SEBI Upholds Penalty on Essel FMP Trustees and Executives, Allows Partial Relief in Kotak AMC Appeal

Kotak Mahindra Asset Management Co. Partially Wins Appeal Against Sebi Order

Key Findings:

• The Securities Appellate Tribunal (SAT) has partly allowed an appeal by Kotak Mahindra Asset Management Co. against a 2021 order by the Securities and Exchange Board of India (Sebi).
• The tribunal has upheld Sebi's findings of regulatory violations by Kotak AMC in six fixed maturity plans (FMPs) investments made in 2016.
• Kotak AMC will not be required to disgorge management and advisory fees linked to the investments, but the company and its senior executives will still face penalties.

Background:

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• The dispute relates to investments made in 2016 by Kotak AMC through six FMPs in debt securities issued by Essel Group entities.
• Problems surfaced in January 2019 after the share price of Zee Entertainment fell sharply, causing the collateral cover to drop below the mandated 150%.
• Kotak AMC entered into agreements with the issuers to extend the maturity of the debentures to September 2019.

Sebi's Allegations:

• Sebi alleged that Kotak AMC violated mutual fund regulations in the investments and directed the company to refund part of the management and advisory fees collected from investors.
• Sebi also asked Kotak AMC to not launch any other FMPs for six months from the date of the order.

Tribunal's View:

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• The SAT noted that the investments were primarily based on the value of pledged shares and on the reputation and standing of the Essel Group and its promoters rather than an assessment of the financial strength of the issuing companies.
• The tribunal held that such an approach fell short of the due diligence expected from an asset management company.
• The SAT also ruled that extending the maturity of the securities violated mutual fund regulations governing closed-ended schemes.

Penalties:

• Sebi's adjudicating officer imposed penalties totalling ₹1.6 crore on Kotak Mahindra Trustee Company Ltd. and several executives, including managing director Nilesh Shah and chief investment officer (debt) Lakshmi Iyer.
• The SAT dismissed the appeal against that order.