Tag: fmp

SEBI bans Kotak Mahindra AMC from launching FMP for 6 months

Banking & Finance

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Market regulator SEBI has banned Kotak Mahindra Asset Management Company from launching any Fixed Maturity Plan (FMP) for six months for arbitrarily entering into a ‘standstill’ agreement with the promoters of Subhash Chandra-backed Essel Group.

The 2019 agreement effectively extended the maturity of these debt papers. This, in turn, delayed payment of full proceeds to investors of six FMP schemes run by the AMC.

As the name indicates, FMPs are fixed-income funds that invest in debt with maturities similar to the fund’s duration. Kotak was found to have invested in Non-Convertible Debentures of insignificant and financially handicapped entities of Essel Group, including Konti Infrapower & Multiventures Pvt. Ltd and Edison Utility Works Pvt. Ltd.

Refund of fees ordered

SEBI also levied a penalty of ₹50 lakh on the AMC. The fund house has also been directed to refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes, equivalent to the percentage of exposure to the Zee Group NCDs.

“For a mutual fund house, which has been in this industry in India for over two decades, the least that can be expected of its AMC is to have in place a robust system for research, risk assessment and due diligence. The insensitive manner in which the AMC has actuated its system of risk evaluation and due diligence… it seems the effectiveness of its systems stood compromised,” SEBI said in its order on Friday.

In 2019, Kotak Mutual Fund entered into a first-of-its-kind standstill agreement with Essel Group after the latter expressed inability to repay the investments made by the six FMPs of the fund house.

Kotak MF had invested in the debentures of Konti Infrapower, an accounting and consulting services provider, and Edisons Utility Works, operating in the construction industry. These debentures carried a coupon of 11 per cent. The debt was secured by a pledge of Zee Entertainment Enterprise shares.

Following the default, the fund house had redeemed the FMP investors, partially withholding the returns from Essel Group.

Irked with the development, SEBI had issued a show-cause notice to the fund house for entering into an agreement with a company in default.

SEBI noted that by postponing the payment to its unit-holders, Kotak Mahindra MF segregated its units like side-pocketing. This is allowed only if the scheme’s offer document mentions it explicitly, and the fund follows the SEBI guidelines for side-pocketing; this was not done by the fund house.

Reviewing order: Kotak

Reacing to the development, a Kotak Mahindra Group spokesperson said: “In the interest of our unit-holders, we decided to provide additional time to the promoters for optimal recovery, which led to partial deferment of maturity payout. This ensured that all dues along with interest of 11.1 per cent were paid to our investors in September 2019. We are reviewing the SEBI order and will evaluate the next steps.”

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Simply Put: Roll-down strategy – The Hindu BusinessLine

Personal Finance

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Mutual fund houses have been rolling out scheme after scheme, the past several months. Among the ones rolled out are also those that follow what is called the roll-down strategy. Two friends, Sita and Geeta discuss what it is.

Sita: All these years, I was made to believe that equity mutual funds (MFs) are risky and that debt MFs are a safe bet. Now I see debt MF returns fluctuating too. So, where do I invest?

Geeta: Why don’t you invest some money in a roll-down strategy MF scheme?

Sita: What’s that? Is that a scheme where hard-earned money rolls down from my pocket into the wallets of mutual fund houses! Just joking. Can you please explain?

Geeta: Sure. While debt fund returns may not gyrate as much as equity fund returns, they are not all safe. Debt investments suffer from interest rate risk – as interest rates go up, prices of existing bonds fall, hurting MF debt scheme returns. The reverse holds true too.

Target maturity funds and fixed maturity plans (FMPs) follow the roll-down strategy and help minimise the interest rate risk.

Sita: How do they achieve this?

Geeta: Such schemes invest in debt papers of a certain maturity and then hold them till maturity. As time passes, the maturity of these papers and so of the scheme portfolio gradually goes down. And with it, the interest rate risk.

Such schemes offer some degree of return predictability. On maturity, you are returned your original investment plus return.

Sita: From now on I’ll invest only in such schemes to get assured returns.

Geeta: Not so fast. These schemes promise only return predictability and not return certainty. They give you a fair sense of what your returns are likely to be and not what they will be. After all, debt MFs are market-linked products, and nothing is guaranteed.

Sita: I understand. Anything else that I should know?

Geeta: I forgot to mention – all this applies only if you stay invested until the end of scheme maturity.

If you decide to redeem your investment any time before that (of course, FMPs don’t allow premature exit), then the roll down strategy won’t save you from interest rate risk.

Your return can, then be higher or lower than that indicated at the start, depending on whether interest rates have fallen or risen since you invested.

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