Nobody Lost Money. That Was No Defence At All.

What happened

Kotak Mahindra Mutual Fund launched six close-ended schemes between 2013 and 2016, each with a fixed maturity period, maturing around April and May 2019.

Of the Rs 1,625 crore collected, Rs 266 crore was invested in Zero Coupon Non-Convertible Debentures issued by ESSEL group companies, backed by a pledge over 22.8% of the shares of Zee Entertainment Enterprises Limited.

The ZEEL share price fell and the security cover dropped below 1.5 times the exposure. Kotak Asset Management agreed with other lenders to restructure the redemption, and the maturity dates of the ZCNCDs were extended beyond the maturity dates of the schemes themselves.

The six schemes matured. The entire amount ought to have been paid to unitholders. It was not.

The defence, and why none of it worked

The appellants argued the actions caused no loss or harm to the investing public; that they in fact resulted in gain to investors; that all three sets of appellants acted bona fide in the interests of investors and made no monetary benefit; and that had they taken the steps SEBI postulated, investors would have faced a loss in the range of Rs 376.05 crore.

The Court called the first of these “no defence at all”.

Market integrity being the paramount consideration, profit or loss to investors is immaterial to determine whether a regulatory infraction has occurred.

The reasoning is about incentives rather than this transaction. Breaches of a regulatory framework could fortuitously end in gain — but excusing a breach because it led to profit is likely to incentivise the next one. The Court traced the sequence plainly: from profit to greed, from greed to regulatory breach, and from breach to systemic failure.

A wrongdoer cannot use the plea that investors gained as a shield for evading penalty.

The roll over that never happened

There was a lawful route available, and the judgment is explicit that taking it would have saved the fund house.

Kotak AMC had represented to unitholders that their investment was for a fixed term and that returns would be credited on the maturity dates or soon after. A roll over carried out in the manner ordained is what could have avoided the breach.

No notification of a proposed roll over was made to the unitholders, or to SEBI. So there was no roll over. The Court described the breach as brazen and indefensible.

Compliance is not weighed against outcomes

The most consequential holding is on the Rs 376 crore argument — that following the regulatory route would have hurt investors, and that this justified departing from it.

The Court held that argument wholly opposed to the very scheme of securities law. The course Kotak AMC adopted was unknown to, and irreconcilable with, the legislative scheme under the SEBI Act; it departed from a carefully calibrated framework by not winding up the schemes on their respective maturity dates.

Compliance with the regulatory mechanism being mandatory and non-negotiable, it is no valid defence that compliance with law would have resulted in loss.

All three parties — Kotak AMC, Kotak Trustee and the senior executives — failed to ensure compliance with the 1996 Regulations. The appeals were dismissed, with costs of Rs 30 lakh on Kotak AMC and Rs 20 lakh on Kotak Trustee.

Who argued it

Frequently asked

Is it a defence that investors made money despite the breach?

No. The Supreme Court held it is no defence at all. The SEBI (Mutual Funds) Regulations, 1996 make no distinction between a breach resulting in profit and a violation resulting in loss, and market integrity is the paramount consideration.

Why does investor gain not excuse a regulatory breach?

Because of what it would encourage. The Court reasoned that excusing a breach which led to profit is likely to incentivise the next breach, and described the progression from profit to greed, from greed to regulatory breach, and from breach to systemic failure.

Can a fund house depart from the rules to avoid causing investors a loss?

No. The argument that compliance would have caused a loss of about Rs 376 crore was held wholly opposed to the scheme of securities law. Compliance with the regulatory mechanism is mandatory and non-negotiable.

What should Kotak AMC have done instead?

Rolled the schemes over in the manner ordained by the regulations. The Court said that is what could have saved it from breach, but because no notification of a proposed roll over was made to the unitholders or to SEBI, there was no roll over at all.

What costs were imposed?

The appeals of Kotak AMC, Kotak Trustee and the senior executives were dismissed, and Kotak AMC and Kotak Trustee were directed to bear costs assessed at Rs 30 lakh and Rs 20 lakh respectively.

For anyone advising a regulated intermediary

1. Stop arguing outcomes. Whether investors gained or lost does not determine whether a regulatory infraction occurred, and leading with it invites the answer that it is no defence at all.
2. Where the regulations provide a route out of a problem — here, a roll over — take that route and document the notification to both investors and the regulator.
3. Never treat 'compliance would have caused a loss' as a justification. The Court held it opposed to the scheme of securities law.
4. Check that any restructuring of an underlying instrument does not push its maturity beyond the maturity of the scheme holding it.
5. Note the costs exposure. Rs 50 lakh was imposed on the fund house and trustee, which is a separate consequence from penalty.

Source. Supreme Court of India, 2026 INSC 681, [2026] 8 S.C.R. 160, Civil Appeal No. 6529 of 2026, decided 13 July 2026 by Justice Dipankar Datta and Justice Satish Chandra Sharma. This explainer is written from the judgment text as reported.

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