The Security and Exchange Board of India (SEBI) has issued an order penalizing Kotak Mahindra Trustee Company and Managing Director of Kotak Asset Management Company (AMC) Nilesh Shah along with Kotak’s fund managers, Lakshmi Iyer, Deepak Agarwal, and Abhishek Bisen as well as Compliance Officer Jolly Bhatt and Director Gaurang Shah for flouting rules pertaining to mutual funds.
SEBI Adjudicating Officer, Soma Majumdar noted that the interests of the of the investors were affected negatively on account of the infractions on the part of the senior officials whose main duty was to ensure that the interest of the unit holders is protected while making sure that the mutual fund complies with all the regulatory requirements of SEBI.
"It is imperative for the Trustee and the persons at the helm of affairs viz., MD, CIO, CO and the Fund Managers at all times, to act diligently and faithfully in the best interest of the unitholders. Infirmities in their conduct and any non-compliance or deviation from the regulatory requirements, would derail the trust imposed by the unitholders in the Mutual Fund and threaten the very structure of this industry. Therefore, I am of the view that appropriate penalty should be imposed on Noticees, given the gravity of the violations established against each of the Noticees, which would act as a deterrent for the Noticees and others", the SEBI order stated.
The issue before SEBI concerned a transaction entered into by Kotak Mahindra through Fixed Maturity Plans (FMPs) Scheme with Essel Group of Companies. The aim of these schemes was to invest in debt and money market instruments to generate returns with reduced interest rate risks.
All the six schemes had investments in debt securities and Zero Coupon Non-Convertible Debentures (ZCNCDs) of Konti Infrapower and Multiventures along with investments in debt securities of Edisons Utility Works which belong to the Essel Group of companies.
The debt securities were secured by a pledge of equity shares of Zee Entertainment Enterprises by its promoter Cyquator Media Services.
The regulator identified irregularities in certain FMPs of Kotak AMC and observed that Kotak AMC had 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 September 30, 2019.
Due to such extension, investors of all the six schemes were not paid the full amount on maturity based on the net asset value of the six schemes.
The regulator further 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)”
It was contended that even though the transactions happened through debt securities, they are basically loans against shares.
It was surmised that Kotak AMC and its senior officials violated mutual fund regulations 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.
According to SEBI, the trustees and AMC should have ensured extreme care, caution, robust due diligence
“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” , the order stated.
Demming it appropriate to impose penalties on the senior officials (noticees), SEBI directed them to pay the respective penalties imposed on them within a period of 5 days.