SEBI imposes Rs 1.6 crore penalty on Kotak AMC chief and 6 others: Know details here

Kotak AMC
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Kotak AMC SEBI fine

The market regulator on Thursday imposed penalties amounting to Rs 1.6 crore on seven entities including Kotak Mahindra Trustee Company and Managing Director of Kotak AMC Nilesh Shah. Let us look at the reasons.

Kotak fine: What are FMPs?

Before you know about the penalty and reasons, it is crucial to understand what are FMPs? Fixed Maturity Plans (FMPs) are a special class of close-ended debt mutual funds. They expire after the completion of a predetermined time. Since they are close-ended, you can invest in them when a New Fund Offer (NFO) comes - no new investments are allowed post-NFO closure window. More importantly, FMP investments can be redeemed only after the scheme has matured, and no premature redemption is allowed.

Kotak Nilesh Shah fine: The backstory

  • The case is related to six FMP schemes that matured in April and May 2019.
  • These schemes held the investments in debt securities issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, belonging to the Essel Group.
  • The debt securities were secured by a pledge of equity shares of Zee Entertainment by its promoter Cyquator Media Services.
  • As per rules, the payment should have been made on maturity. However, Kotak Mahindra AMC agreed with promoters and other promoter entities of Essel Group and agreed to extend the maturity of securities of various Essel Group entities to September 30, 2019.
  • Investors of all the six schemes were not paid the full amount on maturity based on the Net Asset Value of the schemes.

Kotak FMP SEBI: Why did SEBI impose a penalty on related entities?

  • As per SEBI, Kotak Mahindra Trustee Company being a trustee of Kotak AMC failed to disclose scheme-related information. 
  • It should have disclosed the adverse situation related to Essel Group companies to its unitholders accurately and in a timely manner. 
  • As per the SEBI report, the AMC was aware of the same since January 2019.
  • Information of Essel promoters not providing additional cover and trustees to extend the maturity of the securities have an adverse bearing on investors' investment. This information was not communicated to the investors when the events took place.
  • Also, SEBI found non-compliance with principles of fair valuation while valuing the debt securities or Zero Coupon Non-Convertible Debenture (ZCNCDs) of the issuers and inadequate disclosures to investors of the six FMP schemes by these entities.

Kotak AMC SEBI: Who all are fined and how much?

  • SEBI has fined Kotak Mahindra Trustee Company and MD of Kotak AMC Nilesh Shah for flouting rules pertaining to mutual funds while investing in Essel Group companies.
  • Others who have been penalized are Kotak AMC's fund managers - Lakshmi Iyer, Deepak Agarwal, Abhishek Bisen & Compliance Officer Jolly Bhatt, and Gaurang Shah.
  • Sebi imposed a fine of Rs 40 lakh on Kotak Mahindra Trustee Company, Rs 30 lakh on Nilesh Shah, Rs 25 lakh on Iyer, Rs 20 lakh on Agarwal, Rs 10 on Bhatt, Rs 15 lakh on Bisen, and Rs 20 lakh on Gaurang Shah.

Kotak AMC fine: Other penalties by SEBI

  • Last year, in August, SEBI asked the AMC to refund a part of the investment management and advisory fees collected from the unit holders of the six FMP schemes with 15% interest per annum.
  • It has also restrained Kotak AMC from launching any new fixed-maturity plans for six months and imposed a penalty of Rs 50 lakh on the fund house in the matter.

Kotak AMC SEBI: Other recent cases

  • SEBI had earlier found evidence that Invesco Asset Management India Pvt. Ltd has executed trades on behalf of offshore funds, violating norms governing mutual funds in India.
  • Axis Mutual Fund had also come under the scanner after SEBI’s investigation on irregularities in trading in May this year.

What should you do now?

  • Kotak AMC may look to challenge SEBI’s order, according to media reports. So far, the AMC has not responded to the allegations.
  • According to Mutual Fund advisors, investors should not do anything at the moment and wait for the details. Avoid panic selling.
  • We shall keep you updated in case of any action.
  • What is the FMP scheme?

  • What is the return on FMP?

  • Why did SEBI impose a fine on Kotak Mahindra Trustee Company?

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