Case: Desmond Anthony D'Souza Vs. Sbi Mutual Fund

2. In December 2006, the Petitioner invested an amount of Rs.2 lakhs in a Mutual Fund by the name of One India Fund floated by SBI in respect of which he was allotted 20,000 units in January 2007. The grievance of the Petitioner is that though other SBI Mutual Funds yield high returns to investors, the One India Fund has not resulted in any return to investors over six years. According to the Petitioner, the disclosure that Mutual Funds are subject to market fluctuations, merely implies that the dividend can vary and would not justify an assumption that no dividend can be declared at all for several years. The case of the Petitioner is that the management has disregarded the interests of the depositors and the investments which were made by the Investment Team have been negligent. Effective 10 August 2012, a merger was announced of the One India Fund Scheme with the SBI Magnum Equity Fund Scheme on the basis of the prevailing Net Asset Value (NAV) as of that date. This according to the Petitioner, will result in detriment to the investors because the NAV of the fund which is to be merged is quoted almost at par whereas that of the SBI Magnum Equity Fund is above Rs.28. According to the Petitioner, sanction ought to have been taken at a meeting of the General Body.3. Initially an affidavit in reply was filed on behalf of the First Respondent on 6 August 2012. Among other things, an objection to the maintainability of the Petition was raised on the ground that the First Respondent is not State within the meaning of Article 12 of the Constitution. The First Respondent stated that the Scheme Information Document of the SBI One India Fund made it clear that returns under the Fund were not guaranteed or assured and that equity instruments carry market risks. In the present case, it was stated that the scheme was an open ended diversified equity scheme with 70 to 100 percent of asset allocation under equities and equity related instruments including derivatives which made the scheme more prone to risk as compared to a debt scheme. The First Respondent stated that in pursuance of an application submitted to SEBI for the merger of the scheme with the Magnum Equity Fund, an approval was received on 20 June 2012. The Magnum Equity Fund is stated to be a large cap diversified equity fund and considering the growth potential of Indian large caps coupled with the capacity of the fund to deliver consistent long term performance, the merger is stated to be in the interest of investors.4. By an order dated 8 August 2012, this Court directed impleadment of SEBI as a party to these proceedings. Moreover, there was a direction that a further affidavit be filed on the following issues which were raised in the order of the Court:(i) The extent of mobilization of funds for the One India Fund since its inception;(ii) An assessment by the Respondent of the reasons why the fund did not result in returns;(iii) The internal oversight machinery, if any, that is provided by the Respondent in respect of the decisions taken by the fund manager in regard to investments;(iv) The rationale for the proposed merger of the One India Fund with Magnum Equity Fund; and(v) The basis on which the swap ratio for the merger was arrived at.This was without prejudice to the contention of the First Respondent with reference to Article 12 of the Constitution. Following the directions of the Court, a formal impleadment of SEBI has remained to be carried out by the Petitioner in person which will be done during the course of the day.

Court's reasoning:
11. We have carefully considered the disclosures which have been made on affidavit both by SEBI and by the First Respondent. We have made a reference to those disclosures in a considerable degree of detail since the Petitioner, who appears in person, has articulated his line of enquiry in these proceedings bona fide and with a considerable amount of painstaking research. The issue raised related to the well being of investors and accountability towards their needs and concerns. Regulatory mechanisms must provide for accountability, responsiveness and transparency. SEBI has put into place Regulations which regulate the activities of mutual funds. The Regulations contain specific provisions that are designed to ensure that trustees and AMCs conduct their activities in a manner which would not be detrimental to and would protect the interests of investors. In the present case, there is nothing on the record whatsoever that would lead to the inference that there was lapse on the part of SEBI in ensuring that its regulatory regime is duly complied with. In so far as the First Respondent is concerned, it is evident that the One India Fund Scheme was an open ended diversified scheme. By its very nature, a Mutual Fund scheme whose object is the investment of funds in the equity market is subject to market risks that are associated with equity investments. The highlights of the scheme as disclosed in the scheme information document in fact indicated that between 70 to 100% of the net assets would be in the form of equity and equity related investments including derivatives with a high risk profile. The table which has been extracted earlier would indicate that the NAV of the One India Fund Scheme varied between Rs.5.47 on 31 March 2009 and Rs.10.84 on 31 March 2011. The returns of an investor would, therefore, of necessity depend upon the timing of the investment. For instance, investors when the NAV had fallen to a level as low as Rs.5.47 on 31 March 2009would stand to sustain a fair rate of appreciation of the investment as compared to investors who invested at the relatively higher NAV of Rs.10.84 on 31 March 2011.12. On this state of the record, it would not be appropriate for this Court to issue directions of the nature that are sought in these proceedings. The scheme for the merger of the One India Fund with the Magnum Equity Fund has received the approval of SEBI. The approval which has been granted by SEBI is not demonstrated to be based on extraneous considerations or without due application of mind to the relevant statutory requirements. A meeting of all the investors of the One India Fund Scheme is not mandated. The decision has been explained to be in the interests of depositors. In any event, consistent with the regulations any investor who did not desire the conversion of his investment to the Magnum Equity Fund was at liberty to exit from the scheme on the prevailing NAV without an exit load. In these circumstances, we find no reason or justification to order an independent outside audit. The requirements of audit are already in place under the regulations which have been made by SEBI. Finally, it will not be permissible for the Court to direct that the investment made by the Petitioner in the amount of Rs.2 lakhs should be returned with interest as payable on a fixed deposit of a nationalized bank. Fixed deposits of nationalized banks do not bear the risks associated with an investment in an equity based mutual fund scheme. But that is the very reason why the returns on fixed deposits, though stable, offer a much lower return than what an equity based mutual fund investment may provide. An investor in an equity based mutual fund scheme is conscious of the fact that the returns are liable to vary and that in a given case where the market has underperformed, as during the period here, returns may not be forthcoming. We, therefore, do not consider that the prayer for relief would be maintainable.13. In the view which we have taken, it is not necessary to render a conclusive finding on whether the First Respondent is state for the purposes of Article 12.14. For these reasons and having considered the matter in all its perspectives, we do not find any case for interference under Article 226 of the Constitution.