Specialist in Indian Banking and Economic Research

Hemindra Hazari

Is a Securities & Exchange Board of India (SEBI) registered research analyst with over 25 years experience in the Indian capital markets with a specialization in banking and economy research and has managerial experience of establishing profitable equities business, leading and mentoring analysts.  He has worked with prominent foreign and domestic capital market firms such as UBS, Societe Generale, HSBC, ASK Raymond James  and Karvy Stock  Broking and is a regular guest on business media channels and is respected for his non-consensus view on stocks and the market.

Kotak Mahindra Bank – Watch Your Costs Too

Kotak Mahindra Bank – Failing To Answer The Hard Questions

Essel Fiasco a Startling Exposure of HDFC AMC’s Credit Appraisal

Battle Lines Drawn As BABA Builds Out First/Last-Mile Capacity; But Who Will Fund 75+ Bn CNY CapEx?

The Securities and Exchange Board of India (SEBI)’s <a href="https://www.sebi.gov.in/enforcement/orders/aug-2021/order-in-the-matter-of-kotak-mahindra-asset-management-company-ltd-_52130.html" target="_blank" rel="noopener">order</a>  penalising Kotak Mahindra Mutual Fund (Kotak MF), a subsidiary of <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> (KMB) provides an in-depth insight normally unavailable to the public on how imprudently investment decisions are taken by so called professionals in marquee firms who are managing public funds in a fiduciary capacity. The indictment by SEBI shows Kotak MF in a poor light and also casts a spot light on Kotak Mahindra AMC's high profile chairman, Uday Kotak who is also founder-CEO, KMB.Even though investors ultimately (after some delay) recovered their funds, the SEBI order exposes the unprofessional conduct of the concerned debt fund managers and the Investment Committee (IC), in Kotak MF in investing in dubious debt instruments of companies which had no financial ability to pay back the principal and where equity shares was the only security. That such a high-risk transaction conformed to the investment policy of  Kotak MF is a cause for significant concern for all debt investors of Kotak mutual fund schemes. In a shocking revelation, thoroughly exposing Kotak MF’s Investment Policy, the SEBI order <a href="https://www.sebi.gov.in/enforcement/orders/aug-2021/order-in-the-matter-of-kotak-mahindra-asset-management-company-ltd-_52130.html" target="_blank" rel="noopener">notes</a>  that the company’s IC on March 7, and May 18, 2016 was <blockquote>not aware of the issuer entity even on the date of approving the proposal to invest in the ZCNCDs [zero coupon non-convertible debentures]. (para 40, p. 34) </blockquote>Such was the professionalism on Kotak MF’s IC that they approved an investment in a corporate entity whose identity they did not know and consequently had no clue about its financials. They did so as documented in its approval note solely on the belief that,<blockquote>repayment of our exposures will, in all probability, be funded through a refinance. We take comfort from the reputation and track record of Essel Group in general and fundamentals, liquidity and performance of Zee shares. (ibid)</blockquote>Although KMB has historically reported strong asset quality, an added concern is that Kotak AMC is a subsidiary of the bank and when Kotak MF  follows such appalling credit appraisal/underwriting practices under its chairman Uday Kotak, can the bank where Kotak is the founder-CEO also be following similar practices where belief overrides financial fundamentals and where the decision-makers invest blindly?The SEBI order is an eye-opener in how investment decisions are taken at mutual funds and as Uday Kotak is the chairman of Kotak AMC, regulators especially, SEBI and the Reserve Bank of India should consider whether such conduct conforms to the fit and proper criteria for managing public money in a fiduciary capacity.

The Securities and Exchange Board of India (SEBI)’s order  penalising Kotak Mahindra Mutual Fund (Kotak MF), a subsidiary of Kotak Mahindra Bank (KMB IN) (KMB) provides an in-depth insight normally unavailable to the public on how imprudently investment decisions are taken by so called professionals in marquee firms who are managing public funds in a fiduciary capacity. The indictment by SEBI shows Kotak MF in a poor light and also casts a spot light on Kotak Mahindra AMC's high profile chairman, Uday Kotak who is also founder-CEO, KMB.Even though investors ultimately (after some delay) recovered their funds, the SEBI order exposes the unprofessional conduct of the concerned debt fund managers and the Investment Committee (IC), in Kotak MF in investing in dubious debt instruments of companies which had no financial ability to pay back the principal and where equity shares was the only security. That such a high-risk transaction conformed to the investment policy of  Kotak MF is a cause for significant concern for all debt investors of Kotak mutual fund schemes. In a shocking revelation, thoroughly exposing Kotak MF’s Investment Policy, the SEBI order notes  that the company’s IC on March 7, and May 18, 2016 was not aware of the issuer entity even on the date of approving the proposal to invest in the ZCNCDs [zero coupon non-convertible debentures]. (para 40, p. 34) Such was the professionalism on Kotak MF’s IC that they approved an investment in a corporate entity whose identity they did not know and consequently had no clue about its financials. They did so as documented in its approval note solely on the belief that,repayment of our exposures will, in all probability, be funded through a refinance. We take comfort from the reputation and track record of Essel Group in general and fundamentals, liquidity and performance of Zee shares. (ibid)Although KMB has historically reported strong asset quality, an added concern is that Kotak AMC is a subsidiary of the bank and when Kotak MF  follows such appalling credit appraisal/underwriting practices under its chairman Uday Kotak, can the bank where Kotak is the founder-CEO also be following similar practices where belief overrides financial fundamentals and where the decision-makers invest blindly?The SEBI order is an eye-opener in how investment decisions are taken at mutual funds and as Uday Kotak is the chairman of Kotak AMC, regulators especially, SEBI and the Reserve Bank of India should consider whether such conduct conforms to the fit and proper criteria for managing public money in a fiduciary capacity.  

SEBI Exposes Kotak Mahindra Mutual Fund’s Policy of Investing Blindly