SEBI re-looking order on Kotak MF practices

SEBI is taking a re-look at its October order that had let go of Kotak Asset Management (AMC) and Kotak Mahindra Trustee without levying any penalty for the various violations by Kotak Mutual Fund (MF).

The regulator sparingly uses its powers to review its own orders and the current exercise is because it thinks the October order could have been “erroneous to the extent that it may not be in the interest of the securities market,” sources told BusinessLine .

The review could have wider ramifications for the MF industry as other fund houses found in violation of SEBI circulars were citing Kotak’s example to get away without paying any penalty, the sources said.

Norms say that no mutual fund can park money in the short-term deposits (STDs) of a bank which has invested in a scheme of that MF. The Kotak MF auditor pointed to four instances where units of a scheme were redeemed and purchased back within a short period by HDFC Bank and, within that period, STDs had been placed with HDFC Bank by Kotak MF. The amount involved was around ₹250 crore.

Under SEBI norms, MFs should maintain the email IDs of investors for various correspondence including portfolio disclosures, results and annual reports. SEBI, during its inspection, found that Kotak had email IDs like ‘enter@validemail.com’, ‘arn41571@gmail.com’ and ‘kmamcpmsclient.servicing@kotak.com’ that featured against names of multiple investors and were invalid.

NAV calculation

Further, SEBI inspection found that despite a warning, Kotak was violating its circular on the calculation of the net asset value (NAV) for the purpose of redemption in its scheme.

For gold ETF, in case of application of cut-off timing for redemption in ‘cash’, the cash component was calculated considering the previous day’s NAV, while SEBI had warned Kotak against. While SEBI observed that the Kotak scheme information document mentions applicability of cut-off timing for NAV calculation as per SEBI circular only, nowhere does it mention the diversion made from the rule.

For such violations, which could have far-reaching impact on practices by other MFs, SEBI had initiated adjudicating proceedings against Kotak. But the adjudicating officer did not find it necessary to impose any penalty on Kotak and was satisfied with the explanations given.

Kotak had told SEBI the STD circular was a guideline and not a regulation, and there was no absolute ban on any investment by MFs or banks into each other. On email IDs, it said records were reviewed post SEBI inspection and remedial measures taken.

On the NAV issue, Kotak argued that the SEBI circular pertained to investment in securities and not commodities like gold. Also, the impact of the alleged violation was a minuscule ₹2,103.10.

SEBI is now reviewing its orders and will come out with its final findings shortly, the sources said. SEBI did not respond to an email query from BusinessLine .

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