In an order issued by the Securities and Exchange Board of India (SEBI), Kotak Mahindra Asset Management Company (Kotak AMC) has been fined Rs. 50 lakh and barred from launching any new Fixed Maturity Plan (FMP) Schemes for the next six months.

What are FMPs?

FMPs are closed-ended debt mutual fund schemes that have a fixed maturity period. The maturity of an FMP can range between one month and five years. Typically, FMPs invest in fixed-maturity debt instruments like bank FDs, corporate bonds, money market instruments, commercial papers, or certificate of deposits.

The Sequence Of Events

  • In 2019, Essel Group went through a debt crisis. 
  • As a result, various mutual fund schemes that had invested in Essel Group companies did not receive the repayment in full. 
  • Kotak AMC had six FMPs that had invested in the Essel Group. These were non-convertible debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, belonging to the Essel Group and secured by a pledge of equity shares of Zee Entertainment Enterprises Ltd.
  • Due to the debt crisis, during April-May, 2019, Kotak AMC was exposed to bad debt and failed to make redemptions to FMP investors at the time of the maturity of the scheme. 
  • SEBI stated that Kotak AMC entered into a ‘standstill’ agreement with the Essel Group extending the maturity of the debt papers.
  • While the AMC cleared investor payments by September 2019, many SEBI norms were violated in the process.

Some violations specified by SEBI were the extension of the maturity of the underlying instruments in excess of the maturity of the scheme, neglect of due diligence, delay in communicating with the scheme investors, etc.

On August 27, 2021, SEBI issued an order directing Kotak AMC to refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes. The order also specified that the amount collected from the AMC should be equal to the percentage of exposure to the NCDs of the issuers of the respective schemes as on the date of maturity of the FMPs. Additionally, the amount must include a simple interest at the rate of 15% per annum from the date of maturity of the FMP to the date of repayment to the unitholders of the scheme. SEBI also levied a fine of Rs.50 lakh to be paid to the Government of India within 45 days and barred the AMC from launching any new FMPs for six months.

A Kotak Mahindra Group spokesperson said that the AMC had cleared all dues along with an interest of 11.1% in September 2019 and were reviewing SEBI’s order to evaluate their next steps.