Building India’s REIT

SEBI has issued two consultation papers on REITs and InvITs within two days, one enabling depository receipts against their units, the other proposing five ease-of-doing-business measures. Both are welcome, and both leave the central questions half-answered: the DR framework transplants equity rules onto instruments that behave differently, and never explains what problem DRs actually solve when foreign investors can already buy these units directly. Aniket, Purva and I, in our column in @FinancialXpress on what SEBI should fix before finalising.

India has issued almost no equity depository receipts since 2014. SEBI now proposes to extend the instrument to its real estate and infrastructure trusts. Within two days in August, it issued two consultation papers on Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The first, dated August 4, 2026, proposes a framework for issuing Depository Receipts (DRs) against units of REITs and publicly listed InvITs (CP-1). The second, dated August 6, 2026, proposes five ease of doing business measures for the same instruments (CP-2). 

Both consultation papers draw on recommendations of SEBI’s Hybrid Securities Advisory Committee, and CP-2 additionally responds to representations from the Indian REITs Association and the Bharat InvITs Association. Both leave the central questions half-answered.

CP-1 addresses an enabling gap rather than a fresh policy choice. Units of REITs and InvITs already qualify as “permissible securities” under the Depository Receipts Scheme, 2014, and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, permit persons resident outside India to invest directly in these trusts as “Investment Vehicles”. DRs against such units have, in principle, been permissible. What was missing was an enabling provision under the SEBI regulations and an operational framework. 

CP-1 seeks to fill that gap by inserting a regulation in the REIT Regulations and in the InvIT Regulations, without expanding the foreign investment permissions under the Foreign Exchange Management Act, 1999. Privately listed InvITs are excluded because a DR, once listed overseas, trades freely and cannot carry forward the lot-size restriction applicable to privately listed InvITs, which limits their units to institutional investors and body corporates.

Annexure A of CP-1 raises calibration concerns. Most arise from transplanting the equity DR framework onto instruments that behave differently. 

First, CP-1 proposes a uniform 75 per cent approval threshold for every fresh DR issue beyond the initial listing. That is disproportionate. A DR issue does not by itself change control, and its dilutive effect depends on the size and terms of the issue. The approval requirement could instead be calibrated based on the size or nature of the issue, with a higher threshold reserved for issues involving material dilution or control implications.

Second, the framework places responsibility on DR holders to monitor the 25 per cent acquisition threshold, a breach of which triggers a unitholder approval requirement and, failing approval, an exit offer to dissenting unitholders. In practice, this may be difficult to achieve through international clearing systems. A corresponding obligation on the foreign depository or domestic custodian may be more effective.

The more fundamental question, however, is commercial rather than regulatory: what problem will DRs solve?

India’s capital markets are already among the largest and most actively traded in the world. Foreign investors, including sovereign wealth funds and global asset managers, already hold significant stakes in listed REITs and InvITs through the foreign portfolio investment route. CP-1 does not identify any restriction that impedes overseas investors from participating directly.

Further, India’s experience with equity DRs, negligible since 2014, suggests their declining relevance owes as much to market preference as to regulatory constraint. Whether REIT and InvIT DRs fare any better is an open question.

If DRs are to be enabled, the enabling should be wider. CP-1 excludes privately listed InvITs because a DR, once listed overseas, cannot carry their lot-size restriction. That does not require exclusion. Eligibility can be controlled at the point of issue, by confining subscription to qualified institutional buyers and their overseas equivalents, and by requiring the foreign depository to police holder eligibility under the deposit agreement. Privately listed InvITs hold much of India's operating infrastructure. Denying them the one new access route on offer narrows the market SEBI says it wants to build. 

CP-2 approaches the market from a different direction. Its five proposals seek to address operational frictions identified by industry participants.

The proposal to permit non-controlling minority investment in under-construction third-party projects addresses a genuine gap, since REITs and InvITs presently cannot deploy capital during a project’s development phase without assuming controlling interest. 

The requirement for a binding agreement to transition to the prescribed level of ownership and control may limit the flexibility the proposal intends, particularly where other shareholders will not commit upfront. SEBI may therefore consider a framework that permits REITs and InvITs to remain minority investors in such projects, rather than requiring every such investment to ultimately result in control over the investee entity.

Oversight can instead come from governance and contractual mechanisms: veto rights over specified matters, prescribed voting thresholds, and information and reporting covenants. These would serve as alternatives to the mandatory glide path.

