SEBI fines Kotak MF trustee, Kotak AMC MD over regulatory violations

Markets regulator Securities and Exchange Board of India has fined Kotak Mahindra Trustee Company — the trustee to Kotak Mahindra Mutual Fund, Kotak Mahindra Asset Management Company’s managing director Nilesh Shah, and others over irregularities while investing in Essel Group of Companies. The regulator has imposed a cumulative fine of ₹1.6 crore against seven entities in the matter.

Along with the Kotak MF trustee and Shah, SEBI has also fined Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak AMC; Deepak Agarwal, vice-president and Fund Manager at Kotak AMC; Jolly Bhatt, compliance officer at Kotak AMC; Abhishek Bisen, fund manager; Gaurang Shah, Director of Kotak AMC.

SEBI started adjudication proceedings against Kotak Mahindra Trustee Company, Shah and others after finding that rules pertaining to mutual funds were not followed in six fixed maturity plans (FMP) offered by Kotak Mahindra Mutual Fund.

As per the SEBI order, all the six schemes had investments in zero coupon non-convertible debentures (ZCNCDs) of Konti Infrapower & Multiventures. Three FMP schemes also invested in debt securities of Edisons Utility Works. Both Konti and Edisons belong to the Essel Group of Companies, and the investments by the schemes were backed by pledge of shares of Zee Entertainment Enterprises Limited by Cyquator Media Services, a promoter of Zee, holding 22.80% of its total share capital.

In its 104-page, SEBI says, "...lapses and violations have been observed on the part of the noticees 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 of schemes, the six FMP schemes... not being wound up at the end of their maturities and being partially redeemed at the end of their maturity dates, non-compliance with principles of fair valuation while valuing the ZCNCDs of the issuers, and inadequate disclosures to investors of the six FMP schemes. I note that the interests of the investors have been affected negatively on account of the aforesaid infractions on the part of noticees."

The regulator notes that Kotak AMC entered into an agreement with promoters and other promoter entities of Essel Group to extend the maturity of securities of various Essel Group entities to September 30, 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 in question.

SEBI found the 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, was not communicated to the investors when the events took place.

Considering these findings, the SEBI imposed a fine of ₹40 lakh against Kotak Mahindra Trustee Company, ₹30 lakh against Nilesh Shah, ₹25 lakh against Lakshmi Iyer, ₹20 lakh each against Deepak Agarwal and Gaurang Shah, ₹15 lakh against Abhishek Bisen and ₹10 lakh against Jolly Bhatt. The noticees have been ordered to pay the fine within 45 days of receipt of the order.Markets regulator Securities and Exchange Board of India has fined Kotak Mahindra Trustee Company — the trustee to Kotak Mahindra Mutual Fund, Kotak Mahindra Asset Management Company’s managing director Nilesh Shah, and others over irregularities while investing in Essel Group of Companies. The regulator has imposed a cumulative fine of ₹1.6 crore against seven entities in the matter.

Along with the Kotak MF trustee and Shah, SEBI has also fined Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak AMC; Deepak Agarwal, vice-president and Fund Manager at Kotak AMC; Jolly Bhatt, compliance officer at Kotak AMC; Abhishek Bisen, fund manager; Gaurang Shah, Director of Kotak AMC.

SEBI started adjudication proceedings against Kotak Mahindra Trustee Company, Shah and others after finding that rules pertaining to mutual funds were not followed in six fixed maturity plans (FMP) offered by Kotak Mahindra Mutual Fund.

As per the SEBI order, all the six schemes had investments in zero coupon non-convertible debentures (ZCNCDs) of Konti Infrapower & Multiventures. Three FMP schemes also invested in debt securities of Edisons Utility Works. Both Konti and Edisons belong to the Essel Group of Companies, and the investments by the schemes were backed by pledge of shares of Zee Entertainment Enterprises Limited by Cyquator Media Services, a promoter of Zee, holding 22.80% of its total share capital.

In its 104-page, SEBI says, "...lapses and violations have been observed on the part of the noticees 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 of schemes, the six FMP schemes... not being wound up at the end of their maturities and being partially redeemed at the end of their maturity dates, non-compliance with principles of fair valuation while valuing the ZCNCDs of the issuers, and inadequate disclosures to investors of the six FMP schemes. I note that the interests of the investors have been affected negatively on account of the aforesaid infractions on the part of noticees."

The regulator notes that Kotak AMC entered into an agreement with promoters and other promoter entities of Essel Group to extend the maturity of securities of various Essel Group entities to September 30, 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 in question.

SEBI found the 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, was not communicated to the investors when the events took place.

Considering these findings, the SEBI imposed a fine of ₹40 lakh against Kotak Mahindra Trustee Company, ₹30 lakh against Nilesh Shah, ₹25 lakh against Lakshmi Iyer, ₹20 lakh each against Deepak Agarwal and Gaurang Shah, ₹15 lakh against Abhishek Bisen and ₹10 lakh against Jolly Bhatt. The noticees have been ordered to pay the fine within 45 days of receipt of the order.