PGIM India Mutual Fund and Kotak Mutual Fund have moved the Securities Appellate Tribunal (SAT) to appeal against the Securities and Exchange Board of India’s (SEBI) orders against them in July.
In separate orders, SEBI had penalised the fund houses' key officials for inter-scheme transfers and investment decisions taken after the IL&FS crisis.
“We have filed an appeal against the order of the adjudicating officer against the employees of Kotak AMC and Kotak Trustee Company in SAT,” said Nilesh Shah, managing director and chief executive officer, Kotak MF.
PGIM India MF was not available for comment.
In the case of Kotak Mutual Fund, SEBI penalised Kotak Mahindra Trustee Company and fund house’s key officials for extending the maturities of debt securities of the Essel group, which were held by its six fixed maturity plans (FMPs).
Kotak MF, along with some other fund houses, had entered into a ‘standstill’ agreement with the Essel group to give it more time to repay its dues.
SEBI in its order observed that Regulation 39 (1) of the MF Regulations provides that a close-ended scheme shall be wound up on expiry of the duration fixed in the scheme (FMP) on the redemption of the units unless rolled over for a further period under Regulation 33 (4), and said that Kotak’s FMPs were not rolled-over.
The six FMPs were maturing between April 2019 and May 2019. The schemes paid the unitholders on maturity, except for the corpus held in Essel group papers. The maturities of the Essel group debentures was extended to September 30, 2019.
The FMP unitholders received part payment of the pending dues in September 2019, and on September 25, 2019, the balance payment along with accrued interest was paid off to the investors.
SEBI also observed that extending the maturity of Essel group’s papers was tantamount to creating a segregated portfolio, but the FMPs did not have this provision. Kotak MF in its reply to SEBI’s show-cause notice said that these schemes were launched before SEBI’s circular on segregated portfolios was issued in December 2018.
In its reply to SEBI’s show-cause notice, Kotak MF also stated, “The AMC’s Investment Committee has rightly acted within the parameters of the investment objectives in the relevant SIDs (scheme information document), and has acted in the best interest of unitholders while continuing to render high standard of service, due diligence, care, and professional judgment”.
PGIM India MF case
In the case of PGIM India MF, SEBI found 315 cases of inter-scheme transfers, 25 of which involved securities that were downgraded before or after the shifts. SEBI said the fund house had transferred stressed securities from open-ended schemes to close-end schemes, and good securities from close-end schemes to open-ended ones.
The same order cited PGIM India’s defence.
PGIM India MF submitted that even after it transferred securities from open-ended schemes to close-end schemes, the former still continued to hold sizeable chunks of the same securities.
The underlying securities, the fund houses added, continued to pay interest. Any downgrade as observed by Sebi, it added, was “only by one notch” and had happened “much later” or “prior” to the inter-scheme transfer.
The fund house also said that as opposed to SEBI's charges of not recording adequately the rationale behind the inter-scheme transfers (a requirement per SEBI's 2020 circular), “there is no specific template as to how detailed the reason must be”.
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