Successor Trustee Liability under AIF Regulations – SAT Modifies SEBI Penalty

Case Details: Catalyst Trusteeship Ltd. vs. Securities and Exchange Board of India - [2025] 181 taxmann.com 8 (SAT - Mumbai)

Judiciary and Counsel Details

• Justice P. S. Dinesh Kumar, Presiding Officer
• Ms. Meera Swarup & Dr. Dheeraj Bhatnagar, Technical Member
• Sharan Jagtiani, Sr. Adv., Ieshan Sinha, Ms. Dhruvi Mehta & Ms. Janhavi Kapgate, Advs. for the Appellant.
• Sumit Rai, Nitin Jain, MS. Prapti Kedia & Pranav Diya, Advs. for the Respondent.

Facts of the Case

The instant case involves Catalyst Trusteeship Limited (the appellant), which became the successor trustee of a trust originally managed by Milestone Trusteeship Services. The trust had launched a scheme with a target corpus of Rs. 500 crores. However, the scheme failed to meet its second and final closing targets. As a result, the SEBI (Securities and Exchange Board of India) conducted an inspection and found that the trust had violated AIF (Alternative Investment Fund) Regulations and SEBI Circulars, specifically for failing to close the scheme as outlined in the Private Placement Memorandum (PPM). The SEBI issued an order barring the appellant from accepting new trustee assignments for one year and restraining it from associating with SEBI-registered intermediaries for three months.

The appellant argued that as the successor trustee, it should not be held responsible for the actions of the predecessor (Milestone). It contended that the failure to close the scheme was a technical issue and did not harm investors, as the fund had been wound up and the assets liquidated after SEBI’s notice. The appellant also argued that the penalties imposed were excessive and disproportionate. SEBI countered that as the trustee, the appellant had a duty to ensure the trust’s objectives were met, and it was still liable for the violations, including failing to meet the closing deadlines.

Tribunal Held

The Tribunal held that the appellant, as the successor trustee, was legally responsible for the failures of the trust, including not achieving the second and final closings as required under the AIF Regulations and SEBI Circulars. While the Tribunal rejected the appellant’s claim that liability rested solely with the investment manager, it acknowledged that the appellant had subsequently taken corrective steps by winding up the fund, liquidating assets, and distributing proceeds to investors. Considering these mitigating factors, the Tribunal found SEBI’s original directions to be excessive and therefore modified the penalty by reducing the restriction on taking new AIF trustee assignments to six months and setting aside the three-month prohibition on associating with SEBI-registered intermediaries.

List of Cases Referred to

• Trafiksol ITS Technologies Limited v. SEBI 2025 SCC OnLine SAT 325 (para 6),
• Price Waterhouse & Co. v. SEBI [2010] 103 SCL 96 (Bombay) (para 6)
• Mohinder Singh Gill v. Chief Election Commissioner (1978) 1 SCC 405 (para 11).