Penalties under MF and AIF Regulations

The SEBI (Mutual Funds) Regulations, 1996 and the SEBI (Alternative Investment Funds) Regulations, 2012 do not, on their own, prescribe rupee penalties. They define the duties; the consequences of default flow from a layered enforcement architecture built on the parent statute. A single instance of non-compliance can attract three distinct streams of liability at once: a monetary penalty in adjudication under Chapter VIA of the SEBI Act, 1992; administrative action such as suspension or cancellation of registration; and criminal prosecution under Section 24. For the judiciary and CLAT-PG aspirant, the examinable core is appreciating that these streams are cumulative, that civil penalty attaches without proof of mens rea, and that the procedural routes differ between mutual funds and AIFs. This chapter maps the entire penalty matrix and anchors it in the controlling authorities.

The three-tier enforcement architecture

SEBI's enforcement power against pooled investment vehicles operates on three independent tiers, and the most common examination error is to treat them as alternatives. They are not. The first tier is civil monetary penalty imposed by an Adjudicating Officer in proceedings under Chapter VIA (Sections 15A to 15JB) of the SEBI Act, 1992. The second tier is administrative or remedial action under Sections 11, 11B and 11D of the Act read with the Regulations, ranging from directions and disgorgement to suspension and cancellation of the certificate of registration. The third tier is criminal prosecution under Section 24, prosecuted before a court of competent jurisdiction.

Regulation 76 of the Mutual Funds Regulations expressly recognises this layering. It provides that the Board may, for the offences specified in Sections 15A to 15E of the Act, initiate action under Section 15-I (adjudication), and in case of violation of any provision of the Act or the Regulations, initiate action under Section 11, 11B or Section 24. The opening words of Section 24(1) itself confirm the cumulative design: prosecution is "without prejudice to any award of penalty by the Adjudicating Officer under this Act." The Regulations are thus the source of the substantive obligation; the SEBI Act is the source of the sanction. To understand penalties you must read the two instruments together, a structure surveyed in our chapter on the SEBI (Mutual Funds) Regulations, 1996. The practical importance of the distinction is that a fund cannot escape adjudication merely because SEBI has chosen not to prosecute, nor can it treat the lapse of a criminal proceeding as wiping out a civil penalty; each tier is judged on its own footing and answers a different regulatory purpose.

Section 15D: penalty for certain defaults by mutual funds

Section 15D of the SEBI Act is the dedicated monetary penalty provision for collective investment schemes including mutual funds. It is structured around enumerated defaults. Clause (a) penalises a person who, being required to obtain a certificate of registration for sponsoring or carrying on a scheme, does so without registration; clause (b) penalises a registered fund that fails to comply with the terms and conditions of its certificate. The remaining clauses cover failure to make an application for listing of a scheme, failure to dispatch unit certificates, failure to refund application monies, failure to invest money in the manner or within the period specified in the offer document, and failure to comply with directions issued under Section 11B.

The penalty structure is uniform across the clauses and was recast by the Securities and Exchange Board of India (Amendment) Act, 2002. As it stands, a person in default is liable to a penalty of one lakh rupees for each day during which the default continues, or one crore rupees, whichever is less. The "whichever is less" cap is the examinable feature: the running daily penalty cannot exceed an aggregate of one crore rupees. The minimum and mandatory character of this kind of language was the very issue that produced the litigation culminating in Adjudicating Officer, SEBI v. Bhavesh Pabari, discussed below. Because clause (b) bites on any breach of the conditions of registration, and the registration conditions incorporate the entire body of the Regulations by reference, Section 15D operates as a broad civil-penalty gateway for mutual fund misconduct rather than a narrow provision confined to unregistered operators.

Section 15E: penalty for breach of AMC activity restrictions

Section 15E targets the asset management company specifically. It provides that where any asset management company of a mutual fund registered under the Act fails to comply with any of the regulations providing for restrictions on the activities of asset management companies, the AMC shall be liable to a penalty of one lakh rupees for each day during which the failure continues, or one crore rupees, whichever is less. The penalty quantum mirrors Section 15D, but the addressee and the trigger are different: here the liable person is the AMC, and the trigger is breach of the specific activity-restriction regulations.

