India’s markets regulator on Friday banned Kotak Mahindra Asset Management Co. Ltd from launching new fixed maturity plans (FMPs) for six months and imposed a ₹50 lakh fine for violating mutual fund regulations.
The Securities and Exchange Board of India (Sebi) also asked Kotak Mahindra Asset Management to refund a portion of the investment management and advisory fees collected from unitholders of the FMPs with 15% annual interest. The fine has to be paid within 45 days, Sebi said.
A Sebi probe found that the asset manager had not paid the full value of the six FMPs that matured in April and May 2019 at the time of maturity.
FMPs are close-ended debt mutual funds with launch and maturity dates. They invest in debt papers that mature before the tenure of the fund expires.
Kotak Mahindra AMC invested in Essel Group debt papers that were secured by pledged shares of Zee Entertainment Enterprises Ltd (ZEEL). However, with the deterioration of Essel Group’s financial health, lenders started invoking the shares pledged.
The sharp selling of ZEEL shares in January 2019 led to a crash in the stock price. The stock crash prompted Kotak Mahindra AMC and other such asset managers to enter into a moratorium on selling the pledged shares of ZEEL until September 2019. However, this prevented Kotak Mahindra AMC from fully repaying investors in the six FMPs when they matured in April and May 2019.
{{/usCountry}}The sharp selling of ZEEL shares in January 2019 led to a crash in the stock price. The stock crash prompted Kotak Mahindra AMC and other such asset managers to enter into a moratorium on selling the pledged shares of ZEEL until September 2019. However, this prevented Kotak Mahindra AMC from fully repaying investors in the six FMPs when they matured in April and May 2019.
{{/usCountry}}“The industry had gotten very aggressive in good times and had effectively moved into promoter lending, which eventually backfired,” said Dhirendra Kumar, chief executive of Value Research.
“There is a seasonality to FMPs. People invest in them when interest rates are expected to go up, as is currently the case. Hence, the six-month ban on FMP issuance can be quite consequential for Kotak Mahindra AMC.”
Sebi held that the delay in payments, a lack of due diligence in investing in the companies in question, and a failure to keep investors informed sufficiently in advance were all violations of its rules.
Kotak Mahindra AMC did repay investors in its FMPs in September 2019 when the moratorium ended, and the Essel Group was able to repay some of its borrowings.
“All the investors have been fully repaid along with applicable interest in September 2019. Kotak Mahindra AMC is committed to protecting investor interest at all times,” a spokesperson for the Kotak Mahindra Group said.