The proposed shift in the unitholder approval threshold from “value” to “votes cast” is also useful, but participation and voting weight need careful consideration. In pooled investment vehicles, voting is generally linked to economic interest, so a unitholder with a larger economic stake should continue to have greater voting power. A votes cast formulation should therefore preserve this principle and should be accompanied by a minimum participation requirement.

Narrowing “dissenting unitholders” to those who voted against a resolution, rather than all who simply did not vote in favour, corrects a definitional overreach that conflated apathy with active opposition. Removing the proportionate-acceptance cap on exit offers, subject to a one-year window to cure any resulting breach of minimum public unitholding, matches the cure period under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. SEBI itself draws the comparison. 

Taken together, the two consultation papers reflect a shift from simply expanding the regulatory framework to making it more responsive to how REITs and InvITs operate, with InvITs having been part of the Indian listed market since 2017 and REITs since 2019. The proposed reforms could support the next phase of growth by widening avenues for foreign capital, enabling REITs and InvITs to participate in projects at an earlier stage, and improving flexibility in governance and sponsor exits. Their effectiveness, however, will depend on whether the final framework provides sufficient flexibility without weakening investor protection. The larger opportunity is therefore not merely to simplify rules, but to build a regulatory framework that allows REITs and InvITs to access capital more efficiently, invest across the project lifecycle and scale as a mainstream asset class in India.

The insider trading defence that Indian law does not have

The Supreme Court has just told insiders they have more defences than the rulebook lists. That sounds like relief. It isn't. A closed list of six has become an open list nobody can state in advance, and the burden of discovering its contents falls on the person who already carries the burden of proof. Worse, the one defence an insider actually needs that he decided to sell before the information reached him, still isn't there. My column in Financial Express on SEBI v. Rajeev Vasant Sheth, and the entry SEBI should write into the proviso without waiting for Parliament.

The Supreme Court has told insiders that they have more defences than the rulebook lists. That is not the relief it appears to be. A closed list of six has become an open list. Nobody can state its contents in advance, and the work of discovering them falls on the person who already carries the burden of proof.

On 11 August 2026, in Securities and Exchange Board of India v. Rajeev Vasant Sheth, the apex Court set aside an order of the Securities Appellate Tribunal and restored SEBI’s findings against the promoters of Tara Jewels Limited. Between 2 October and 29 November 2017 the company’s collapsing results were still unpublished. In that window the Chairman and Managing Director sold 30,93,948 shares, roughly 12.56 per cent of the shareholding. His two daughters, both promoters and vice presidents, sold their entire holdings. The loss the market had not yet seen was Rs. 166.80 crore for the quarter, against Rs. 6.62 crore in the quarter before. The defence of the Sheth family was that they sold shares to raise money for the company, which used it to repay creditors.

SEBI’s whole time member found that the sales avoided a cumulative loss of about Rs. 1.38 crore. He ordered disgorgement with interest, restrained the three from the securities market and imposed penalties under the SEBI Act. The Tribunal set all of it aside. It accepted that the shares were sold to keep Tara Jewels from being downgraded to a non-performing asset. That explanation, it held, fell within the proviso to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The Supreme Court restored the regulator’s order, reducing only the principal promoter’s penalty from Rs. 25 lakh to Rs. 10 lakh.

Two propositions emerge. The first is that the six circumstances in the proviso to Regulation 4(1) are illustrative and not exhaustive, because the enumeration is introduced by the word “including”. The Court declined to apply ejusdem generis, which reads a general expression down to the specific instances that follow it, because here the general expression comes first. Any further defence, it held, must be of the same or a similar character as the six. The second proposition is that the purpose to which the sale proceeds were applied is irrelevant. Avoiding a loss is as much a benefit as making a gain. The Court distinguished its own decision in SEBI v. Abhijit Rajan, where the trades dated from 2013 and the 1992 Regulations left room to ask why an insider had traded. That question, it said, no longer arises.

The first proposition will be reported as a liberalisation. It is not one. An insider who could once read the proviso and know that he stood outside it must now persuade a tribunal that his facts resemble facts that stand inside it. Certainty has been exchanged for analogy. Where the burden already rests on the accused, that is not obviously a favourable exchange.

