SEBI Imposes Rs3 Lakh Penalty on 3 Kotak Group Entities in India Growth Fund Case
Moneylife Digital Team 21 February 2024
Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs3 lakh on Kotak SEAF India Fund, Kotak Alternate Asset Managers Ltd and Kotak Mahindra Trusteeship Services Ltd (noticees) for violating Venture Capital Funds (VCF) Regulations in the case of India Growth Fund, a scheme by Kotak SEAF India Fund.
 
In an order, Barnali Mukherjee, adjudicating officer (AO) of SEBI says, "...the available records do not quantify the amount of profits made by the noticees or losses suffered by the investors due to violations by the noticees in the instant case. I note that the Fund that filed an online application dated 10 May 2022 has wound up the scheme on 31 March 2022, and all unitholders are paid back. However, as a registered entity, the Fund, fund manager and the trustees should have complied with the provisions as laid down in the VCF Regulations, which the noticees have failed, and this calls for a penalty."
 
On 6 October 2022, Kotak SEAF India Fund, a VCF, informed SEBI about winding up its scheme India Growth Fund as of 31 March 2022. It is alleged that this was beyond the period specified in the private placement memorandum (PPM) of the Fund, the fund manager and the trustees. 
 
In its show-cause notice (SCN), SEBI alleged that as per PPM, the term of the VCF was for nine years from the date of first closing, i.e. 30 March 2005, extendable by one year. "The Fund's tenure was supposed to end on 30 March 2014. The Fund has submitted vide email dated 7 April 2023 and 4 September 2023 that it has taken four extensions which include one extension of one year (till 30 March 2015-first extension) as per the PPM of the scheme and then three extensions of seven years (till 30 March 2022). The manager had approached and received super-majority consent (greater than 75% of the value of investment) from contributors for all these extensions of the Fund till 30 March 2022 (fourth extension)."
 
The corpus of Kotak SEAF India Fund was Rs698.50 crore, and it had invested Rs577.15 crore in 18 portfolio companies. As per the submission of the Fund via email dated 2 June 2023, all the investments have been exited.
 
SEBI alleged that the VCF failed to wind up the scheme upon completion of its tenure, as disclosed in the original PPM. The Fund also extended its tenure beyond the PPM of the Fund on three occasions, it added. 
 
During the hearing, the three Kotak group entities submitted that the scheme could not divest some of its investments during the extended term since these investments were under litigation. Hence, it was necessary to extend the term beyond 30 March 2015. They further submitted that the PPM approved by SEBI contained a reference to the contribution agreement. "In the event of any conflict between the terms of the PPM and the contribution agreement, the latter shall prevail," the noticees submitted. 
 
Ms Mukherjee, the SEBI AO, however, noted that neither there is any provision under the VCF Regulations which provides for obtaining such further extension of the period of maturity of a scheme of a Fund after the expiration of its term nor any situation has been envisaged under VCF Regulations to enable the trustees or the investment manager of the Fund to further extend the term of the scheme of the Fund, post expiry of its maturity period as declared under its PPM including the extended period as permissible in terms of the PPM. "Thus, (it) cannot go beyond what is required by law." 
 
"Pending litigation cannot be a valid ground for not complying with mandatory obligation prescribed under VCF Regulations with respect to winding up of the scheme of the fund at the expiry of its term," she says, adding, "The noticees failed to wind up the scheme upon completion of its tenure as disclosed in the original PPM. The Fund also extended its tenure beyond the PPM of the Fund on three occasions."
 
The SEBI AO then imposed a penalty of Rs3 lakh jointly and severally on the noticees.
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