The Securities and Exchange Board of India (SEBI) has imposed penalties totalling Rs1.6 crore on seven entities including Kotak Asset Management Company (AMC), its managing director (MD) Nilesh Shah, chief investment officer (debt) Lakshmi Iyer, and four other senior company officials for flouting rules pertaining to mutual funds (MFs) while investing in Essel group companies.
The regulator has imposed a penalty of Rs40 lakh on Kotak AMC. Mr Shah and Ms Iyer have been fined Rs30 lakh and Rs25 lakh, respectively. The other senior officials of the fund house to be penalised are Deepak Agarwal, vice-president & fund manager (Rs20 lakh), Jolly Bhatt, compliance officer (Rs10 lakh), Abhishek Bisen, fund manager (Rs15 lakh), and Gaurang Shah, director of Kotak AMC (Rs20 lakh). They have been directed to pay the penalties within 45 days.
The case pertains to six FMP (fixed maturity plan) schemes that matured in April and May 2019, which held investments in debt securities issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, belonging to the Essel group. The investment objective of these six debt schemes was to generate returns through investments in debt and money market instruments with a view to reducing interest rate risks.
All the six schemes had investments in debt securities and zero coupon non-convertible debentures (ZCNCDs) of Konti Infrapower and Multiventures. The schemes also invested in the debt securities of Edisons Utility Works. Both Konti and Edisons belong to the Essel group of companies.
Investments by the schemes were backed by the pledge of shares of Zee Entertainment by Cyquator Media Services, a promoter of Zee and holding 22.80% of its total share capital, SEBI said.
"It is observed that Kotak AMC entered into an agreement with the promoters and other promoter entities of Essel Group to extend the maturity of securities of various Essel Group entities to 30 September 2019. Consequently, investors of all the six schemes were not paid full amount on maturity based on the Net Asset Value (NAV) of the six schemes,” SEBI said in an order which came late on Thursday evening.
The regulator said this transaction has been referred to as a loan against shares where the collateral was in the form of pledge over shares of Zee. Initial security cover was 1.6 times by the pledge of shares, and this was to be maintained at 1.5 times thereafter. There is, however, no rationale for how 1.6 times security cover is adequate collateral.
“It is, therefore, alleged that the investments are not based on financials or the business operations of the issuer companies i.e. Konti and Edison. The investments are purely done based on the security provided by Cyquator, a promoter group company, through pledge of shares of Zee Entertainment and the external rating of a credit rating Agency (CRA),” SEBI said. The market regulator further added that even though the transactions happened through debt securities, they are basically loans against shares.
“By not taking investment decisions solely in the interest of unit holders, not rendering high standards of service, not exercising due diligence, not ensuring proper care at the time of investment by assessing the adequacy of the collateral, not recording of the rationale as to how 1.6/1.5 times security cover is adequate collateral, (and) not assessing the credit quality of the underlying bond and repayment capacity of the issuer in the investment rationale, the noticees (Kotak AMC and its senior officials) have allegedly violated... mutual fund regulations,” SEBI said.
SEBI found that Kotak Mahindra Trustee Company, being a trustee of Kotak AMC, failed to disclose scheme-related information, particularly regarding the adverse situation related to Essel group companies, to its unit-holders accurately and in a timely manner, despite being aware of the same since January 2019.
According to SEBI, information of Essel promoters not providing additional cover when the margin call triggered and the decision of AMC and trustees to extend the maturity of the securities, all being information having adverse bearing on the investments of investors were not communicated to the investors when the events took place.
"Lapses and violations have been observed on the part of the noticees (seven entities) with regard to lack of due diligence and consequently negligence while investing in Essel Group companies as well as with regard to maturity date of the security exceeding the maturity date schemes, the six FMP schemes... and not being wound up at the end of their maturities and being partially redeemed at the end of their maturity dates," SEBI said in its 104-page order.
Further, it also observed non-compliance with principles of fair valuation while valuing the debt securities or ZCNCDs of the issuers, and inadequate disclosures to investors of the six FMP schemes by these entities. According to the regulator, interests of the investors has been affected negatively on account of the infractions on the part of the noticees.
The order came after SEBI noticed that the investors of certain FMPs launched by the Kotak Mahindra Mutual Fund were not paid their full proceeds based on the declared NAV of the said schemes as on respective maturity dates.
In August 2021
, SEBI had asked the AMC to refund a part of the investment management and advisory fees collected from the unit holders of the six FMP schemes with 15% interest per annum. In addition, the regulator had restrained Kotak AMC from launching any new FMP for six months and imposed a penalty of Rs50 lakh on the fund house in the matter. Later in October that year, the Securities Appellate Tribunal (SAT) partly stayed the SEBI order.
"The direction to refund a part of the investment management and advisory fees collected by the appellant (Kotak Mahindra AMC) from the unit holders shall remain stayed," as per the SAT order.