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SEBI settles proceedings in respect of a prominent Mutual Fund and its executives

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Regstreet Law Advisors obtains settlement for a Mutual Fund that is a unit of governmental authority.

The SEBI had undertaken thematic inspection of the Asset Management Company for the period August 01, 2018 to February 28, 2019 with respect to Inter Scheme Transfers (ISTs) and valuation of downgraded debt securities.

Pursuant to the inspection, a Show Cause Notice was issued to the Asset Management Company of the Mutual Fund including its executives such as the erstwhile CEO, erstwhile Compliance Officer and Chief Investment Officer amongst others. Breach of the SEBI Act, 1992; the SEBI (Mutual Fund) Regulations, 1996 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003 (PFUTP Regulations) was alleged broadly for (i) undertaking ISTs resulting into transfer of high-risk securities to schemes categorized as low / medium risk, at variance with their investment objectives; (ii) failing to adhere with the overarching principles of fair valuations; and (iii) dealing in securities in contravention of the PFUTP Regulations.

After the receipt of the Show Cause Notice, the Noticees vehemently denied the broad brush allegations and subsequently applied for settlement under the SEBI (Settlement Proceedings) Regulations, 2018 without the noticees admitting or denying the findings of fact and conclusions of law. SEBI issued the Settlement order.

In law, a settlement will not be considered adverse or negative against a Noticee as settlement leaves the determination of question of law as well as of facts, open. Further, settlement is usually obtained to buy peace and to put quietus to a matter, subject to payment of a usually high sum called Settlement Amount. In a particular case, SEBI can also impose other conditions.

SEBI has in recent times increased its scrutiny of Mutual Funds. As per the SEBI Annual Report for 2021-2022, SEBI undertook inspection of 23 Mutual Funds and their Registrar and Share Transfer Agents and issued 13 administrative warnings, 9 advice letters, 2 deficiency observations and 3 adjudication orders.

SEBI also has brought about a slew of regulatory changes w.r.t. MFs including amending the SEBI (Prohibition of Insider Trading) Regulations, 2015 to bring units of mutual funds under its ambit.

Copy of the Settlement order is annexed hereinbelow.

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