Appeal No. 111 of 2010. Case: 1. Subramanian R. Venkat, 2. Anuradha Venkatasubramanian Vs 1. Securities and Exchange Board of India, 2. Board of Trustees of HSBC Mutual Fund, 3. HSBC Mutual Fund, 4. HSBC Asset Management (India) Private Limited, 5. Chief Executive Officer of HSBC Asset Management (India) Private Limited. Securities and Exchange Board of India
| Case Number | Appeal No. 111 of 2010 |
| Counsel | For the Appellants: Mr. Zal Andhyarujina, Advocate with Mr. Joby Mathew and Mr. Deepak Dhane, Advocates and For the Respondents: Mr. Kumar Desai, Advocate with Ms. Daya Gupta, Advocate, Mr. Iqbal Chagla, Senior Advocate with Mr. Riyaz Chagla, Mr. M. P. Bharucha and Mr. Charles De Souza, Advocates |
| Judges | N. K. Sodhi, Presiding Officer, P. K. Malhotra, Member and S. S. N. Moorthy, Member |
| Issue | Securities and Exchange Board of India Act, 1992 (hereinafter called the Act) - Section 15T |
| Judgement Date | May 03, 2011 |
| Court | Securities and Exchange Board of India |
Judgment:
N. K. Sodhi, Presiding Officer
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Whether the changes made by Respondents 2 to 5 in the Mutual Fund scheme had changed the fundamental attributes thereof or modified the same affecting the interest of unitholders so as to attract the provisions of Regulation 18(15A) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereinafter referred to as the Regulations) is the short question that arises for our consideration in this appeal. Facts giving rise to the appeal are these.
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The appellants before us are husband and wife and they claim that they regularly invest in shares and mutual fund schemes through market intermediaries duly registered with the Securities and Exchange Board of India (the Board) and/or recognized by the stock exchanges. Respondent no. 2 is the Board of Trustees of HSBC Mutual Fund. Respondent no. 3 is the HSBC Mutual Fund set up in the year 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsors of the mutual fund. Respondent no. 4 is a private limited company promoted by HSBC Limited and appointed by respondent no. 3 to manage the mutual funds and operate the schemes of such funds in accordance with the provisions of the Regulations. Respondent no. 5 is the Chief Executive Officer of the fourth respondent.
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Respondents 2 to 4 had launched an open ended Gilt scheme by the name of HSBC Gilt Fund during the year 2003 (hereinafter referred to as the scheme) which sought to generate reasonable returns through investments in government securities. The scheme had two plans -- Short Term Plan and Long Term Plan. The short term plan was known as HSBC GILT FUND -- SHORT TERM PLAN (HGF-ST). In the offer document it was mentioned that the short term plan was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 7 years and modified duration of the portfolio normally not exceeding 5 years. The long term plan was intended to suit investors with surpluses for medium to long periods and the plan was to invest in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 20 years and modified duration of the portfolio normally not exceeding 12 years. The appellants chose the short term plan as against the long term plan as, according to them, they wanted to invest their personal savings in the short term plan of the scheme and considering the fund's objective, the fund's previous years' investment pattern and having regard to the reputation and brand of HSBC, they agreed to entrust a large portion of their life's savings to this fund and made the following investments through DSP Merrill Lynch Limited (for short the distributor).
Sr.
No.
Date
Amount
1
October 20, 2008
Rs. 2 00 69 000/- (Rupees Two Crore Sixty
Nine '
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 when they received the monthly statement for their account around the third week of February 2009, they noticed a sharp erosion in the value of their account compared to the previous month and also observed that Net Asset Value (NAV) of the fund had sharply fallen (nearly 10 per cent in three days) from January 6, 2009. The appellants made enquiries in this regard from the distributor who reportedly informed the former that respondents 2 to 5 had made changes in the scheme on January 5, 2009. The long term plan was wound up. The short term plan which was meant for investment in government securities for a period of 5 to 7 years was changed to a term investment not exceeding 15 years. The respondents had also changed the name of the scheme by dropping the words "SHORT TERM" from its name. They also changed the benchmark index of the scheme from 'I sec Si-Bex' to 'I sec composite index'. According to the appellants, the fall in the NAV was as a consequence of the changes made in the scheme and their grievance is that the respondents had changed the fundamental attributes of the scheme without informing the unitholders or the distributor of the changes and without giving a reasonable opportunity to the unitholders to exit the scheme as required under the Regulations. The appellants also allege that they were completely unaware of the changes until March 2009. It is their case that mutual funds are required to follow the guidelines and procedures laid down by the Board under the Regulations and respondents 2 to 5 were under an obligation to inform each 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 investment for 5-7 years was converted into a long term plan for investment for a period not exceeding 15 years. The appellants claim that since the NAV was steeply falling and with a view to avoid further continued losses in their investments, they exited the scheme and lodged a complaint with the distributor and the respondents. A complaint dated April 4, 2009 was also filed with the Board with a request to intervene in the matter and direct the asset management company to make good the losses suffered by the appellants.
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The matter was investigated by the Board. While investigating the complaint the Board formulated the following issues for its consideration:-
"a. Whether the impugned changes made in the scheme amounted to changes in the fundamental attributes of the scheme in contravention of Regulation 18(15A) of the Mutual Funds Regulations and SEBI Circular dated May 23, 2008?
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Whether the Board of Trustees and the Fund have contravened Regulations 18(9) & 18(22) and Clauses 2, 6 and 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations?
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Whether the AMC had contravened Regulations 18(9), 18(22), 25(1) & 25(16) and Clauses 2, 6 & 9 of the Code of Conduct prescribed under the Fifth Schedule of the Mutual Funds Regulations?
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Whether the Chief Executive Officer of the AMC had failed to ensure that the Fund/AMC complied with all the provisions of the Regulations, Guidelines and Circulars issued in this regard from time to time, in violation of Regulation 25(6A) of the Mutual Funds Regulations?"
On the first issue, the whole time member observed that "After the Long Term Plan was wound up, only the Short Term Plan was continued. Subsequently, the said plan underwent certain changes, the major change being the change of the modified duration from "normally not exceeding 5 years" to "not exceeding 15 years". He further observed that even though the fund/asset management company had cited liquidity crisis and the corresponding volatility of the assets under management as the reasons for increasing the duration, "the same...
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