Capital markets watchdog Sebi has imposed penalty totalling Rs 2 crore on seven entities, including JM Financial Asset Management Ltd, its trustee and its former CEO Bhanu Katoch, for flouting regulatory norms.
The fine needs to be paid within 45 days, the Securities and Exchange Board of India (Sebi) said in its order.
Individually, a fine of Rs 25 lakh was levied on JM Financial Asset Management, Rs 10 lakh on JM Financial Trustee Company, Rs 1.1 crore on Bhanu Katoch, Rs 17 lakh on his mother Swarn Lata Katoch and Rs 8 lakh on his wife Sharika Kher.
Additionally, the regulator slapped a fine of Rs 22 lakh on Deepen Doshi, who was head of institutional sales at JM Financial Asset Management during the violation, and Rs 9 lakh on his mother Aruna Doshi.
In its order, Sebi noted that these five persons invested in certain JM Financial Mutual Fund schemes, holding defaulted Dewan Housing Finance Corporation Ltd (DHFL) securities before the valuation change, using unpublished information. This was considered unfair trading.
Additionally, their investments were made before informing unit holders, violating Sebi regulations and the AMC's policy on employee investments.
Through this act, these five persons made a notional gain of over Rs 1 crore collectively.
"The Noticee Nos. 1 (Bhanu Katoch) and 4 held (Deepen Doshi) important positions as Chief Executive Officer and Head of Institutional Sales, respectively, during the examination period. By virtue of their positions, they were privy to non-public material information regarding the impending sale of defaulted securities of DHFL.
"However, Noticee Nos. 1 and 4 by putting their interests over the interests of unitholders, have misused their positions and taken undue benefits out of the same," Sebi said in its 86-page order passed on Wednesday.
Further, the regulator said that JM Financial Asset Management and JM Financial Trustee Company were responsible for promptly and accurately informing all unit holders about the schemes' general affairs, including the reasons for the NAV increase, but failed to do so in a timely manner.
Sebi said that JM Financial Asset Management and JM Financial Trustee Company cannot abdicate their responsibility of disclosing to the investors at large by merely averring that the sale of defaulted securities had a positive impact on the net asset value (NAV).
"No doubt Noticee Nos. 6 (JM Financial Asset Management) and 7 (JM Financial Trustee Company) had disclosed relevant information in the annual report for FY 2020-21 regarding the sale of defaulted securities, but the fact remains that the said annual report was issued on April 10, 2021, i.e. almost nine months after the sale of defaulted securities," Sebi added.
The order came after Sebi received a news article in July 2020, reporting an unusual 19.9 per cent increase in the Net Asset Value (NAV) of JM Low Duration Fund and other debt funds. This jump was mainly due to the sale of defaulted securities from DHFL, which had matured in 2019.
A Sebi circular dated June 23, 2020, allowed transactions in such matured downgraded securities, enabling the sale. Since these securities had a 'Nil' valuation, their sale value was entirely considered a gain, causing the NAV to rise.