The provision matters because the day-to-day operational discipline of a fund rests on the AMC, and the activity restrictions are detailed. They include the prohibition on the AMC acting as a trustee of any mutual fund, the bar on undertaking business activities other than those permitted, the restriction on investing in its own schemes unless disclosed, and the limits on dealings through associate brokers. Each of these restrictions is examined in our chapter on restrictions on AMC business activities. A breach of the associate-broker limit was precisely the conduct penalised in Chairman, SEBI v. Shriram Mutual Fund, the leading authority on the nature of penalty under this Chapter. The structural division of responsibility between the AMC and the trustees, which determines who bears the penalty in a given case, is set out in our notes on the asset management company.

Section 15HB: the residuary penalty for other contraventions

Not every breach of the Regulations fits within the specific heads of Sections 15A to 15HA. For these, Section 15HB supplies a residuary penalty. It provides that whoever fails to comply with any provision of the Act, the rules or the regulations made, or directions issued by the Board, for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees. Following the Securities Laws (Amendment) Act, 2014 the provision is read in practice with an articulated floor, but the statutory ceiling of one crore rupees is the examinable figure.

Section 15HB is the workhorse of mutual fund and AIF enforcement because the bulk of regulatory obligations are procedural and disclosure-based, with no bespoke penalty clause of their own. Failure to file a periodic return, a defective disclosure in an offer document, a delay in dispatching account statements, or a breach of the code of conduct in the Fifth Schedule typically draws a Section 15HB penalty. The Securities Appellate Tribunal has repeatedly underscored that the residuary character of Section 15HB does not make it a soft option: non-compliance with SEBI directions strikes at the very framework of regulation, and undue leniency would defeat the deterrent intent of the provision. The phrase "for which no separate penalty has been provided" is the key limiting condition. If conduct squarely falls under Section 15D or 15E, those specific provisions, and not the residuary clause, must be invoked; the residuary penalty cannot be used to side-step the structure or quantum of a special provision.

Adjudication: Section 15-I and the quantum factors in Section 15J

The monetary penalties under Sections 15D, 15E and 15HB are imposed through adjudication. Section 15-I empowers the Board to appoint an officer not below the rank of a Division Chief as Adjudicating Officer, to hold an inquiry in the prescribed manner after giving the person concerned a reasonable opportunity of being heard, and to impose the penalty. The Adjudicating Officer may summon and enforce attendance of any person acquainted with the facts and require production of documents. Regulation 76(1) of the Mutual Funds Regulations channels the offences under Sections 15A to 15E into this Section 15-I route.

Quantum is governed by Section 15J, which directs that while adjudging the amount of penalty the Adjudicating Officer shall have due regard to three factors: the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors; and the repetitive nature of the default. The decisive question of whether these three factors are exhaustive, and whether the Adjudicating Officer retains discretion to go below an apparent statutory minimum, was resolved in Adjudicating Officer, SEBI v. Bhavesh Pabari (2019) 5 SCC 90. A three-judge Bench held that the factors in clauses (a) to (c) of Section 15J are illustrative and not exhaustive, so that the Adjudicating Officer may take into account other mitigating circumstances; in so holding it overruled the contrary view in SEBI v. Roofit Industries Ltd. (2015) 12 SCC 313, which had read the penalty as a rigid, non-negotiable minimum. The net effect is a regime of controlled discretion: the figures in the Act bound the outer limits, but within them the Adjudicating Officer must reason towards a proportionate penalty against the fund or AMC.

Shriram Mutual Fund: civil penalty without mens rea

The single most important authority on the character of penalties under the Mutual Funds Regulations is Chairman, SEBI v. Shriram Mutual Fund (2006) 5 SCC 361. The fund had, on twelve occasions over roughly two years, dealt in securities through its associate brokers in excess of the limits permitted under the activity restrictions, thereby contravening the conditions of its certificate of registration. The Adjudicating Officer imposed a penalty; the Securities Appellate Tribunal set it aside on the footing that there was no deliberate intention or contumacious conduct on the part of the fund. The Supreme Court reversed the Tribunal and restored the penalty.

