In two recent cases that market regulator SEBI found mutual funds (MFs) guilty of mismanaging their debt schemes, it has levied three kinds of penalties. One, it imposed a monetary penalty (Rs 50 lakh to Rs 5 crore on fund managers of—and the AMC—Franklin Templeton India and Rs 50 lakh on Kotak AMC last week). Second, it banned both fund houses from launch new schemes for a stipulated period. The third leg of the punishment is by far the harshest and may run into rough weather with the Securities Appellate Tribunal (SAT). SEBI has asked both fund houses to return management fees back to investors. SEBI asked Templeton to return Rs 512 crore by way of management fees it earned during the period of which it found the MF to be in violation of rules. It asked Kotak AMC to return the management fees of the six FMPs. Many legal experts term the disgorgement of fees unfair. Usually, firms are asked to return fees if there is fraud. That is not the case with either of the fund houses, per SEBI’s own findings. Legal experts also say management fees collected is a pool of money from where all of the AMC’s expenses—including salaries to its entire employee force and not just the fund managers in question—are paid. At worst, the fund houses made terrible fund management calls, which many legal experts say is possible in a market-driven product, whose monthly portfolios were in the public domain. It’s unclear whether Kotak AMC will approach SAT to get the disgorgement order reversed (some legal experts believe it should), but given that the size of the penalty and the six-month ban to be small, it may not feel worth its while to take on SEBI. But Templeton filed an appeal at SAT in July. SAT asked it to deposit Rs 250 crore pending its final decision. SEBI went to Supreme Court (SC), which passed on the baton back to SAT and said it would rather wait for SAT to finish its hearing. How SAT and SC view disgorgement will have far-reaching implications on future cases.