SC notice to Shriram over MF rule violation

The Supreme Court issued notices to Shriram Mutual Fund and its asset management company on an appeal of the Securities and Exchange Board of India (Sebi) raising question of imposing penalty on mutual funds under the strict liability rule.

This is reportedly the first time such a penalty has been imposed on a mutual fund.

The Securities Appellate Tribunal (SAT) had ruled in this case that if there was no intention to violate the regulations on the part of the mutual fund, it should not be imposed a penalty.

Sebi argues that the intention is not necessary. Once it is conclusively established that the mutual fund has violated the terms of the certificate of registration and the Sebi (Mutual Funds) Regulations 1996, the company becomes liable to penalty.

In this case, the companies have allegedly admitted the violation of the regulations during a continuous period of two-and-a half years in 12 instances, covering six quarters.

Regulation 25 (7) (A) provides that an asset management company shall not, through any broker associated with the sponsor, purchase or sell securities which is an average of five per cent or more of the aggregate purchases and sale of securities made by the fund in all its schemes.

The limit shall apply for a block of three months. Therefore there has been a repetitive violation of the regulation and the terms of the registration, Sebi argues.

Sebi appointed an adjudicating authority to enquire into and decide alleged contravention of the Sebi Act and regulations.

After an enquiry, a penalty of Rs 5 lakh was imposed on the asset management company and Rs 2 lakh on the parent company. They appealed to SAT which set aside the penalty.

"SAT invented its own tests which are not found in the regulations," counsel for Sebi, P Chidambaram, submitted before a bench consisting of justice Y K Sabharwal and justice S B Sinha.

The counsel stressed that the 'intention' to violate a regulation is not necessary in civil law. It is a concept in criminal law.

The penalty clauses in regulations 15-D and 15-E do not speak of the intention to violate the regulations.

In this case, the companies had grossly exceeded the permissible limits of 5 per cent for certain quarters. In one quarter, the percentage of business done through its associate broker Springfield Securities was 91.68 per cent.