The Court laid down propositions that are routinely tested. First, mens rea is not an essential ingredient for the imposition of penalty for breach of a civil obligation under the Act and the Regulations. Second, penalty is attracted as soon as the contravention of the statutory obligation occurs, and the intention of the party committing the violation is wholly irrelevant to the question of liability. Third, the proceedings are for the enforcement of a civil liability and are neither criminal nor quasi-criminal, so the requirement of proving a guilty mind does not arise. Fourth, where the breach is a deliberate defiance of law or flows from dishonest conduct, that is a matter relevant to the quantum of penalty, but the absence of such an element does not excuse the breach itself. The practical consequence is that a fund or AMC cannot defend an adjudication penalty by pleading good faith, inadvertence, or the absence of any investor loss; once the regulatory limit is shown to have been crossed, liability is established and only the quantum remains open. The case is the bedrock for understanding that compliance under the Regulations is a strict-liability discipline rather than a fault-based one.

Suspension and cancellation under the Mutual Funds Regulations

Beyond money, SEBI's most potent sanction is action against the registration itself. Chapter IX of the Mutual Funds Regulations, headed "Procedure for Action in Case of Default," carries Regulation 68, which lists the defaults that expose a mutual fund to action: contravening any provision of the Act or the Regulations; failing to furnish information or furnishing wrong information relating to its activity as a mutual fund; failing to submit periodic returns; failing to co-operate in any inquiry or inspection conducted by the Board; and failing to comply with directions of the Board issued under the provisions of the Act. Regulation 68 was substituted by the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, with effect from 27 September 2002, which is why the original Regulations 69 to 74, which once prescribed a stand-alone enquiry procedure, now stand omitted; that procedure was consolidated into the dedicated enquiry regulations.

Regulation 75 deals with action against intermediaries, permitting the Board to initiate suspension or cancellation of the registration of an intermediary holding a certificate under Section 12 of the Act who fails to exercise due diligence or to comply with its obligations, subject to the procedure applicable to that class of intermediary. Regulation 75A, inserted later, provides that without prejudice to Regulation 68, a mutual fund and/or AMC shall be liable for action where an advertisement is issued in contravention of the Advertisement Code in the Sixth Schedule, or where the valuation of securities is in contravention of the Principles of Fair Valuation in the Eighth Schedule. The enforcement net thus reaches conduct as granular as a single misleading advertisement, underlining that the registration sanction is not reserved only for grave or systemic failures.

From inspection to action: Regulations 61 to 67

The penalty process usually begins with inspection. Chapter VIII of the Mutual Funds Regulations confers on the Board, under Regulation 61, the right to inspect and investigate the books of account, records and documents of a mutual fund, trustee or AMC. Regulation 62 requires notice before inspection, subject to an exception where notice would prejudice the interest of investors; Regulation 63 imposes obligations of co-operation on the entity and its employees; and Regulation 64 requires the inspecting officer to submit a report to the Board.

Regulation 65, as substituted in 2002, provides that the Board or the Chairman shall, after consideration of the inspection or investigation report, take such action as it deems fit and appropriate, including action under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 66 empowers the Board to appoint an auditor to inspect or investigate the books or affairs, and the auditor enjoys the same powers as the inspecting officer under Regulation 61, with the entity bound by the same co-operation obligations under Regulation 63. Regulation 67 entitles the Board to recover the expenses of inspection, including the fees paid to auditors. This inspection-to-action sequence ensures that penalty and registration consequences are preceded by a documented factual inquiry and an opportunity of hearing, satisfying the requirements of natural justice. The accountability of the trustees, who form the first line of supervision over the AMC and whose lapses frequently surface in inspection, is detailed in our chapter on trustee constitution and duties.

The effect of suspension and cancellation

The consequences that follow an order against registration are themselves prescribed by the Regulations. On and from the date of suspension of the certificate or approval, the mutual fund, trustees or AMC must cease to carry on any activity as such during the period of suspension, and remains subject to the directions of the Board with regard to any records, documents or securities in its custody or control relating to those activities. On and from the date of cancellation, the entity must, with immediate effect, cease all activity as a mutual fund, trustee or AMC. Critically, the Regulations empower the Board, in the interest of the unit holders, to issue directions concerning the management and transfer of the schemes and their assets following such action.

