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SEBI Bars Kotak Mahindra AMC From Launching FMP Schemes For Six Months

SEBI finds Kotak AMC's standard of service 'abysmal' towards investors in 6 FMPs that invested in Essel Group's NCDs

The logo of the Securities and Exchange Board of India (SEBI), India’s market regulator, is seen on the facade of its head office building in Mumbai. 
The logo of the Securities and Exchange Board of India (SEBI), India’s market regulator, is seen on the facade of its head office building in Mumbai. 

The Securities and Exchange Board of India has barred Kotak Mahindra Asset Management Company Ltd. from launching any new fixed maturity plans for six months.

The regulator found that the AMC invested in zero coupon non-convertible debentures of insignificant and financially handicapped entities of Essel Group, including Konti Infrapower & Multiventures Pvt. Ltd and Edison Utility Works Pvt. Ltd.

The AMC should've realised that "high reward" is generally concomitant to "high risk", the regulator said. And that retail investors are not able to take high risk especially when FMP schemes are expected to be conservative in investing the unit holders' money.

The regulator has imposed a penalty of Rs 50 lakh on the AMC and directed it to refund investment management and advisory fees, along with interest, collected from the unitholders of the six FMPs.

"For a mutual fund house which has been in this industry in India for over two decades, the least that can be expected of its AMC is to have in place a robust system for research, risk assessment and due diligence. The insensitive manner in which the AMC has actuated its system of risk evaluation and due diligence... it seems the effectiveness of its systems stood compromised" - SEBI Order

The investigation began when SEBI noticed that the investors of these FMPs were not paid their full proceeds based on the declared net asset value of the schemes as on their respective maturity dates.

Upon investigation, the regulator has found the AMC guilty of:

  • Lack of due diligence and proper care leading to not rendering high standards of service.

  • Failure to consider research reports and analyse various factors.

  • Extension of maturity date of NCDs beyond the maturity date of the scheme.

  • Partial redemption and FMPs not wound up at the end of maturity. The regulations require an AMC to wind up the close-ended scheme at the end of its maturity period, dispose of its assets as per the best interest of the unitholders, discharge the liabilities of the respective schemes, and then distribute the funds among the unitholders by redeeming their units within 10 days of such winding up. The AMC failed to follow this process.

  • Wrong method of valuation of securities. The liability for erroneous valuation lies with the AMC if the third-party valuer failed to do proper valuation to reflect the value of the securities closer to market realizable value.

The slipshod manner in which the (AMC) handled the hard-earned money of the unit holders ... sans any worthwhile due diligence or risk assessment, can deter years of efforts being made by SEBI to promote participation by more and more investors in the securities market and can discourage the potential investors from investing even in the debt market...
SEBI Order

In an emailed response, a spokesperson fpr Kotak Mahindra AMC said the order pertains to six FMP schemes that matured in April and May 2019, which held investments in NCDs issued by Edison and Konti, belonging to the Essel Group and were secured by a pledge on equity shares of Zee Entertainment Enterprises Ltd. "All the investors have been fully repaid along with applicable interest in September 2019. Kotak Mahindra AMC is committed to protecting investor interest at all times."