SAT partly allows Kotak AMC appeal in Essel FMP case, upholds ₹1.6 crore penalty on trustee, executives
The Securities Appellate Tribunal (SAT) on Friday partially allowed Kotak Mahindra Asset Management Co.’s appeal against the 2021 order of the Securities and Exchange Board of India (Sebi) and set aside the regulator’s order to deduct management and advisory fees associated with investments made through six fixed maturity plans (FMPs).
The court, however, upheld Sebi’s findings on Kotak AMC’s regulatory violations in the same investments and dismissed a separate plea challenging the penalties imposed on the company and its top executives.
The SAT also decided to extend the suspension of sentences by eight weeks to allow the appellants to appeal to the High Court.
“There is no impact on KMAMC’s existing programs or unit holders,” a Kotak AMC spokesperson said in a statement. “Hon’ble SAT granted eight weeks to pursue further legal remedies which the company will consider in due course.”
Background
The dispute was filed by Kotak AMC in 2016 (for 2019 maturity) against Essel Group entities Konti Infrapower & Multiventures Pvt. It relates to investments made through six fixed maturity plans (FMP) in debt securities issued by. Ltd. and Edison Utility Works Pvt. Ltd was backed by pledged shares in the promoters’ group companies.
Problems arose in January 2019 when Zee Entertainment’s share price fell sharply, causing the security deposit to fall below the mandatory 150%. Although the bond trustees gave notice to restore the margin, Essel Group entities failed to complete the pledged shares.
Instead, Kotak AMC entered into agreements with the issuers to extend the maturity of the bonds to September 2019. This resulted in the FMPs being partially redeemed when the plans matured between April and May 2019; investors were able to receive the remaining amount only after the pledged shares were sold in late September.
In its interim order dated August 27, 2021, Sebi had alleged that Kotak AMC violated mutual fund regulations in these investments and directed the company to refund some of the management and consultancy fees collected from investors in the schemes. It also asked Kotak AMC not to launch another FMP for six months from the date of order.
opinion of the court
In its order dated March 6, 2026, SAT stated that the investments were based primarily on the value of the pledged shares and the goodwill and reputation of the Essel Group and its promoters, rather than on an assessment of the financial strength of the issuing companies.
The court found that such an approach fell short of the due diligence expected of an asset management company. He also noted that the program information documents reassure investors that the issuers’ financial profile, cash flows and solvency capacity will be assessed prior to investment.
The SAT also ruled that extending the maturity of the securities violated mutual fund regulations for closed-end plans, which require investments to mature on or before the maturity date.
The court also found that investors were not informed about the negative developments in a timely manner, although the fund institution was aware of these developments as of January 2019.
Separately, in an order dated June 30, 2022, Sebi’s judicial officer imposed a total penalty of Rs. ₹Kotak Mahindra Trustee Company Ltd for regulatory violations in connection with the same investments. and Rs 1.6 crore to several executives, including managing director Nilesh Shah and chief investment officer (debt) Lakshmi Iyer. SAT rejected the appeal against this order.