This investor-protective overlay distinguishes registration action against a fund from the ordinary revocation of a licence. The schemes hold public money; cancellation cannot be permitted to strand unit holders or freeze their investments. SEBI therefore retains a supervisory hand to arrange an orderly winding up or a transfer of the affected schemes to another AMC. For the AMC and the sponsor, the practical sting is severe: suspension freezes the launch and management of schemes and chokes the flow of management fees, while cancellation is commercially terminal. The sponsor's continuing exposure to these outcomes is connected to the net-worth and integrity commitments discussed in our chapter on sponsor eligibility and role, since it is often the sponsor that must step in to protect investors when the AMC's registration is at risk.

AIF default: Regulation 35 and the Intermediaries Regulations route

The Alternative Investment Funds Regulations, 2012 adopt a notably different and more economical drafting technique for default. Chapter VI, headed "Procedure for Action in Case of Default," contains Regulation 35. Sub-regulation (1) lists the triggering defaults by an AIF: contravening any provision of the Act or the Regulations; failing to furnish any information relating to its activity as an AIF as required by the Board; furnishing to the Board information that is false or misleading in any material particular; not submitting periodic returns or reports as required; not co-operating in any enquiry, inspection or investigation conducted by the Board; and failing to resolve investor complaints or to give a satisfactory reply to the Board in that behalf.

The pivotal feature is the consequence. Instead of housing its own enquiry-and-penalty machinery, Regulation 35(1) provides that an AIF in default shall be dealt with in the manner provided under the SEBI (Intermediaries) Regulations, 2008. The AIF Regulations therefore borrow, by reference, the unified enforcement code that SEBI applies across all its registered intermediaries, which carries the designated authority, the show-cause and hearing procedure, and the menu of sanctions. This is an important point of contrast with mutual funds, where the procedure runs through Chapter IX of the Mutual Funds Regulations read with the 2002 enquiry regulations. Sub-regulation (2) makes clear that this designated route is without prejudice to the Board's powers to issue directions or measures under Sections 11, 11B, 11D, sub-section (3) of Section 12 or Section 24, or Chapter VIA of the Act, or under any other law for the time being in force, thereby preserving the full three-tier liability described at the outset.

AIF inspection: Chapter V, Regulations 30 to 32

For AIFs, the path to action again begins with inspection. Chapter V confers on the Board, under Regulation 30, the right to appoint one or more persons as an Inspecting Authority, either suo motu or on receipt of information or complaint, to inspect the books of account, records and documents of an AIF. The enumerated reasons include ensuring that the records are maintained in the manner specified, examining complaints received from investors, clients or others bearing on the AIF's activities, ascertaining whether the provisions of the Act and the Regulations are being complied with, and suo motu inspection in the interest of the securities market or investors.

Regulation 31 requires not less than ten days' notice before an inspection, with an exception where the Board, satisfied that it is in the interest of investors that no notice should be given, directs inspection without notice by an order in writing. Regulation 32 imposes detailed obligations of co-operation on the AIF during the inspection, including production of records and rendering of assistance. Standing alongside this inspection power is Regulation 26, the Board's general power to call for information at any time from an AIF or its Manager, Sponsor, trustee or investor on any matter relating to its activity, including for the assessment of systemic risk or the prevention of fraud, with the information to be furnished within the time specified. Non-co-operation with these powers is itself a default under Regulation 35, closing the loop between supervision and sanction and ensuring that an AIF cannot stonewall SEBI without inviting consequences.

Section 24: criminal prosecution and its independence

The most serious tier is criminal prosecution under Section 24 of the SEBI Act. Section 24(1) provides that, without prejudice to any award of penalty by the Adjudicating Officer under the Act, any person who contravenes or attempts to contravene or abets the contravention of the Act or of any rules or regulations made thereunder shall be punishable with imprisonment for a term which may extend to ten years, or with fine which may extend to twenty-five crore rupees, or with both. Section 24(2) addresses a distinct default: a person who fails to pay the penalty imposed by the Adjudicating Officer, or fails to comply with any of the Board's directions or orders, shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine up to twenty-five crore rupees, or with both.

