AMCs cannot change Unit terms without taking consent from Unitholders : SAT

Subramanian R. Venkat vs. Securities Exchange Board of India(Date of Decision 3/5/2011)

CLR Note: It was held by the Securities Appelate Tribunal (SAT) that Asset Management Companies (AMCs) cannot change the terms of the issued units / securities arbitrarily without taking consent from the Unit-holders.

Brief Facts:

The Appellant are husband and wife who are regularly invest in shares and mutual fund scheme  through various market intermediaries duly registered under Securities Exchange Board of India.  HSBC Mutual Fund i.e.  Respondent No. 2  had issued a scheme with two plans, viz. a long term plan and a short term plan.  The Short term Plan is known as HSBC Gilt Fund. In the offer document it was mentioned that the short term plan was suitable for investors seeking to obtain returns from a plan investing in gilt across the yield curve with the average maturity of portfolio normally not exceeding 7 years and modified normally not exceeding 5 years. The long term plan was intended to suit investors with surpluses for medium to long period and the plan was to invest in gilts across the yield curve with the average maturity of the portfolio normally not exceeding 20years and modified duration normally not exceeding 12 years. The appellants chose the short term as against the long term plan and wanted to invest their personal saving in the short term plan of the scheme.  However, HSBC wound up the long-term plan, and changed the term of the short-term plan by increasing the tenure from 5 to 7 years to not exceeding 15 years. They also changed the benchmark index of the scheme from I- sec- Si- Bex to I-sec   Composites  Index. This resulted in a fall in the net asset value (NAV) of the scheme and the grievance is that the respondent has changed the scheme without  informing the unitholders and without giving opportunity to the unitholders to exit the scheme.  The appellant filed the compliant with the board and asset management company to direct the matter and to make good the losses suffered by the appellant.  The order of the board was against the appellant and the present appeal has been filed.


The appeal is allowed  in the favour of  investors.


1. Such a change in the term of the plan was found to be one that affects the fundamental attributes of the scheme and modifies the interests of the unitholders. It was given effect to without notifying the unitholders and providing an exit option as set out in Reg. 18(15A) of the SEBI (Mutual Funds) Regulations, 1996; and

2. The investors here were entitled to relief from the SAT on appeal although they had sold their units previously in order to cut their losses. Going by this, investors who no longer hold their investments are entitled to relief under securities so long as they traded at a loss at the time of the exit despite recovery of the securities to a higher value subsequently (including at the time of appeal).

The full Judgement can be downloaded below.

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