The Securities Appellate Tribunal (SAT) has partly allowed an appeal filed by Kotak Mahindra Asset Management Company (Kotak AMC) in a case related to investments by its fixed maturity plans (FMPs) in Essel Group-linked entities, while upholding penalties imposed by the market regulator.
In an order dated March 6, the tribunal set aside a direction issued by the Securities and Exchange Board of India (SEBI) requiring Kotak AMC to disgorge a portion of the investment management and advisory fees collected from investors in six FMP schemes. However, it upheld findings of regulatory lapses and dismissed a separate appeal challenging monetary penalties imposed on the asset manager, its trustee company and certain officials.
The case relates to investments made by Kotak Mutual Fund’s six closed-ended FMPs in zero-coupon non-convertible debentures issued by Essel Group-linked firms Konti Infrapower & Multiventures and Edison Utility Works. The investments were backed by pledged shares of Zee Entertainment Enterprises, part of the Essel Group.
The tribunal held that the fund house had failed to exercise adequate due diligence while making the investments, noting that the decisions were largely based on the reputation of the Essel Group and the pledged shares rather than the financial strength of the issuer entities.
SAT also observed that Kotak AMC delayed informing investors about adverse developments after the share price of Zee Entertainment fell sharply in January 2019, reducing the value of the pledged collateral.
However, the tribunal found that SEBI’s direction to disgorge management fees was not justified because investors ultimately received their full dues with interest, and no “wrongful gain” by the asset manager had been established.
“Investors repose trust in mutual fund companies and invest their hard-earned money,” the tribunal said, adding that the lapses in due diligence and delayed disclosures warranted regulatory penalties.
While setting aside the disgorgement order, SAT upheld the penalties imposed by SEBI on the fund house and its officials, including managing director Nilesh Shah. The tribunal also granted an eight-week extension of the stay on penalties to allow the appellants to approach the Supreme Court.
A Kotak AMC spokesperson said it will carefully review the detailed judgment once it becomes available. It said there was no impact on the existing schemes or unit holders of the AMC.