SAT Sets Aside SEBI Disgorgement Order Against Kotak AMC Over Mutual Fund Investments In Essel Entities

The Securities Appellate Tribunal (SAT) on Friday partly allowed appeals filed by Kotak Mahindra Asset Management Company, its Trustee Company and certain officials against SEBI orders directing refund of part of the investment management and advisory fees collected from investors in six close-ended debt mutual fund schemes known as Fixed Maturity Plans (FMPs), and imposing monetary penalties over investments made in Essel Group entities.

A coram of Presiding Officer Justice P.S. Dinesh Kumar and Technical Members Meera Swarup and Dr. Dheeraj Bhatnagar upheld SEBI's findings on regulatory violations but set aside the direction requiring Kotak AMC to disgorge a portion of the management and advisory fees.

Kotak had challenged the regulator's order dated August 27, 2021 directing refund of part of the investment management and advisory fee collected from unit holders of six FMPs along with 15% interest, as well as a June 30, 2022 order of SEBI's Adjudicating Officer imposing monetary penalties.

Kotak Mutual Fund had launched six close-ended debt schemes, maturing between April and May 2019. The schemes had invested in Zero Coupon Non-Convertible Debentures of Essel Group entities Konti Infrapower & Multiventures Pvt. Ltd. and Edison Utility Works Pvt. Ltd. The investments were secured by pledged shares of Zee Entertainment Enterprises Ltd. (ZEEL), provided by Essel promoter entity Cyquator Media Services Pvt. Ltd., with a 150% collateral cover.

In January 2019, ZEEL's share price fell sharply, causing the collateral value to drop below the mandated 150%. Though the schemes reached their maturity dates, investors were paid only partially at that stage, with the remaining amount being paid between September 9 and September 25, 2019 after the pledged ZEEL shares were invoked and sold.

Kotak contended that there was no allegation of fraud and that the case was limited to alleged lack of due diligence. It argued that investors were ultimately repaid in full along with additional profit after the pledged shares were sold, resulting in investors receiving Rs 24.16 crore more than what they would have received had the schemes been redeemed as originally scheduled. It also argued that SEBI erred in concluding lack of due diligence given that the investments were effectively backed by one of India's largest media groups.

SEBI, however, argued that extending the maturity of the debentures beyond the maturity date of the closed-ended schemes was impermissible under the Mutual Fund Regulations.

Rejecting Kotak's contention, the Tribunal held that Kotak had failed to adequately assess the financial strength of the issuer entities and had primarily relied on the pledged ZEEL shares.

“In our considered view, appellants failed to exercise adequate care and due diligence expected from a professional Mutual Fund Asset Management Company, the Mutual Fund Trustee Company and its professional employees who were part of the decision-making process to invest in Konti and Edison,” it concluded.

The Bench further held that extending the maturity of the investments went against the basic tenet of closed-ended schemes.

“It is also an admitted fact that the extension of the maturity dates led to partial redemption of the Fixed Maturity Plans. Thus, the unit holders were deprived of full redemption. Their consent was not taken for making the partial redemption,” it noted.

On disclosures, the Tribunal observed that though Kotak was aware of adverse developments from January 2019, investors were informed only in April 2019.

“Even though 'timely' is not defined, the delay in informing the unit holders after three months cannot be considered as 'timely',” the bench held.

However, the tribunal noted that SEBI itself had recorded that investors ultimately suffered no monetary loss. Since SEBI failed to establish that Kotak had made any “wrongful gain,” the tribunal disagreed with the direction to disgorge part of the management and advisory fee.

Accordingly, the tribunal partly allowed Kotak AMC's appeal by setting aside the direction for disgorgement while upholding the findings on regulatory violations. It also declined to interfere with the penalties imposed on the trustee company and the officials, dismissing the connected appeal.

For Appellants: Senior Advocate Pesi Modi, Advocates Neville Lashkari, Joby Mathew, Aditya Joby and Sanskrity Purohit

For Respondent: Senior Advocate Shiraz Rustomjee, Advocate Suraj Choudhary and Abhishek Khare