The deeper problem is one the judgment exposes rather than creates. Indian law prohibits trading while in possession of unpublished price sensitive information. It does not require SEBI to prove that the information was used in a causal chain, that the informational advantage caused the trade. Regulation 4(1) presumes use, and the proviso is the only way out to break the causal chain. But the proviso lists transactional situations: off-market inter-se transfers, block deal window trades, transactions under a statutory obligation, the exercise of stock options, internal arrangements within non-individual insiders and trades under a Regulation 5 trading plan. Not one of them is a defence of non-use. There is no route by which an insider may say, and prove, that he decided and committed to sell before the information reached him. The Court has told us that further defences exist. It has not told us that non-use is among them, and on this language it could not have. 

The proviso exists to let an insider break that causal chain, to show that the trade occurred while he was pregnant with unpublished information but was not caused by it. Its list does that only in transactional settings. Consider a promoter who needs money at short notice for open heart surgery in his family and sells shares while the results are unpublished, raising close to the sum the surgery costs. On no sensible view did the information cause that trade. Nothing in the proviso saves him, and after this ruling nothing outside it will either. 

The second objection goes beyond causation, to intention. Insider trading began life as a fiduciary wrong. The earliest cases, brought by shareholders in American courts, predate any statute prohibiting insider trading by several decades. They share the DNA of the modern offence. The US passed the Securities Exchange Act in 1934 to prohibit fraud, and insider trading was drawn out of that anti-fraud rule only in 1961, in Cady, Roberts. Till today, the US has not passed a separate law prohibiting insider trading. The pedigree matters. The offence is quasi-criminal and its parent is fraud. India chose to write a standalone prohibition and left intention out of it. The Supreme Court has itself read the roots of fraudulent intent back into the law in two earlier rulings. This ruling departs from that, and would make a wrongdoer of the seller in the surgery example above. The Court could have reached the same result on these facts, by holding that the Sheths had not discharged the burden of showing that the information did not cause their trades and that nothing on the record displaced an intention to trade on it. It said instead that purpose never matters, which is far wider than the case needed.

SEBI can fix this without waiting for Parliament. A defence of non-use, open to an insider who can prove he committed to trade before the information reached him, belongs in the proviso itself. The Court has said the list is not closed. The regulator should write the missing entry into it. Dispensing with both causality and intent to harm will have long shadows on future innocent conduct. 

The Medium Has Changed. The Rules Should Too.

SEBI's June 2026 consultation paper proposes a single Common Advertisement Code to replace the fragmented, entity-specific codes that currently govern how brokers, advisers, analysts, portfolio managers and mutual funds describe what they sell. It is a genuine simplification and should be adopted. But harmonisation is the starting point, not the object: universal 24-hour filing and standing prior approval for celebrity endorsements keep it a permission system, only a tidier one. Parker Karia and I in today's Financial Express on what the paper gets right and where it stops short.

Financial regulation usually follows innovation in products. SEBI’s consultation paper of 23 June 2026 addresses innovation in selling. The proposed Common Advertisement Code says nothing about what regulated entities may offer investors. It governs only how they may describe it, across every medium that now reaches investors.

Advertisements today reach investors through social media, podcasts, webinars and trading applications at a speed and scale the first advertisement codes never contemplated. Those codes remain fragmented and entity specific, differing more in procedure than in principle. A stock broker answers to exchange circulars, investment advisers and research analysts to their master circulars, a mutual fund to the Fifth Schedule of its regulations and a portfolio manager to an annexure of another. SEBI now proposes to replace all of them with a single chapter in the SEBI (Intermediaries) Regulations, 2008, covering brokers, depository participants, investment advisers, research analysts, portfolio managers, online bond platform providers and mutual funds.

The proposal is both timely and necessary. The market has moved from distinct intermediaries to integrated platforms that offer several regulated products through one interface. Separate codes for each entity produced overlapping obligations, inconsistent interpretation and avoidable cost, although every code pursued the same objective: advertisements that are fair, balanced and not misleading. The Code is also technology neutral, treating print, broadcast and digital communication alike. Investor harm turns on what a communication says, not on the medium that carries it. It borrows, too, the Central Consumer Protection Authority’s 2023 guidelines on dark patterns, so that false urgency and subscription traps are treated as advertising failures in their own right.

The most significant change proposed is the shift from prior approval to post-issuance reporting. Several existing codes require an intermediary to obtain clearance from an exchange or supervisory body before an advertisement is issued, a model built for a time when advertising was infrequent and confined to traditional media. Entities now respond to market developments on the same day, sometimes within the hour. Requiring clearance for each such communication delays legitimate activity without measurably improving investor protection. SEBI’s own explanation is candid: the prior approval model was designed for traditional advertising where volumes were low and lead times were long.

