was he entitled to object and be heard by the authority
before it took the impugned action? If so, was he prejudicially
affected in the exercise of that right by the act of usurpation of
jurisdiction on the part of the authority? Is the statute, in context of
which the scope of the words “person aggrieved” is being
considered, a social welfare measure designated to lay down ethical
or professional standards of conduc t for the community? Or is it a
statute dealing with private rights of particular individuals?”
Having regard to the aforesaid observati ons, we are of the firm view that the
appellants satisfy all the tests laid dow n by the Supreme Court and that they are
persons aggrieved entitling them to maintain the present appeal. - It was then argued by the learned seni or counsel that since the appellants
had exited the scheme in March, 2009 on their own volition, they have ceased to be
unitholders and any relief granted to them would be in the form of compensation
which is beyond the jurisdiction of this Tr ibunal and falls within the scope of a 9
Civil Court which alone can deal with such matters. Here again, we are unable to
agree with the learned senior counsel. If the grievance of the appellants is justified,
then a direction must issue to responde nts 2 to 5 to comply with Regulation
18(15A) of the Regulations as on the date of the change. In that event we will have
to hold that the Board erred in not issuing such a direction and that such a direction
would only mean compliance with the provi sions of the Regulations. If such a
direction results in the appellants being compensated, so it be. It is true that the
appellants have exited the scheme a nd that was because the NAV was steeply
falling and it appears that th ey did not have the capacity to take further risks and
bear further losses. Their conduct in exiting the sche me cannot, in the
circumstances of the case, be said to be unreasonable so as to disentitle them to
come up in appeal. It was pointed out by the learned counsel for the respondents
that large number of unitholders continued with the scheme and did not exit. That
may be so as they may be having a larger risk taking capacity. This fact also does
not make the appellants ineligible for claiming the relief which they may otherwise
be entitled to. In the result, we overrule the preliminary objection raised on behalf
of the respondents. - This brings us to the merits of the grievances made by the appellants. Mr.
Zal Andhyarujina, learned counsel for the appellants, strenuously contended that
when the scheme was floated in the year 2003, it had two plans – short term plan
and the long term plan and that the appellants consciously chose the short term plan
whereunder the investments in the scheme could be made for a period not
exceeding 7 years though the said period coul d be brought down to 5 years. It is
argued that after the appellants had invest ed their life’s savings in the scheme,
respondents 2 to 5 brought about substa ntial changes therein changing its
fundamental attributes and, therefore, it was incumbent upon them to have sent a
written communication about the proposed change to each unitholder including the
appellants and also to have given them an option to exit at the prevailing net asset
value without burdening them with any exit load. In other words, what is argued is
that because of the material changes made in the scheme, respondents 2 to 5 ought 10
to have complied with the provisions of Regulation 18(15A) of the Regulations and
not having done so they flouted the law. It is also the grievan ce of the appellants
that they made a complaint to the Boar d which enquired into the same and having
found that material changes had been ma de in the scheme which affected the
interest of the unitholders, it (the Board) failed to issue appropriate directions to
respondents 2 to 5 to comply with the Re gulations. The lear ned senior counsel
appearing on behalf of respondents 2 to 5 has, on the other hand, contended that the
scheme was launched with the investme nt objective of generating reasonable
returns through investment in government s ecurities of various maturities and that
the difference between the long term plan and the short term plan was not the
maturity of the government securities invested in but the investment horizon of the
investors in the scheme. He referred to the circular of February 4, 1998 issued by
the Board and strenuously argu ed that the fundamental attributes of the scheme
would have undergone a change only if it had ceased to be an open ended scheme
or if the investments therein were to be made in securities other than government
securities. The argument is that since neither of these attributes were changed in
the present case, the fundamental attributes of the scheme were not altered so as to
attract the provisions of Regulation 18(15A) of the Regulations. The learned senior
counsel also argued that it was the invest ment pattern in a scheme which is its
fundamental attribute and th at a modified duration or average maturity of an
investment made therein does not constitute a fundamental attribute. According to
the respondents, the fundamental attributes of the scheme would get altered if
investments therein were to be made in equity or money market instruments instead
of government securities as originally stip ulated. The respondents also referred to
the combined offer document wherein it is stipulated that the duration of the
investment could undergo a change in case the market conditions warrant and
according to the fund manager’s view. In short, the respondents pleaded that the
changes brought about in the scheme did not affect the fundamental attributes
thereof and, therefore, compliance with the requirements of Regulation 18(15A)
was not necessary. 11 - Before we deal with the respective contentions of the parties it is necessary
to refer to the changes that were brought about in the scheme after the appellants
had made investments therein. As alrea dy observed, the scheme as originally
formulated in the year 2003 was by the na me of HSBC Gilt Fund and it had two
plans, short term plan and long term plan. It is common case of the parties that the
long term plan was wound up in January 2009 and the short term plan under which
investments were to be made for a period from 5 to 7 years has been changed to a
term investment for a period not exceeding 15 years. The name of the scheme was
also changed and the words “SHORT TERM” appearing in the title of the scheme
were also dropped. Apart from changing the duration of the investments to be
made, the benchmark index of the scheme was also changed from ‘I sec Si-Bex’ to
‘I sec composite index’. It is pertinent to mention here that a benchmark index of a
scheme is a methodology adopted to meas ure the success and performance of a
scheme. It is, thus, clear that the name of the scheme was changed, the duration of
the investments to be made therein ha d undergone a substantial change and the
benchmark index to measure its performance was also altered. - We may now refer to the provisions of the Regulations. These were framed
by the Board with a view to regulate the mutual funds and the schemes operated by
them which have to be in accordance w ith the provisions of the Regulations. A
mutual fund is a fund established in the form of a trust to raise monies through sale
of units to the public or a section of the public in one or more schemes for investing
in different kinds of securities. Public is invited to invest in a scheme through an
offer document. Every mutual fund is required to be registered with the Board and
operate scheme(s) in accordance with the provisions of the Regulations.
