A default by some of the Essel Group companies is still affecting mutual funds more than two years later. Markets regulator Sebi on Friday penalised Kotak Mutual Fund for its delay in making full payment to some of its investors in mid-2019. The delay happened because two Essel Group companies — Edisons Utility Works and Konti Infrapower & Multiventures — had defaulted on non-convertible debentures (NCDs) held by six fixed maturity plans (FMPs) of Kotak MF.Sebi barred Kotak MF from launching new FMPs for six months and asked it to pay a fine of Rs 50 lakh. Further, it ordered the fund house to partially refund fees relating to fund management and advisory to investors in those six FMPs. In these FMPs, the full amount was not refunded to its investors after two of the Essel Group companies failed to refund money to these Kotak MF’s schemes during 2019.
A spokesperson for the fund house, reacting to the Sebi order, said that all the investors were fully repaid along with applicable interest in September 2019. Kotak MF “is committed to protecting investor interest at all times”, the spokesperson added.
The case relates to the fund house’s holding of zero-coupon NCDs of the two Essel Group companies in six FMPs on which the companies defaulted in April-May 2019. Although the NCDs were backed by shares of Zee Entertainment as collateral with the fund house, the share price had then fallen drastically. Hence, the fund house didn’t sell those shares to partially recover its loan to the two companies, sources in the MF had then told TOI.
Since five other fund houses were also in a similar position, holding Zee Ent shares as collateral, any forced selling by Kotak MF would have prompted other fund houses to also sell the stock, leading to a crash in its price, the source had said then. At that time, HDFC MF, Aditya Birla MF, ICICI Prudential MF, Templeton MF and UTIMF were also hit by defaults by Essel Group companies.
In its 84-page order, Sebi said that there were lapses on the part of Kotak MF in carrying out due diligence and in risk assessment while taking investment decisions relating to these NCDs. Sebi also said that the fund house had failed to disclose information about negative impact on the six FMPs to its investors on time.
“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, permitting extension of the maturity of the NCDs of the issuers in contravention of extant regulations, etc…there remains no doubt in mind that the (fund house) has acted in gross violation of provisions of the Sebi … as well as various circulars issued by Sebi from time to time,” the order said.
On its part, Kotak MF had relied on a Sebi circular relating to MFs issued on June 20, 2002 that had said that fund houses would make all effort to recover the full value of its investments that is illiquid till two years after closure of a scheme. Following the Sebi regulations, the fund house had made all efforts to recover full value of NCDs.