The proposal then stops short. Every advertisement must still be reported to the supervisory body, promptly and no later than 24 hours from issuance. For an entity that issues hundreds of digital communications a month, that does not reduce the compliance burden. It relocates it from before publication to after. The filing is universal, so supervisory attention remains spread evenly across communications that carry no risk at all. A more proportionate design would rely on internal approval by the entity, prescribed governance standards for how that approval is exercised, and periodic or risk-based review by the supervisory body. Where an advertisement is misleading, it should be taken down through a reasoned order that the entity can contest, not forestalled by a filing obligation imposed on everyone in advance.

The paper also recognises that not every communication issued by a regulated entity is an advertisement. Investor education, factual corporate communication and regulatory disclosure serve a purpose different from promotion and should not be treated alike. The carve-out, however, turns on branding that is “minimal and incidental” and content carrying “no promotional intent”. Both are matters of degree, and degree is exactly what a compliance officer cannot certify. A workable test would be structural rather than aesthetic: educational content should fall outside the Code so long as it identifies the entity, makes no performance claim, names no product and contains no call to action. An entity can apply that test without asking anyone’s permission.

The treatment of celebrity endorsement is the clearest instance of the older approach surviving. SEBI would permit celebrities at the entity or brand level rather than for a named product, which is a liberalisation, but it retains prior approval for every such advertisement. The definition of celebrity then extends across eight categories, taking in anyone with more than five lakh followers on a single social media handle, a television anchor who has completed ten episodes, and a virtual character with lifelike human traits. The rule therefore attaches to who is speaking rather than to what is said. A line drawn at five lakh followers also invites the obvious answer, which is to engage four influencers with four lakh followers each. The requirement is then satisfied and the investor is in precisely the same position. If prior approval is retained, it should at least carry a defined timeline, failing which it should be deemed granted.

Two structural gaps remain. Because the Code is anchored in the Intermediaries Regulations, it reaches only registered intermediaries. Mutual fund distributors, who register with the industry association and not with SEBI, fall outside it, although they remain among the primary points of contact between a product and a retail investor. A common code that omits a large category of sellers preserves the fragmentation it was drafted to remove. Second, the paper sensibly permits a hyperlink to full disclosures where an SMS, a pop-up or a push notification cannot carry them. The same constraint applies to short-form video and audio, where a spoken disclaimer is either unreadable or unheard, and the concession should extend there as well.

The Code is a real simplification and should be adopted. But harmonisation is the starting point, not the object. A single rulebook administered through universal filing and standing approvals is still a permission system, merely a tidier one. SEBI has accepted that the medium no longer determines the harm. It should now accept that the messenger does not either.

Electronic Gold Receipts: A Second Attempt at Building India’s Gold Exchange Ecosystem

I have a piece with Purva Mandale and Sudiksha Moorthi in today's Financial Express on the financialisation of gold receipts: 

Indian households hold more than 25,000 tonnes of gold, roughly three times the official reserves of the United States. Almost none of it trades on a regulated market. For decades, policymakers have tried to bring that idle stock into the formal financial system. The Union Budget 2018-19 announced a Gold Policy meant to develop gold as an asset class and build a regulated exchange for it. The Union Budget 2021-22 then made SEBI its regulator. 

Thereafter, the term ‘Electronic Gold Receipts’ (EGRs) was coined by SEBI, whose board approved the trading framework and the SEBI (Vault Managers) Regulations, 2021 on 28 September 2021. The Central Government then notified EGRs as securities, letting them trade on the exchanges like shares. BSE launched the first EGR segment during Muhurat Trading in October 2022, and NSE followed in May 2026 by dematerialising a 1,000-gram gold bar. Despite these developments, market participation in EGRs has remained relatively limited, particularly when compared with Gold ETFs, whose assets under management exceeded ₹1.7 lakh crore by March 2026.

The framework itself is worth setting out briefly. An EGR is a dematerialised security representing ownership of physical gold stored with a SEBI-registered vault manager. Gold deposited with a vault manager is first assayed to verify compliance with London Bullion Market Association (LBMA) or Indian Good Delivery (IGD) standards. Once verified, an equivalent EGR is credited to the depositor’s demat account. The EGRs can then be traded on stock exchanges on a T+1 settlement basis, and holders may redeem them for physical gold, upon which the EGR is extinguished.

