The regulator has imposed a penalty of ₹40 lakh on Kotak AMC. Shah and Iyer have been fined ₹30 lakh and ₹25 lakh, respectively.
The other senior officials of the fund house to be penalised are Deepak Agarwal, vice-president & fund manager, Jolly Bhatt, compliance officer, Abhishek Bisen, fund manager, and Gaurang Shah, director of Kotak AMC.
The regulator has alleged irregularities in certain fixed maturity plans (FMPs) of Kotak AMC. The investment objectives of these schemes were to generate returns through investments in debt and money market instruments with a view to reducing interest rate risks.
All the six schemes had investments in debt securities and Zero Coupon Non-Convertible Debentures (ZCNCDs) of Konti Infrapower and Multiventures. The schemes also invested in the debt securities of Edisons Utility Works. Both Konti and Edisons belong to the Essel Group of companies.
Investments by the schemes were backed by the pledge of shares of Zee Entertainment by Cyquator Media Services, a promoter of Zee and holding 22.80% of its total share capital, Sebi said. “It is observed that Kotak AMC entered into an agreement with the 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 (NAV) of the six schemes,” Sebi said in an order on Thursday.
The regulator said this transaction has been referred to as a loan against shares where the collateral was in the form of pledge over shares of Zee. Initial security cover was 1.6 times by the pledge of shares, and this was to be maintained at 1.5 times thereafter. There is, however, no rationale as to how 1.6 times security cover is adequate collateral.
“It is, therefore, alleged that the investments are not based on financials or the business operations of the issuer companies i.e. Konti and Edison. The investments are purely done based on the security provided by Cyquator, a promoter group company, through pledge of shares of Zee Entertainment and the external rating of a credit rating Agency (CRA),” Sebi said.
The regulator further alleged that even though the transactions happened through debt securities, they are basically loans against shares.
“By not taking investment decisions solely in the interest of unit holders, not rendering high standards of service, not exercising due diligence, not ensuring proper care at the time of investment by assessing the adequacy of the collateral, not recording of the rationale as to how 1.6/1.5 times security cover is adequate collateral, (and) not assessing the credit quality of the underlying bond and repayment capacity of the issuer in the investment rationale, the noticees (Kotak AMC and its senior officials) have allegedly violated… mutual fund regulations,” Sebi said.