Kotak mutual fund (2019)

(A look back at 2019, maturity delayed but investors repaid?)

Objective:

Consequences of AMCs extending the payment date beyond the prescribed limit.

Introduction:

A mutual fund1 is basically a trust that pools the money invested by the investors which is
manged by a professional fund manager. There are number of investor involved, they share
a common investment objective and invest the money in equites, bonds, money market
instruments and/ or other securities as well.

India's first mutual fund was established in the year of 1963, namely, Unit Trust of India
(UTI). It was an initiative of the Government of India and reserve Bank of India with the
objective of encouraging saving, investment and participation in the income, profit and
gains build up by the corporation from the acquisition, holding, managing and selling the
securities. By the year of 1992, the Indian securities market gained more importance as the
SEBI (securities and exchange board of India) came into picture to protect the interest of the
investors, in securities market as well as promote, develop and regulate the securities
market. In 1993, SEBI mutual fund regulation came into being for all mutual funds, which
gave birth to private sector mutual funds. In July of the same year Kothari Pioneer became
the first private sector mutual fund registered in India. A new era began in the mutual fund
industry with the entry of private player, it gave the Indian investor a wider choice of mutual
fund product, which was why the SEBI MF2 regulation was revised and replaced in 1996 by a
comprehensive set of regulation, namely SEBI (Mutual Fund) Regulations, 1996.

1. For knowing more: https://www.amfiindia.com/investor-corner/knowledge-center/what-are-mutual-funds-new.html

2. For knowing more: https://www.fincash.com/l/sebi-guidelines-for-investing-in-mutual-funds
The number of mutual fund schemes and the number of players in the market have been
growing since than an on of such private mutual fund is Kotak mutual Fund 3. The assets
manager of Kotak mutual fund is Kotak Mahindra asset management company limited
(KMAMC)came into being on august 2, 1994. The company is also a subsidiary of Kotak
Mahindra bank limited (KMBL). The mutual fund was founded on 23th of June 1998 and the
asset management company was incorporated on 5th august 1994. Kotak Mahindra bank
limited is the sponsor, the trustee organisation is the Kotak Mahindra trustee co. Ltd, with
the chairman Mr. Uday Kotak. The managing director and the chief executive officer both
position is occupied by Mr. Nilesh shah. The chief investment officers are Mr Harsha
Upadhyaya and Ms, Lakshmi Iyer, the compliance officer is Ms. Jolly Bhatt and investor
service officer is Ms. Sushma Mata. They also have many Fixed maturity plans (FMP).

These kinds of funds are similar to fixed deposits as they are closed-ended debt fund with a
maturity period which is fixed in nature. But in the schemes the money is invested in the
debt securities like in government securities, or in commercial paper (CPs), certificates of
deposits (CDs), other money market instruments, corporate bonds, non- convertible
debentures (NCDs) of companies which are reputed in the market. These schemes don’t
have a rate of return which is guaranteed by the Asset management company. The main aim
of such scheme is to protect investor from the fluctuations on the market by offering a
steady return of a fixed period. The fixed lock-in period minimises the interest rate risk as
well as liquidity risk, as the gains from investments are realised upon the maturity of the
schemes. They are becoming a suitable option for the investors who does not wish to take
higher risks.

About the case:

There was a delay in payment to the investors of the six of its FMP series 4– 127, 183, 187,
189, 193, and 194, which was launched by the Kotak mutual fund. The delay was made by
the AMC because of a default by two Essel group companies, namely, Edisons Utility Works

3. For knowing more: https://groww.in/mutual-funds/amc/kotak-mutual-funds

4. For knowing more: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doGetFundDetails=yes&mfId=33&type=2
and Konti Infrapower & Multiventures. The two companies defaulted on zero-coupon non-
convertible debentures that were held by many mutual funds, like HDFC mutual fund,
ADITYA Birla Mutual fund, ICICI Prudential Mutual fund, Templeton Mutual Fund, anther
others as well. One of these funds was Kotak Mutual Fund. The NCDs of the two companies
were although backed by the shared of Zee entertainment as collateral with the fund house,
the share price had sharply fallen down. Therefore, the fund house didn’t sell the shares to
recover some part of the loan to the companies and held them as securities. Subsequently,
the fund house delayed payment to some investors in the six of its FMPs. The FMPs were to
be redeemed in the month of April-May but they were redeemed in the month of
September.

Investors of the said schemes were paid part they were supposed to get on the maturity in
April and may 2019. According to SEBI, investors received Rs 1,740 crore5 on the maturity
date, as against the aum on maturity of Rs 2,092 crore.