The opening "without prejudice" clause settles that prosecution is independent of, and in addition to, adjudication; the discretion to prosecute rests with SEBI and does not depend on the outcome of the penalty proceeding. The decision in Shriram Mutual Fund reinforces the conceptual divide between the tiers: adjudication enforces civil liability and dispenses with mens rea, whereas a Section 24 prosecution is a criminal proceeding in which the ordinary safeguards of the criminal law, including proof beyond reasonable doubt and the requirement of a culpable mental state where applicable, come into play. Section 24A permits the compounding of offences not punishable with imprisonment only, before or after the institution of proceedings, by the Securities Appellate Tribunal or the court before which the proceedings are pending, while Section 24B provides for the grant of immunity on SEBI's recommendation. For a fund manager, the spectre of imprisonment under Section 24 is what elevates a serious or persistent regulatory breach from a balance-sheet cost into a matter of personal liberty.

Directions, disgorgement and debarment under Sections 11 and 11B

Between the civil penalty and the criminal prosecution sits a flexible remedial tier under Sections 11 and 11B of the Act. Section 11 vests SEBI with the general duty and power to protect the interests of investors and to regulate the securities market by such measures as it thinks fit. Section 11B empowers the Board to issue directions to any person associated with the securities market, in the interest of investors or the orderly development of the market, including, after the Securities Laws (Amendment) Act, 2014, the express power to direct disgorgement of an amount equivalent to the wrongful gain made or loss averted. Regulation 76(1) of the Mutual Funds Regulations and Regulation 35(2) of the AIF Regulations both expressly preserve these powers.

In the fund context, these directions can take the form of restraining a fund from launching new schemes, debarring an AMC or its directors and key personnel from accessing the securities market for a specified period, directing refund to investors, or ordering disgorgement of fees or gains earned through the violation. Because Section 15J's quantum factors include disproportionate gain and investor loss, and because Bhavesh Pabari confirms a regime of controlled discretion, SEBI frequently couples a monetary penalty with a Section 11B direction to disgorge and a period of debarment, producing a calibrated response proportionate to the gravity of the default. This remedial flexibility is precisely what allows SEBI to address mutual fund and AIF misconduct in a graded manner, without invariably resorting to the blunt instruments of cancellation of registration or criminal prosecution, and it is the tier most often litigated before the Securities Appellate Tribunal.

Exam synthesis: reading the penalty matrix together

The examinable synthesis is structural rather than numerical. The Regulations create the duty; the SEBI Act supplies the sanction; and the sanction comes in three cumulative tiers. For mutual funds, monetary penalty flows through Sections 15D (registration and scheme defaults), 15E (AMC activity-restriction breaches) and 15HB (residuary contraventions), adjudicated under Section 15-I with quantum guided by Section 15J as liberalised in Bhavesh Pabari. Registration action runs through Regulations 65, 68, 75 and 75A read with the SEBI enquiry regulations of 2002. Remedial directions lie under Sections 11 and 11B, and prosecution under Section 24. For AIFs, the same monetary and prosecution provisions of the Act apply, but registration-stage default is routed through Regulation 35 into the SEBI (Intermediaries) Regulations, 2008, with inspection governed by Chapter V.

Three propositions recur in answers and should anchor any response. First, penalty for breach of a civil obligation under these Regulations does not require mens rea, on the authority of Chairman, SEBI v. Shriram Mutual Fund. Second, the Section 15J factors are illustrative and not exhaustive, and the Adjudicating Officer enjoys controlled discretion in fixing quantum, on the authority of Bhavesh Pabari overruling Roofit Industries. Third, adjudication, remedial directions under Sections 11 and 11B, and prosecution under Section 24 are independent and cumulative, not mutually exclusive. Mastering this matrix, rather than memorising isolated figures, is what distinguishes a complete answer. For the architecture from which these obligations spring, return to our overview of the SEBI (Mutual Funds) Regulations, 1996 and the broader hub at SEBI Mutual Funds and AIF notes.