Sebi on Friday imposed a penalty of Rs 50 lakh on Kotak Mahindra Asset Management Company (AMC) and barred the fund house from launching new fixed maturity plan (FMP) scheme for six months for violating regulatory norms.

The markets regulator has directed the fund house to refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes along with a simple interest at the rate of 15 per cent per annum.

The case relates to the fund house’s investment in certain FMPs. These FMPs of Kotak AMC had invested in Zero Coupon Non-Convertible Debentures (ZCNCDs) issued by Essel Group entities.

Sebi found lapses on part of Kotak AMC in carrying out due diligence and laid back approach adopted by the fund house in risk assessment while taking investment decision vis-a-vis the ZCNCDs of Essel Group entities.

The fund house has not analysed various risk parameters — credit risk, liquidity and interest rate risk etc — while evaluating the proposal to invest in the ZCNCDs of “certain insignificant and financially handicapped entities” of Essel Group such as Konti Infrapower & Multiventures and Edison Utility Works, it said.

Further, the events that took place involving the shares of ZEEL and the Essel Group from January 25, 2019 onwards clearly suggest that there were strong
possibilities of default on the part of the two issuer companies to honour the redemption of the ZCNCDs on their maturities, an event which was prevented by the fund house by extending maturity dates of these ZCNCDs.

“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, permitting extension of the maturity of the ZCNCDs of the issuers in contravention of extant regulations etc, 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 in its 84-page order.

It further said that the fund house failed to exercise due diligence and failed to disclose information about negative impact on the six FMP schemes to its investors on time.

Accordingly, Sebi has imposed a monetary penalty of Rs 50 lakh on the fund house and also restrained it from launching any new FMP scheme for a period of six months.

“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 ZCNCDs of the issuers in the respective schemes as on the date of maturity of the six FMP schemes,” Sebi said.

The refund is along with a simple interest at the rate of 15 per cent per annum from the date of maturity of such schemes till the date of actual payment to the respective unitholders of the said schemes, it added.
The regulator has directed to complete the exercise of payment of funds to the respective unitholders within a period of 45 days.

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 Net Asset Value (NAV) of the said schemes as on their respective maturity dates.

Upon noticing the same, Sebi noted that Kotak Mahindra AMC had launched two FMPs as close ended debt schemes during November 2013 and December 2015 both of which were scheduled to mature in April 2019. These FMPs had invested in ZCNCDs of Konti and Edison.

In addition, the fund house in its made submissions to Sebi revealed that it had also subscribed to the ZCNCDs of the same issuers from four FMP schemes.
In all six schemes, the fund house had permitted the issuers to extend the maturity period of those ZCNCDs till September 30, 2019.