Sebi Imposes Penalty of Rs 1.6 Crore on Kotak AMC Managing Director Nilesh Shah, 5 Others

Capital markets regulator Securities and Exchange Board of India or SEBI, has imposed a fine of Rs 1.6 crore on seven entities and senior executives of Kotak Mahindra Trustee Company and Managing Director of Kotak AMC Nilesh Shah for flouting rules that were connected to to mutual funds while investing in Essel Group companies. It has also penalised other executives including 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 (FMP) schemes, Sebi said in an order.

In the over-100 page adjuncting order dated June 30, the markets regulator said that its adjuncting officer found that there were faults in the conduct of the officers on two grounds. These include faults in the extending the maturity of papers belonging to Essel group, and a lack of due diligence during investment in the Essel group companies.

“It is observed that Kotak AMC 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 (NAV),” said Sebi in its order.

“No reference was made to the financials and operations of the issuers in the investment plan. Investment decision was only based on analysis of collateral (Zee),” Sebi added.

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.

Kotak Mahindra Asset Management Company (AMC) 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,” it said.

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.