AMC: SEBI fines Kotak AMC, its MD Nilesh Shah and 5 other officials for violation of rules

Mumbai: Securities and Exchange Board of India (SEBI) has imposed penalty on Kotak Asset Management Company (AMC), its managing director Nilesh ShahChief Investment Officer (Loans) Lakshmi Iyer and four other senior executives of the company for violation of mutual fund rules.

The regulator has imposed a fine of Rs 40 lakh on Kotak AMC. Shah and Iyer have been fined ₹30 lakh and ₹25 lakh respectively.

Other senior officials of the fund house to be penalized are Deepak Agarwal, Vice President and Fund Manager, Jolly Bhatt, Compliance Officer, Abhishek Bisen, Fund Manager and Gaurang Shah, Director, Kotak AMC.

The regulator has alleged irregularities in certain Fixed Maturity Plans (FMPs) of Kotak AMC. The investment objective of these schemes was to generate returns through investment in debt and money market instruments with a view to mitigating interest rate risk.

All the six schemes had investments in debt securities and zero coupon non-convertible debentures (ZCNCDs) of Conti Infrapower and Multiventures. The plans also invested in debt securities of Edison Utility Works. Conti and Edison are both Essel Group of companies.

SEBI said that the schemes investment were pledged by Zee Entertainment’s shares to Scquire Media Services, the promoter of Zee, and accounted for 22.80% of its total share capital. “It is observed that Kotak AMC has entered into an agreement with the promoters of Essel Group and other promoter entities for extension of maturity of securities of various entities of Essel Group up to 30th September, 2019.

Consequently, investors of all the six schemes were not paid the 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 on Zee’s shares. The initial security cover by pledge of shares was 1.6 times, and thereafter it was to be maintained at 1.5 times. However, there is no justification as to how 1.6 times security cover is sufficient collateral.

“Therefore, it is alleged that the investments are not based on financial or business operations of the issuer companies i.e. Conti and Edison. SEBI said that the investments are purely pledge of shares of Zee Entertainment and external rating of Credit Rating Agency (CRA) through a promoter group company based on the security provided by the Squitor.

The regulator further alleged that even though the transactions took place through debt securities, they are basically loans against shares.

“Not making investment decisions in the interest of unit holders only, not providing high standards of service, not exercising due diligence, not ensuring due care at the time of investment by assessing the adequacy of collateral, not recording reasoning How 1.6/1.5 The Guna security cover is sufficient collateral, (and) the investment logic does not assess the credit quality of the underlying bond and the repayment capacity of the issuer, the notice (Kotak AMC and its senior executives) has allegedly violated… rules,” SEBI said.