Furthermore, the AMC signed a deal with the company asking for future interest of eleven
percent and ask the investor to wait as the money will be recovered soon and the returns
will also be given to them. They told the reason to the investors for the delay and assured
them that the money they have invested will be returned to them as promised in the
beginning of the scheme. They also pointed out that they were not the only one effected by
the default and the market are uncertain and risky as it is already disclosed in the offer
letter. 6

Regulator implications:

Some investors of the six FMPs complained to SEBI. Which lead to investigations. The
market regulator noticed the deferred payment on the basis of NAV and said "keeping in
view the forgoing factual exposition about various act of indiscipline, utter neglect of due
diligence, inordinate delay in communicating with the investors, violation of the statutory
sanctity of the maturity dates of the FMP schemes." the SEBI order further stated, "There

5. For knowing more: https://www.financialexpress.com/market/sebi-bars-kotak-amc-mutual-fund-from-launching-fmp-

fixed-maturity-plan-debt-schemes-explained-maturity-delayed-investors-repaid/2319351/
6. For knowing more: https://thewire.in/banking/sebi-penalty-kotak-companies-investor-interest
remains no doubt in mind that the Noticee has acted in gross violation of provisions of the
SEBI Act, 1992, MF Regulations, 19967 as well as various circulars issued by SEBI from time
to time.”

A Kotak Mahindra group spokesperson clarified to the investor saying, "these firms (talking
about the firms those have defaulted) were facing headwinds due to company/group
specific issues. In the interest of our unitholders, we decided to provide additional time to
the promoters for optimal recovery8, which led to partial deferment of maturity playout.
This approach ensured that all dues along with interest of 11.1% were paid to our investors
in September 2019. We are reviewing the SEBI order and will evaluate next steps.”

How it all ended:

On August 27th, 2021 the market regulated securities and exchange board of India (SEBI),
prohibit Kotak Mahindra asset management company from introducing any new fixed
maturity plans (FMP) for the next six months. This was done by the SEBI because there was
delay in the payment of full proceeds to the investors of six FMP schemes. The schemes
were due for maturity in the months of April-May, but they were redeemed fully in
September of the same year, as per the market regulator order. "It was noticed that the
investors of certain schemes launched by the said AMC (Kotak Mahindra AMC) were not
fully paid proceeds based on the declared net asset value,” said SEBI. And it has imposed a
penalty on the AMC of 50 lakhs1 which was to be paid within 45 days.9

Furthermore, on July, 1 2022, SEBI slaps more penalty on Kotak AMC and the employees
responsible. Capital markets regulator SEBI has imposed a penalty of 1.6 crore on seven
entities, including Kotak Mahindra Trustee Company (Rs 40 lakh) and Managing Director of
Kotak AMC Nilesh Shah (Rs 30 lakh), for flouting rules pertaining to mutual funds while

7. For knowing more: https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-mutual-

funds-regulations-1996-last-amended-on-january-25-2022-_55732.html
8. For knowing more: https://www.livemint.com/mutual-fund/mf-news/kotak-mf-says-working-with-essel-group-for-
optimal-recovery-of-dues-1555047594258.html
9. For knowing more: https://timesofindia.indiatimes.com/sebi-slaps-rs-50-lakh-fine-on-kotak-mahindra-amc-bars-from-
launching-new-fmp-schemes-for-6-months/articleshow/85689455.cms
investing in Essel Group companies. Others penalised by Sebi include Kotak AMC’s fund
managers -- Lakshmi Iyer (Rs 25 lakh), Deepak Agarwal (Rs 20 lakh) and Abhishek Bisen (Rs
15 lakh) besides Compliance Officer Jolly Bhatt (Rs 10 lakh) and Director Gaurang Shah (Rs
20 lakh) was among the members of the investment committee that approved the
investment decisions related to certain Fixed Maturity Plan schemes, as per the order. They
have been directed to pay the penalties within 45 days.10

Notes:

SEBI had penalized Kotak Mahindra Trustee Company and its officials under Section 15HB of
the Securities and Exchange Board of India Act, 1992.

10. For knowing more:

o https://www.outlookindia.com/business/sebi-slaps-rs-1-6-cr-penalty-on-nilesh-shah-5-others-from-

kotak-amc-in-fmp-issue-news-206029

o https://economictimes.indiatimes.com/mf/mf-news/sebi-fines-kotak-amc-its-md-nilesh-shah-and-5-

other-officials-for-violation-of-rules/articleshow/92584644.cms

o https://www.moneylife.in/article/sebi-penalises-kotak-amc-its-chief-nilesh-shah-and-5-other-officials-

for-violation-of-rules/67628.html

o https://www.businesstoday.in/markets/top-story/story/sebi-penalises-kotak-mahindra-trustee-

company-kotak-amcs-chief-nilesh-shah-5-others-339919-2022-06-30