Integrity of securities market paramount; rule violator cannot cite investors' profit to escape liability: Supreme Court

Excusing regulatory violations merely because it resulted in profits for investors will threaten the integrity of securities market, the Supreme Court ruled on Monday [Nilesh Shah Vs SEBI].

Integrity of securities market is paramount and a violator of rules cannot cite investors' profit to escape penalty, a bench of Justice Dipankar Datta and Justice Satish Chandra Sharma said.

“Progression from profit to greed, from greed to regulatory breach and from breach to systemic failure is not too unfamiliar. Market integrity being the paramount consideration, profit or loss to investors is immaterial to determine whether a regulatory infraction has occurred," the Court said in its judgment.

Whether investors make a profit or suffer a loss is irrelevant to determining whether a regulatory violation had occurred in the securities market, the Bench underscored.

“The 1996 Regulations make no distinction between a breach resulting in profit and a violation resulting in loss. Neither do we,” the Court said.

The Court made the observation while upholding penalties imposed on Kotak Mahindra Asset Management Company (Kotak AMC), Kotak Mahindra Trustee Company and their six senior executives by Securities and Exchange Board of India (SEBI).

The Court was dealing with their argument that delayed redemption of six close-ended mutual fund schemes, in violation of the relevant regulations, had caused profit to the investors.

The case concerned six close-ended fixed maturity plans launched by Kotak Mutual Fund between 2013 and 2016. They were scheduled to mature in April and May 2019.

Of the ₹1,625 crores collected, ₹266 crores had been invested in zero-coupon non-convertible debentures issued by Konti Infrapower & Multiventures Private Limited and Edison Utility Works Private Limited, both Essel Group companies.

The investments were secured by pledged shares of Zee Entertainment Enterprises Limited. However, the value of the security fell below the stipulated cover after Zee announced plans to divest part of its shareholding and other lenders invoked pledged shares.

Kotak AMC could either sell the pledged shares or restructure the debentures. It chose restructuring and extended their maturity beyond the maturity dates of the schemes.

Consequently, portions of the amount payable to investors were withheld. About ₹376 crore out of ₹2,116 crore was paid after the schemes matured. The entire amount was ultimately paid by September 25, 2019.

Kotak argued that selling the pledged shares could have caused substantial losses to investors. It said decision to extend the maturity date was taken in good faith and had ultimately benefited the investors. It also pointed out that several other mutual funds had invested in Essel Group securities.

However, in August 2021, a whole time member of the SEBI found that Kotak AMC had failed to exercise due diligence, improperly extended the maturity dates and made inadequate disclosures to investors and SEBI.

The whole time member directed Kotak AMC to refund a portion of the investment management and advisory fees with 15 per cent annual interest. It also imposed a ₹50 lakh penalty and restrained Kotak AMC from launching new fixed maturity plan schemes for six months.

In June 2022, a SEBI adjudicating officer separately imposed a penalty of ₹40 on Kotak Trustee. Penalties ranging from ₹10 lakh to ₹30 lakh were imposed on Nilesh Shah and five other senior executives.

In March 2026, the Securities Appellate Tribunal (SAT) partly allowed Kotak AMC’s appeal by setting aside the direction to disgorge the investment management and advisory fees. However, it upheld the remaining findings and penalties. The SAT dismissed the appeal filed by Kotak Trustee and its executives.

The matter then reached the Supreme Court.

Today, the Court said compliance with the regulatory framework is mandatory and “non-negotiable”.

“It is no valid defence that compliance with law would have resulted in loss,” the Court held.

The Bench also rejected the reliance on investments made by other mutual funds.

“Illegality is not cured by numbers; a collective wrong remains illegal, regardless of majority,” it said.

The Court was particularly critical of the manner in which investors were treated, observing that they had no choice in the decision to extend the maturity dates.

“Insofar as the investors are concerned, we pity them,” the Court said.

It added that Kotak Trustee had followed Kotak AMC’s decision instead of independently assessing whether it complied with the regulations and protected unit holders.

Thus, the Court dismissed the appeals and upheld the penalties.

It also imposed costs of ₹30 lakh on Kotak AMC and ₹20 lakh on Kotak Trustee. The amount will be distributed among ten organisations supporting vulnerable groups.

Senior Advocates Mukul Rohatgi and Shyam Divan appeared for the appellants.

Additional Solicitor General N Venkataraman represented SEBI.

[Read Judgment]