Market regulator SEBI has banned Kotak Mahindra Asset Management Company from launching new fixed maturity plan (FMP) schemes for the next six months. The action came against delay in payment of full proceeds to investors of six FMP schemes run by the AMC.

The market watchdog has also imposed a penalty of Rs50 lakh on Kotak Mahindra AMC, which is to be paid within 45 days. SEBI has also asked the AMC to refund part of the investment management and advisory fees collected from unitholders of six FMP schemes with 15 per cent interest per annum, to be calculated from the date of FMP maturity to the date of actual payment.

In its order on Friday, SEBI said it noticed that investors of six FMP schemes launched by the Kotak Mahindra Mutual Fund were not paid their full proceeds based on the declared Net Asset Value (NAV). FMPs are fixed income funds that invest in debt with maturities similar to the fund's duration

The schemes under consideration, with serial numbers 127, 183, 187, 189, 193 and 194, were launched at different times, and were going to mature on different dates in the months of April and May 2019.

SEBI noted that Kotak Mahindra AMC, with respect to the six FMP schemes under consideration, showed lack of due diligence and proper care, leading to sub-standards service; failure to consider research report and analyse various factors; non-disclosure of adverse information to unitholders; extension of maturity date of NCDs beyond the maturity date of the scheme; partial redemption and not winding up FMPs at the end of maturity; creation of segregated portfolio; and wrong method of valuation of securities.

These schemes had invested in zero-coupon non-convertible debentures (ZCNCDs) issued by Konti Infrapower & Multiventures Pvt Ltd and Edison Utility Works Pvt Ltd. Both the issuers belonged to the Essel Group, which was the promoter of Zee Entertainment Enterprises Limited (ZEEL).

Opposed to non-convertible debentures, ZCNCDs are a unique type of debenture that is purchased at a discount to face value and at the maturity, the issuer pays the face value of such ZCNCD. There is no coupon rate defined in the such instrument and no periodical interest payment is made in such instruments.

The cash in hand of issuers, mandatory for such transactions was missing from balance sheets of Konti and Edison, SEBI noted. Kotak Mahindra AMC tried to insulate itself from the credit risk by accepting collateral in the form of pledged shares of ZEEL, but when required, the value of these shares fell short of the stipulated collateral cover.

It also proved to be infeasible on the part of the AMC to dispose of these shares in the market in the fear of accentuating further fall in the price of the shares of ZEEL. Due to this, Kotak Mahindra AMC extended the maturity of those Konti and Edison-issued beyond the maturity dates of the FMP schemes, thereby postponing the redemption of the units corresponding to those instruments, violating regulatory provisions governing the management of close-ended funds, the market regulator said.