The Securities Appellate Tribunal (SAT) on Friday partly allowed an appeal by Kotak Mahindra Asset Management Co. against a 2021 order by the Securities and Exchange Board of India (Sebi), setting aside the regulator’s direction to disgorge management and advisory fees linked to investments made through six fixed maturity plans (FMPs).
The tribunal, however, upheld Sebi’s findings of regulatory violations by Kotak AMC in the same investments, and dismissed a separate appeal challenging penalties imposed on the company and its senior executives.
The SAT also granted an eight-week extension of the stay on penalties to allow the appellants to approach the Supreme Court.
“There is no impact on the existing schemes or unit holders of KMAMC,” a Kotak AMC spokesperson said in a statement. “The Hon’ble SAT has granted eight weeks’ time to pursue further legal remedies, which the company will evaluate in due course.”
The background
The dispute relates to investments made in 2016 (for maturity in 2019) by Kotak AMC through six fixed maturity plans (FMPs) in debt securities issued by Essel Group entities Konti Infrapower & Multiventures Pvt. Ltd. and Edison Utility Works Pvt. Ltd, which were backed by pledged shares in group companies of the promoters.
Problems surfaced in January 2019 after the share price of Zee Entertainment fell sharply, causing the collateral cover to drop below the mandated 150%. Although the debenture trustee issued notices to restore the margin, the Essel Group entities failed to top up the pledged shares.
Instead, Kotak AMC entered into agreements with the issuers to extend the maturity of the debentures to September 2019. This resulted in partial redemption of the FMPs when the schemes matured between April and May 2019, with investors receiving the remaining amount only after pledged shares were sold later in September.
In its interim order dated 27 August 2021, Sebi had alleged that Kotak AMC violated mutual fund regulations in these investments and directed the company to refund part of the management and advisory fees collected from investors in the schemes. It also asked Kotak AMC to not launch any other FMPs for six months from the date of the order.
The tribunal’s view
In its order dated 6 March 2026, the SAT noted that the investments were primarily based on the value of pledged shares and on the reputation and standing of the Essel Group and its promoters rather than an assessment of the financial strength of the issuing companies.
The tribunal held that such an approach fell short of the due diligence expected from an asset management company. It also noted that the scheme information documents had assured investors that the issuers’ financial profile, cash flows and debt servicing capacity would be assessed before investment.
SAT also ruled that extending the maturity of the securities violated mutual fund regulations governing closed-ended schemes, which require investments to mature on or before the scheme’s maturity date.
The tribunal further found that investors were not informed about the adverse developments in a timely manner despite the fund house being aware of them from January 2019.
Separately, in an order dated 30 June 2022, Sebi’s adjudicating officer imposed penalties totalling ₹1.6 crore on Kotak Mahindra Trustee Company Ltd. and several executives, including managing director Nilesh Shah and chief investment officer (debt) Lakshmi Iyer, for regulatory violations linked to the same investments. SAT dismissed the appeal against that order.
