SEBI restrains Kotak Mahindra from launching fixed maturity plans

The Securities and Exchange Board of India (SEBI) asked Kotak Mahindra Asset Management to refund a portion of the investment management and advisory fees collected from the unitholders of FMPs along with 15% annual interest. SEBI said that the penalty will have to be paid within 45 days.

A SEBI investigation found that the asset manager had not paid the full value of six FMPs maturing in April and May 2019 at the time of maturity.

FMPs are closed-ended debt mutual funds with fixed launch and maturity dates. They invest in debt papers which mature before the maturity of the fund.

Kotak Mahindra AMC had invested in Essel Group debentures which were secured by pledged shares of Zee Entertainment Enterprises Limited (ZEL). However, with the deterioration in the financial position of the Essel Group, lenders started withdrawing the pledged shares. The sharp sell-off in ZEEL shares in January 2019 led to the fall in the share price. The stock crash prompted Kotak Mahindra AMC and other such asset managers to hold off on selling pledged shares of Zeel till September 2019. However, this prevented Kotak Mahindra AMC from fully repaying the investors in the six FMPs when they matured in April and May. 2019

Dhirendra Kumar, chief executive, Value Research, said, “The industry had gone too aggressive in good times and effectively shifted to promoter debt, which eventually backfired. There is a seasonality for FMPs. People invest in them. When interest rates are expected to go up, as it is at present. Hence, a six-month ban on issuance of FMPs can be quite consequential for Kotak Mahindra AMC.”

SEBI held that delay in payment, lack of due diligence in investing in related companies and failure to adequately inform investors in advance are all in violation of its rules.

Kotak Mahindra AMC had repaid investors in its FMPs in September 2019, when the moratorium ended, and Essel Group was able to repay some of its borrowings. A spokesperson for the Kotak Mahindra Group said, “All investors have been fully repaid with interest applicable in September 2019. Kotak Mahindra AMC is committed to protect the interest of investors at all times.”