Kotak Mahindra Asset Management Company has been barred by capital markets regulator SEBI from launching any new fixed maturity strategy (FMP) scheme for six months for violating regulatory norms. SEBI has also imposed a fine on the fund property of Rs 50 lakh — all for failing to abide by regulatory needs in 2019 although managing six FMPs. The fund property, backed by the Kotak Group and headed by market place veteran Nilesh Shah, is one of the largest AMCs in the nation with Asset Under Management of Rs 3.43 lakh crore.
Here’s what led SEBI to bar Kotak AMC from launching new FMP
The order issued on 27 August 2021 against Kotak AMC dates back to 2019, when the fund property did not spend investors of six FMPs their complete proceeds based on the declared Net Asset Value (NAV) of the stated schemes as on their respective maturity dates. The AUM of the six schemes at the time of their maturity was Rs 2,092 crore.
Kotak AMC, via these FMPs, had invested in Zero Coupon Non-Convertible Debentures (ZCNCDs) of Essel group firms Konti Infrapower & Multiventures and Edisons Utility Works. Essel group pledged shares of Zee Entertainment Enterprises Ltd with Kotak AMC to safe the stated investments.
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The situation began brewing in January 2019, when shares of ZEEL fell sharply and ZEEL promoters expressed inability to provide added collateral cover. It is then that Kotak AMC entered into separate agreements with ZCNCDs issuers, and extended the maturity period of these ZCNCDs till September 30, 2019 — beyond the fixed maturity date of the stated schemes.
It was noted that Kotak AMC’s investment committee’s approval of the investment was mostly made based on the presumption of getting repayment thereof by way of refinance, without having creating any reference to the financials and small business operations of the Issue.
What occurred to the investors?
Investors of the stated schemes have been paid component of the quantity they have been supposed to get on Maturity in April and May 2019. According to SEBI, investors received Rs 1,740 crore on the maturity date, as against the AUM on maturity of Rs 2,092 crore.
Further, Kotak AMC paid investors of the six schemes in September 2019 a sum of Rs 197.56 crore and then once again in the similar month a sum of Rs 178.49 crore.
Why did Kotak AMC not sell pledged shares?
Kotak AMC had decided against promoting shares of ZEEL pledged with it to safe the ZCNCD investment. Earlier in 2019, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra AMC had stated in an interview that the choice was taken as it wouldn’t have assured complete recovery, and the choice was taken maintaining unitholders interests in thoughts. “Open-ended and closed-ended schemes don’t come with guaranteed returns,” Lakshmi Iyer had then explained.
What Kotak AMC stated immediately after SEBI’s order
“The SEBI order dated August 27, 2021 on KMAMC (Kotak Mahindra Asset Management Company), pertains to six FMP schemes that matured in April and May 2019, which held investments in Non-Convertible Debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, belonging to the Essel Group and secured by pledge of equity shares of Zee Entertainment Enterprises Ltd. All the investors have been fully repaid along with applicable interest in September 2019. KMAMC is committed to protecting investor interest at all times”, a spokesperson of Kotak Mahindra Group stated.