Market regulator Securities & Exchange Board of India (SEBI) has barred Kotak Mahindra Asset Management Company (AMC) from launching any new fixed maturity plan (FMP) for the next six months for the delay in payments to unit-holders of its six schemes. Kotak Mahindra Mutual Fund (KMMF) has also been asked to pay a penalty of Rs50 lakh for violation of provisions of SEBI Act. The case relates to Kotak Mahindra AMC's investment in zero-coupon non-convertible debentures (ZCNCDs) of two companies from the Essel group.
In an 84-page order, SK Mohanty, whole-time member (WTM) of SEBI, says, "The noticee (Kotak Mahindra AMC) shall refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes, equivalent to the percentage of exposure to the zero-coupon non-convertible debentures (ZCNCDs) of the issuers in the respective schemes as on the date of maturity of the six FMP schemes, along with a simple interest at the rate of 15% per annum from the date of maturity of such schemes till the date of actual payment to unitholders of these schemes."
SEBI says some mutual fund investors of Kotak Mahindra were not paid their entire proceeds as per the declared net asset value (NAV) on their respective maturity dates.
On noticing this, SEBI sought certain information from Kotak Mahindra AMC. On examination of the information received from the AMC, SEBI observed that KMMF had launched FMP series 127 and 183 as close-ended debt schemes in November 2013 and December 2015, respectively, both of which have matured on 8th and 10 April 2019, respectively.
As per the scheme information documents (SIDs) of these schemes, the investment objective of these schemes was to generate returns through investments in debt and money-market instruments to reduce the interest rate risk significantly.
As per the SIDs, the schemes were to invest in debt and money market securities, maturing on or before the maturity of these schemes.
SEBI further noted that the Fund's FMP series 127 and 183 had invested in ZCNCDs of Konti Infrapower & Multiventures Pvt Ltd (Konti) and Edison Utility Works Pvt Ltd (Edison). The maturity dates of those ZCNCDs were 8th and 10 April 2019, or before the maturity dates of the FMP series 127 and 183 of the AMC.
It is noted that both the issuers, Konti and Edison, belonged to the Essel group, the promoter of Zee Entertainment Enterprises Ltd (ZEEL), and some other companies commonly known as Zee group companies.
To secure the investment in the ZCNCDs of the issuers, Cyquator Media Services Pvt Ltd (Cyquator), an entity of Essel group and one of the promoters of ZEEL, had pledged shares of ZEEL with the AMC. As per the submissions of KMMF, the share cover for such investment was decided to be a minimum of 1.50 times the exposure amount, and it was mandated to be topped up in case of any drop in share cover falling below such mandated cover of 1.50 times of the investment exposure.
The approval notes of the investment committee (IC) of the AMC on 7 March 2016 and 18 May 2016 that the investment was primarily made based on the presumption of receiving repayment thereof by way of refinancing, without making any reference to the financials and business operations of the issuers, SEBI observed.
Further, the order says, on 25 January 2019, the price of the scrip of ZEEL witnessed a sharp fall. 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 cover to secure the investment exposure of KMMF when the margin call was triggered.
Eventually, on 7 February 2019, letters of intent were executed amongst the issuers, pledgers of ZEEL shares and committee of lenders of which the AMC was a part. On failure of the committee of lenders to reach any conclusion, the AMC entered into separate agreements on 6 April 2019 with each issuer and further extended the maturity period of these ZCNCDs until 30 September 2019.
KMMF had also undertaken or guaranteed to the issuers that it will not invoke the pledge over the shares of ZEEL kept as a security against the investment made in those ZCNCDs, till the end of such extended maturity period. This was reportedly intimated to the investors of the FMP series 127 and 183 on 5 April 2019.
The AMC has further asserted to have communicated to the investors of the said two schemes informing them that it would withhold and defer the payment on certain units in the said FMPs in the interest of the investors, beyond the maturity dates of those FMPs.
After this, SEBI issued a show-cause notice (SCN) to Kotak Mahindra AMC. The market regulator also asked the AMC to respond whether the deferment of payment of proceeds to the investors on the maturity of the FMPs was confined only to the two FMP schemes or the same deferment was extended to some other schemes as well, due to the drastic fall in the scrip of ZEEL.
In its submission, Kotak Mahindra AMC told SEBI that it had also subscribed to the ZCNCDs of the same issuers from four other schemes, FMP series 187, 189, 193, and 194, and in respect of those four schemes also, it had permitted the issuers to extend the maturity period of those ZCNCDs till 30 September 2019 in the same manner as it had done in respect of the investment made from the earlier noted two FMP series of 127 and 183.
Keeping in view the deliberations as well as his observations, Mr Mohanty, the WTM of SEBI says, "I hold that the SCNs have rightfully levelled various allegations against Kotak Mahindra AMC for committing those transgressions with open eyes unmindful of the regulatory & legal implications of such contraventions, thereby prejudicing the interest of the innocent investors and unitholders of those six FMP schemes."
"Hence in all fitness of things, taking into account the abysmal standard of service rendered by the KMMF while handling the monies of the investors of those FMP schemes, it is a deserving case for holding the AMC liable for issuance of appropriate directions for disgorgement of a part of the management fee that it had unjustifiably charged from the unitholders of the six FMP schemes. As a logical consequence to the aforesaid findings, I also hold that the Noticee is liable for imposition of appropriate penalty under Section 11B (2) read with Section 15D(b) and 15HB of SEBI Act, 1992," the SEBI order says.
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