Its defining feature is fungibility. Whichever vault holds the metal, an EGR is meant to trade as one standardised instrument in a nationwide market. It also brings assaying, vaulting, depositories and exchange trading under a single regulatory roof. Thus, while the architecture is coherent and promises transparent price discovery, standardised quality assurance and efficient settlement, the problem lies in the ecosystem surrounding it.

The trouble begins with inadequate market infrastructure. At present, only three vault managers are registered with SEBI, and when NSE launched its platform in May 2026, vaulting and collection centres were operational only in Mumbai and Ahmedabad. Interoperability requires a nationwide network through which both EGRs and physical gold can move. Instead, bullion dealers, refiners and jewellers across the country often find the nearest collection centre hundreds or even thousands of kilometres away. Consequently, trading remains concentrated among a small pool of participants, limiting liquidity and undermining efficient price discovery. This is not a regulatory limitation. SEBI already permits any branch of a registered vault manager meeting prescribed safety standards to function as a collection and withdrawal centre. The framework allows the network to expand; it simply has not yet.

The eligibility criteria for deposits are a more structural problem. Under the existing framework, EGRs may be created only against freshly imported gold, gold sourced from accredited domestic refiners, or gold that has continuously remained within the regulated vaulting ecosystem. Consequently, India’s household gold cannot enter the EGR ecosystem. This significantly narrows the potential supply of exchange-traded gold. The fix is an accredited assaying and refining pathway that turns household gold into standardised bars eligible for EGR issuance.

Taxation is a further obstacle. Redemption of an EGR into physical gold attracts 3 per cent GST on the value withdrawn, even though that same gold will ordinarily have already borne 3 per cent GST at the time of import or purchase. In principle the earlier levy generates an input tax credit that should offset the later one, but in practice that credit may not be readily utilisable because the original depositor and the eventual holder redeeming the EGR for physical delivery are generally unrelated parties. Consequently, the embedded tax remains locked throughout the life of the instrument.

A final weakness is the narrow range of commercial uses open to EGRs. Financial instruments typically derive liquidity not only from trading but also from their integration into broader financial markets. One opportunity lies in the rapidly expanding market for gold-backed lending. The Economic Survey 2025-26 notes that loans against gold jewellery grew 125.3 per cent year-on-year, making them one of the fastest-growing segments of personal credit. Yet lending against jewellery is inherently inefficient because purity is uncertain, lenders apply significant valuation haircuts, and pledged jewellery must remain in their custody, creating storage and insurance costs.

EGRs eliminate each of these inefficiencies. The underlying gold is assayed and standardised before the receipt is issued, remains securely stored within the regulated vaulting ecosystem, and can be pledged electronically through the existing depository infrastructure without any physical movement of gold. Recognition of EGRs as eligible collateral by the Reserve Bank of India for lending by banks and NBFCs is one policy measure that could broaden the commercial applications of the instrument.

India’s experience with EGRs shows that a sound framework alone does not make a market. While the framework provides for standardised custody, assaying and exchange trading of physical gold, market development also depends upon supporting infrastructure. Whether EGRs ultimately unlock India’s vast stock of household gold will depend far less on the framework, which is sound, than on the resolve of regulators and market participants to build the ecosystem around it.

 

Podcast on the plumbing of securities regulations, fraud, insider trading and much more

I recently joined Soulaima Gourani on The Saturday Salon for a wide ranging conversation on securities regulation, insider trading and the invisible plumbing that keeps financial markets running.

We spoke about why the information hierarchy in markets, from corporate management down to the retail investor, can never be fully flattened, and why good regulation focuses on compressing the time lag rather than trying to eliminate the gap altogether. We also discussed why insider trading is so difficult to prove, the circumstantial evidence regulators rely on, and India's transition over the past decade from a tightly controlled economy to a predictable, disclosure based market that has helped keep talent at home and pushed market capitalisation past GDP.

The conversation also touches on my book, Fraud, Manipulation and Insider Trading in the Indian Securities Markets, now in its fifth edition, and on my early years at SEBI.

Watch here 

Podcast on Apple

Compliance cannot override the investor’s interest

I have a piece with Parker Karia and Sudiksha Moorthi in today's Financial Express arguing that the Supreme Court went wrong in its recent ruling against Kotak Mutual fund and that the ruling wrongly elevates a timing rule over the very duty it was meant to serve. A regulatory philosophy that says outcomes are immaterial cannot govern actors whose defining legal duty is to produce good outcomes. This will hurt all mutual fund and other fund managers who will veer towards a box ticking exercise even if it hurts investors. Below if the full piece:

 

 

The Supreme Court’s recent decision in the Kotak mutual fund case has caused unease among not only the mutual fund industry, but across all fund managers, and those who owe a fiduciary duty towards their clients. The term “fiduciary duty” can be vague, and varies with the relationship between the person who owes the duty and the person to whom it is owed, but it invariably involves a duty of good faith, trust and honesty. In the specific context of fund managers, it requires them to act in the best interest, and for the benefit of the investors. 

