Mumbai: The Securities and Exchange Board of India (Sebi) has asked Kotak Asset Management Co. Ltd to clarify under what provisions of the existing rules it has held back redemption of fixed maturity plans (FMPs), two people familiar with the development said.
Sebi wrote to both Kotak AMC and HDFC Asset Management Co. Ltd late on Thursday with questions on the FMPs.
Two Essel Group companies, Konti Infrapower and Multiventures Pvt. Ltd and Edisons Utility Works Pvt. Ltd, failed to repay in full the investment of the FMPs. This led to Kotak AMC to hold back part of the payments that were due to mature on 8 April.
HDFC AMC, ahead of the maturity date of 15 April, decided to roll over the FMPs that held the Essel paper by more than a year. HDFC AMC needs the consent of at least 75% of its investors before it can roll over the FMP.
Till Friday evening the status of consent from investors was not clear.
“Sebi has asked Kotak AMC under what provision did it stop part redemption in one of its FMP," said one of the two people mentioned above. The market regulator also wrote to HDFC AMC on Thursday seeking answers on its FMP maturing on 15 April.
“Sebi has sought (to know) from HDFC AMC what happens if it does not get 100% consent from investors to roll over the FMP. How will the deal with Essel impact the FMP payment to the rest of the investors who may not consent? The majority of investors are believed to have consented to the rollover," said the second person.
“Sebi’s queries to the fund houses are to ascertain whether the actions of the mutual fund houses are in the best interest of the unit holder and whether there was any violation of the code of conduct by the fund managers under the mutual fund regulations," said the first person.
Typically in situations when the underlying assets are not realized, the fund houses have three options—take a hit on their books, roll over the scheme or mark down the value of security to zero.
Emails sent to HDFC AMC and Sebi remained unanswered at press time.
Lakshmi Iyer, Head of fixed income at Kotak AMC, said the company’s actions were within the regulatory ambit.
“Sebi’s winding down of asset clause says that when you are liquidating assets, you have to ensure that you are realizing a fair value, either above that not below. I am being governed by a regulator and a regulation which has given regulations for the working of the mutual fund and the scheme and that is exactly what I am doing. For instance, I decide to wind down an ETF (exchange traded fund) that also comes under the winding down clause," Iyer told Mint.
She did not confirm or deny receiving Sebi queries.
Kotak AMC also defended its actions in a note to investors on Friday.
“While we regret that we had to withhold certain part of units in FMPs represented by portfolio investment in Essel Group companies for now, we believe that our actions are in the interest of our unitholders," it said.
Kotak AMC in a bid to mitigate reputational risks also said that its exposure to Essel Group remained in six FMPs and in Kotak Credit Risk Fund to an extent of 0.37% of its assets under management. It is also working with the promoters of Essel Group to ensure “optimal recovery" of dues owed by the conglomerate.
“I don’t think it is right to second guess the investment decision of a fund manager. In hindsight they do look like poor decisions to invest. Similarly, the call to restructure and negotiate with the promoters if it comes with an additional personal guarantee of the promoter should not be second guessed. Having said that, fund managers need to be transparent and humble in their approach rather than hide behind legalese," said Sandeep Parekh, managing partner, Finsec Law Advisors.
“Essel Group remains committed to achieve the resolution, with a sole objective of saving the loss of public money and the repayment, as per the agreed timelines indicated in the arrangement with lenders," an Essel spokesperson said in a statement.
Clifford Alvares in Mumbai contributed to the story.