Why SEBI barred Kotak from launching new FMPs: A look back at 2019; maturity delayed but investors repaid

Kotak Mahindra Asset Management Company has been barred by capital markets regulator SEBI from launching any new fixed maturity plan (FMP) scheme for six months for violating regulatory norms. SEBI has also imposed a fine on the fund house of Rs 50 lakh — all for failing to abide by regulatory requirements in 2019 while managing six FMPs. The fund house, backed by the Kotak Group and headed by market veteran Nilesh Shah, is one of the biggest AMCs in the country 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 house did not pay investors of six FMPs their full proceeds based on the declared Net Asset Value (NAV) of the said 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, through 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 secure the said investments.

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The issue started brewing in January 2019, when shares of ZEEL fell sharply and ZEEL promoters expressed inability to provide additional 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 said schemes.

It was noted that Kotak AMC’s investment committee’s approval of the investment was primarily made based on the presumption of receiving repayment thereof by way of refinance, without making any reference to the financials and business operations of the Issue.

What happened to the investors?

Investors of the said schemes were paid part of the amount they were 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 again in the same month a sum of Rs 178.49 crore.

Why did Kotak AMC not sell pledged shares?

Kotak AMC had decided against selling shares of ZEEL pledged with it to secure the ZCNCD investment. Earlier in 2019, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra AMC had said in an interview that the decision was taken as it wouldn’t have guaranteed full recovery, and the decision was taken keeping unitholders interests in mind. “Open-ended and closed-ended schemes don’t come with guaranteed returns,” Lakshmi Iyer had then explained.

What Kotak AMC said 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 said.