Sebi bars Kotak AMC from launching FMPs for six months, imposes fine

Firm told to cough up Rs 50 lakh for violation of the provisions of Sebi Act, MF Regulations, 1996

The Securities and Exchange Board of India (Sebi) on Friday restrained Kotak Mahindra Asset Management Company (AMC) from launching any new fixed-maturity plans for six months.

The regulator also imposed a penalty of Rs 50 lakh on the fund house for allegedly violating provisions of the Sebi Act and various circulars it issued.

In its order Sebi stated Kotak Mahindra AMC would refund part of the investment management and advisory fees collected from the unitholders of six fixed-maturity plans (FMPs) schemes at a simple interest rate at 15 per annum from the date of maturity of such schemes till the date of payment to the unitholders.

The fund house had launched FMP series 127 and 183 in November 2013 and December 2015, respectively. They matured on April 8, 2019, and April 10, 2019, respectively, and had invested in zero coupon non-convertible debentures (ZCNCDs) of Konti Infrapower & Multiventures Pvt Ltd and Edison Utility Works Pvt Ltd. 

Both the issuers belonged to Essel Group, which was the promoter of Zee Entertainment Enterprises Ltd (ZEEL) and some other companies commonly known as “Zee Group companies”.

But the scrip of ZEEL fell sharply on January 25, 2019. Consequently, the share cover as collateral also fell below the mandated 1.50 times. However, the promoters of ZEEL at that point expressed their inability to provide additional collateral to secure the investment exposure of Kotak Mahindra AMC when the margin call was triggered.

Later, Kotak Mahindra AMC entered into separate agreements on April 6, 2019, with each of the issuers. In terms of those, it extended the maturity of the ZCNCDs till September 30, 2019.

“Upon observing that the aforesaid actions taken by the Noticee (Kotak Mahindra AMC) were prima facie in violation of certain provisions of Securities and Exchange Board of India Act, 1992, read with the SEBI (Mutual Funds) Regulations, 1996 (hereinafter referred to as ‘MF Regulations, 1996’) as well as various circulars issued by SEBI in this regard from time to time,” said the Sebi order.

Later in its post-hearing submissions the fund house said it had subscribed to four other FMP schemes series 187,189, 193 and 194 (from the same issuers).

“The Noticee has also failed to furnish any research report or any other research inputs so as to demonstrate the factors based on which, the aforesaid investment decision was taken for the first time by the Noticee to invest in the ZCNCDs issued by the Issuers,” said the Sebi order.

In response to three show-cause notices dated May 10, 2019, June 12, 2019, and August 13, 2020, the noticee has said in early September 2019, part payment of investment proceeds was made to all unitholders of the respective schemes and the balance payment along with accrued interest was made on September 25, 2019.

“The SEBI order dated August 27, 2021, on KMAMC (Kotak Mahindra AMC) pertains to six FMP schemes that matured in April and May 2019, which held investments in Non-Convertible Debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, belonging to the Essel Group and secured by pledge of equity shares of Zee Entertainment Enterprises Ltd. All the investors have been fully repaid along with applicable interest in September 2019. KMAMC is committed to protecting investor interest at all times,” said the spokesperson, Kotak Mahindra Group.

Disclosure: Entities controlled by the Kotak family have a significant shareholding in Business Standard