Regulation 18 deals with the rights and obligations of the trustees and sub-
regulation (15A) with which we are concer ned is reproduced hereunder for facility
of reference:-
“18. (1) ……………….
(2) ……………….
…………………..
………………….. 12
(15A) The trustees shall ensure that no change in the
fundamental attributes of any scheme or the trust or fees and
expenses payable or any othe r change which would modify
the scheme and affects the inte rest of unithol ders, shall be
carried out unless,-
(i) a written communication a bout the proposed change
is sent to each unitholde r and an advertisement is
given in one English daily newspaper having
nationwide circulation as well as in a newspaper
published in the language of region where the Head
Office of the mutual fund is situated; and
(ii) the unitholders are given an option to exit at the
prevailing Net Asset Value without any exit load.”
A reading of the aforesaid provision leav es no room for doubt that the trustees
cannot bring about a change in the fundame ntal attributes of any scheme or any
other change therein which would modify the scheme and affect the interest of
unitholders unless a written communication about the proposed change is sent to
each unitholder and an advertisement is given in the newspaper as prescribed in the
Regulation and the unitholde rs are given an option to exit the scheme at the
prevailing NAV without any exit load. - Having regard to the changes made in the scheme by which the duration of
the investments therein was altered from 5 to 7 years to a period not exceeding 15
years, we are of the considered opinion th at this change is one which affects the
fundamental attributes of the scheme a nd also modifies the same affecting the
interest of the unitholders. The words “fundamental attributes” have not been
defined in the regulations and, therefore, they have to be unde rstood according to
their ordinary dictionary meaning. Funda mental is something which is basic or
serves as a foundation or goes to the root of the matter. In the context of an
investment scheme, one of the important f actors that an investor looks at is the
duration for which the investments are going to be made in that scheme. In this
sense, the duration of the investment cons titutes one of the fundamental attributes
thereof. In the instant case when the scheme was launched it had two plans – short
term plan and long term plan the durati on of both was different and the investors
took an informed decision in investing in one or the other plan. As already
observed, the appellants chose the short term plan as, in their perception the said 13
plan would give better returns. It is the case of respondents 2 to 5 that the long
term plan which had a long average matur ity period had to be wound up as they
could not muster even a minimum of 20 inve stors so as to continue with the said
plan. It was on the winding up of the long term plan that the duration of
investments in the short term plan was altered from 5 to 7 years to a period not
exceeding 15 years. It is, thus, clear that there were no takers for the long term plan
and what respondents 2 to 5 did was after winding up the long term plan, they
increased the duration of the short term pl an to a long term without informing the
investors. This was most unfair. Si nce the duration of the investments was
substantially increased, we have no doubt in our mind that one of the fundamental
attributes of the scheme was altered. Even the whole time member has recorded a
finding in the impugned order that the change in the duration virtually modified the
short term plan into a long term plan and this is what he has observed :-
“The sudden change in investing substantial funds of the scheme in
long term gilt instruments from short term instruments had in turn
changed the average maturity an d the modified duration of the
scheme portfolio, drastically vary ing them, so as to modify the
scheme virtually into a Long Term Plan.”
Besides, the scheme got modified which a ffected the interest of the unitholders.
The name of the scheme was also cha nged and the words “short term” were
dropped. This is another indicator of the substantial change made in the scheme.