Kotak MF launched six close-ended schemes, which were to mature during April to May 2019. Out of the Rs. 1,625 crore collected by the schemes, approximately Rs. 266 crore was invested in debentures of two Essel Group companies. This was secured by pledging shares of Zee Limited, to the tune of 1.5 times of the schemes’ exposure. When Zee's price collapsed in early 2019 and lenders across the market began invoking their pledges, the cover fell below the agreed level.

At that point, Kotak MF could either enforce its pledge at once, selling a large block of Zee into a falling market and crystallising a loss of approximately Rs. 376 crore for its unitholders, or extend the debentures and pursue an orderly recovery. The former option would have further lowered Zee’s shares, as well as harmed the other lenders, and the latter option, which Kotak MF chose, resulted in profits to the unitholders. 

By extending the debentures, the schemes were not wound up on their maturity dates in April to May 2019, resulting in a breach of the Mutual Fund Regulations. Instead, the unitholders were paid in part, and the balance was paid out by September 2019, about 4-5 months after the schemes should have been wound up. After completing its inquiries, SEBI penalised Kotak MF, its senior management, as well as the Trustees. The Securities Appellate Tribunal, while removing certain directions, largely upheld SEBI’s action, which was then affirmed by the Supreme Court as well.

The ultimate decision taken by Kotak MF and its officers is aligned with their fiduciary duties.

The SC relies on investors’ awareness of risk in investing in securities while arriving at its conclusions, and the obligations on Kotak MF under the regulatory framework. Surprisingly, the apex court has missed the central point that Kotak MF was required to act in the best interest, and for the benefit of its unitholders. In fact, the mutual fund regulations mandate that investments are to be taken in the interest of unitholders. Any fiduciary asked to choose between those outcomes on behalf of the people whose money it manages would choose what Kotak MF chose. That is their job. 

Per the SC, excusing a profitable breach would incentivise the next one, in a progression from profit to greed and from greed to systemic failure. But this reads conduct backwards, from result to motive. In early 2019 no one knew whether the standstill would hold or collapse. The decision had to be taken under uncertainty, on the information then available, as every investment decision is. A fiduciary who picks the course that appears least harmful to investors, and is later proved right, has not acted out of greed. Prudence is measured before the event, not after it. A court cannot call the outcome immaterial and, in the same breath, read culpability out of it.

The deeper flaw is the assumption that compliance and investor protection always run together. The winding-up rule exists to return unitholders their money on the promised date and to stop a closed scheme carrying open-ended risk. If applied to the letter, Kotak MF would have had to sell Zee’s shares in a collapsing market, resulting in the very harm the framework is intended to avoid. The fund's fiduciary duty pulled the other way. When a timing rule and the duty it serves point in opposite directions, the investor protection argument is far from puerile. The harshness of the judgment sends a message: it tells a fiduciary that the safe course is mechanical compliance even where compliance would hurt the investor. A regulatory philosophy that says outcomes are immaterial cannot govern actors whose defining legal duty is to produce good outcomes.

The mutual fund regulations do not contemplate a situation where a promoter-pledge structure collapses 90 days before maturity, because regulations cannot contemplate everything. When the unforeseen happens, we rely on fiduciaries to exercise judgment. Instead, the SC announced that it could not examine the commercial prudence of the decision, and then penalised the decision anyway. It refused to weigh the economics while punishing an economic choice.

Kotak MF used neither, and provided SEBI with limited information until it was asked, days after the first schemes had matured. That may not be ideal, but in the absence of a baby-sitter rule, is not a legal breach. A pathway similar to what was implemented by Kotak, which SEBI introduced in 2018, called side-pocketing, was not available to Kotak as it was prospective. In economic terms, what Kotak did was nearly the same. What Kotak did was act in a regulatory vacuum, implementing a solution the regulator itself recognised in 2018. Given the above, attaching personal responsibility to senior functionaries of the manager and the trustee is also over the top regulation. Outcomes cannot be immaterial when they would exonerate and decisive when they condemn. The rules exist to protect the investor, not the other way round.

16 years of Finsec Law Advisors