Kotak Mahindra Asset Management Company (AMC) has been barred from launching any new fixed maturity plan (FMP) scheme for the next six months, as per an order issued by the Securities and Exchange Board of India (SEBI) on August 27.
The market regulator, which examined the case of delayed payments made in these six FMP schemes to their unit holders in 2019, has also decided to impose a fine of Rs 50 lakh on the company.
What really happened ?
The case pertains to six of the fund house's FMPs that were due for maturity in around April-May 2019. The fund house had failed to make full redemptions to its investors at the time of schemes' maturities because the said schemes had invested in Essel group companies (among other companies) and these companies had defaulted on their payments.
Kotak AMC, in turn, did not pay its unit holders fully by the time the schemes came up for maturity. The fund house only paid the investors fully by September 2019. In short, the FMPs that were due for maturity in April-May, were in fact fully redeemed only in September of that year. Ordinarily, this wouldn't be a problem, except that in doing so, the fund house violated various SEBI norms, as the SEBI order observed.
To name a few of the violations that SEBI cited in its order, the fund house extended the maturity of its underlying instruments, in excess to the schemes' maturity. This violated December 2008 SEBI rule that the regulator had put in place; all securities of a closed-end debt scheme (such as an FMP) must mature on or before the scheme's maturity.
SEBI also noted that by postponing the payment to its unit holders, Kotak Mahindra mutual fund sort of segregated its units like a side-pocket. This is allowed only if the scheme's offer document explicitly says so, and the fund follows a strictly specified SEBI guideline for side pockets. This, SEBI observed, did not happen here.
SEBI noted that its action has been taken on the basis of "various acts of indiscipline, utter neglect of due diligence, inordinate delay in communicating with the investors, violation of the statutory sanctity of the maturity dates of the FMP schemes."
"There remains no doubt in mind that the Noticee has acted in gross violation of provisions of the SEBI Act, 1992, MF Regulations, 1996 as well as various circulars issued by SEBI from time to time," SEBI said.
A spokesperson of the Kotak Mahindra Group said: “The SEBI order dated 27th August 2021 on 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."
Kotak AMC has also been directed to refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes, it said.
The collected amount should be equivalent to the percentage of exposure to the 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 scheme still the date of actual payment to the respective unitholders of the said schemes," the order added.The fine amount, of Rs 50 lakh, is required to be paid to the Government of India within a period of 45 days, it further noted.