The fact that the bench mark index of the scheme was changed from “I sec Si-Bex”
to “I sec composite index” also supports our view that there was a fundamental
change in the attributes of the scheme which necessitated respondents 2 to 5 to
change the methodology to measure the su ccess of the modified scheme. The
whole time member himself has recorded a finding that the changes affect the
interest of the unitholders of the scheme. It is pertinent to refer to this finding in
his own words :-
“The change in the duration of the scheme is a change which
certainly affects the interest of the unitholders of the scheme. Any
fund house making any changes so as to modify the scheme which
affects the interests of the unitholders would be liable for the
contravention of Regulation 18(15A) of the Mutual Funds
Regulations, if they had effected such changes without complying
with the procedure mentioned therein.” 14
Having recorded the aforesaid findings, the whole time member holds that the
aforesaid changes in the scheme did not alter its fundamental attributes merely
because they did not fall within the clarif ications issued by the Board as per its
circular of February 4, 1998. We cannot ag ree with him. The circular was issued
giving clarifications in regard to some of the fundamental attributes of a scheme.
What is elaborated therein is only illustrative and in the very nature of things it
cannot be exhaustive. Apart from the attributes referred to in the circular, there
could be other fundamental attributes of a scheme like the duration of a scheme as
in the present case. We agree with the learned senior counsel for the respondents
that if the nature of the investments were to change, the fundamental attributes of a
scheme would get altered. He was right in contending that if investments were to
be made in equity or money market inst ruments instead of Government securities
as originally stipulated, th e fundamental attributes of a scheme would undergo a
change. But those could not be the only f undamental attributes of a scheme. As
already observed, there could be other attributes as well depending upon the nature
of the scheme. - We are really amazed that the whole time member after recording a
finding that respondents 2 to 5 had changed the scheme which affected the interest
of the unitholders without complying with Regulation 18(15A) of the Regulations
failed to issue directions to these res pondents for complying with the provision.
The finding recorded in this regard ha s already been reproduced above and we
agree with the whole time member that respondents 2 to 5 had brought about
changes in the scheme which affected the interest of the unitholders. This being so
they were obliged to comply with the provisions of Regulation 18(15A) which they
have not and the grievance of the appellants is justified that the Board failed to
issue appropriate directions in this re gard. The reason given by the whole time
member for not issuing the necessary directions is that there was no such allegation
in the show cause notice dated August 7, 2009 that was issued to the respondents.
This reason, to say the least, is most untenable. The details of the changes made in
the scheme have been elaborated in th e show cause notice a nd there is a clear 15
allegation in para 16 thereof that the respondents had viol ated, among others,
Regulation 18(15A) of the Regulations. It is this Regulation which required the
respondents to give an exit route to all th ose who were the unitholders on the date
of the change including the appellants. We are satisfied that the whole time
member grossly erred in not issuing the appropriate directions in this regard. - Before concluding, we may notice yet another argument raised on behalf
of the respondents. It wa s urged that the combined offer document issued by
respondents 2 to 5 itself cont ained a stipulation that a change could be made if
warranted by the market conditions and according to the fund manager’s view. The
argument is that since the changes were ma de as per the stipulation in the offer
document, the appellants could possibly have no grievance. We cannot accept this
contention either. The power of the fund manager to bring about changes in any
scheme as stipulated in the combined offer document cannot be disputed but if such
changes alter the fundamental attributes of a scheme or modify the same affecting
the interest of the unitholders as in the present case, the fund and its mangers would
have to comply with the provisions of Regulation 18(15A) of the Regulations. It is
the non compliance with this provision which is the root cause of the grievance
made by the appellants. - Respondents 2 to 5 have al so been found guilty of violating the code of
conduct prescribed in the fifth schedule to the Regulations for which they have
been appropriately warned. Since they have not come up in appeal, it is not
necessary for us to go into the merits of those findings.
For the reasons recorded above, we allow the appeal, set aside the findings
of the whole time member on issue (a) as formulated in para 4 of the impugned
order and hold that the changes brought about in the scheme altered the
fundamental attributes thereof and also modified the same affecting the interest of
the unitholders. In view of these findings, we would have normally issued a
direction to respondents 2 to 5 to co mply with Regulation 18(15A) of the
Regulations and give an exit route to all those who were unitholders on the date of 16
the change. We are refraining from issuin g such a direction as we were informed
by the respondents during the course of the hearing that NAV of the scheme has
now substantially increased and that no un itholder shall like to exit at the then
prevailing NAV which was much lower. Moreover, no other unitholder/investor
has come up in appeal before us. This, how ever, does not mean that the appellants
who have been agitating the matter can be deprived of their right to exit the scheme
as on the date of the change at the then prevailing NAV. A direction is, therefore,
issued to respondents 2 to 5 to comply with Regulation 18(15A) of the Regulations
qua the appellants and provide them with an exit route. The appellants are also
directed to furnish adequate proof of the price at which they exited the scheme. We
are issuing this direction in exercise of our powers under Rule 21 of the Securities
Appellate Tribunal (Procedure) Rules, 2000 in order to secure the ends of justice.
Parties are left to bear their own costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
3.5.2011
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