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SEBI Penalises Kotak Mahindra Trustee Company, Kotak AMC’s Chief Nilesh Shah, 5 Others

Capital markets regulator Securities Exchange Board of India on Thursday slapped penalties totalling Rs 1.6 crore on seven entities, including Kotak Mahindra Trustee Company and Managing Director of Kotak AMC Nilesh Shah, for flouting rules pertaining to mutual funds while investing in Essel Group companies.

Others penalised by SEBI are Kotak AMC’s fund managers — Lakshmi Iyer, Deepak Agarwal, Abhishek Bisen — Compliance Officer Jolly Bhatt and Gaurang Shah, who was one of the members of the investment committee that approved the investment decisions related to certain Fixed Maturity Plan schemes, as per the order.

They have been directed to pay the penalties within 45 days.

The case pertains to six FMP schemes that matured in April and May 2019, which held 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 pledge of equity shares of Zee Entertainment Enterprises Ltd by its promoter Cyquator Media Services.

Further, Kotak Mahindra Asset Management Company 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 of the schemes.

SEBI found that Kotak Mahindra Trustee Company, being a trustee of Kotak AMC, failed to disclose scheme related information, particularly regarding the adverse situation related to Essel Group companies, to its unitholders accurately and in a timely manner, despite being aware of the same since January 2019.

According to SEBI, 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, all being information having adverse bearing on the investments of investors were not communicated to the investors when the events took place.

“Lapses and violations have been observed on the part of the noticees (seven entities) 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 schemes, the six FMP schemes… and not being wound up at the end of their maturities and being partially redeemed at the end of their maturity dates,” SEBI said in the 104-page order.

Further, it observed non-compliance with principles of fair valuation while valuing the debt securities or Zero Coupon Non-Convertible Debenture of the issuers, and inadequate disclosures to investors of the six FMP schemes by these entities.

According to the regulator, interests of the investors has been affected negatively on account of the infractions on the part of the noticees.

Accordingly, SEBI imposed a fine of Rs 40 lakh on Kotak Mahindra Trustee Company, Nilesh Shah (Rs 30 lakh), Iyer (Rs 25 lakh), Agarwal (Rs 20 lakh), Bhatt (Rs 10 lakh), Bisen (Rs 15 lakh) and Gaurang Shah (Rs 20 lakh).

The order came after SEBI noticed that the investors of certain FMPs launched by the Kotak Mahindra Mutual Fund were not paid their full proceeds based on the declared NAV of the said schemes as on their respective maturity dates.

In August 2021, SEBI had 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.

In addition, the regulator had 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. Later in October that year, the Securities Appellate Tribunal partly stayed the SEBI order.

“The direction to refund a part of the investment management and advisory fees collected by the appellant (Kotak Mahindra AMC) from the unit holders shall remain stayed,” as per the SAT order.

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