Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs2.10 crore on JM Financial Asset Management Ltd (noticee 6), JM Financial Trustee Company Pvt Ltd (noticee 7) and five individuals associated with JM Financial Mutual Fund. These penalties are related to unfair trade practices, revealing significant breaches of regulatory standards. Top executives of JM Financial Mutual Fund and their close relatives are accused of exploiting non-public information to gain unfair advantages.
Individuals penalised by SEBI are: Bhanu Katoch (noticee 1 ), former chief executive officer (CEO) of JM Financial Asset Management, his mother Swarn Lata Katoch (noticee 2), wife Sharika Kher as well as Deepen Doshi (noticee 4), head of institutional sales of JM Financial Asset Management and his mother Aruna Doshi (noticee 5 ).
In the order, N Hariharan, adjudicating officer (AO) of SEBI, noted, "I note that market efficiency is contingent on fair trade practices and a level playing field in terms of information available to all market participants, including unit holders. I note that the noticee no 1 and 4 held important positions as CEO 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 1 and 4 by putting their interests over the interests of unit holders, have misused their positions and taken undue benefits out of the same. Therefore, the conduct of Bhanu Katoch and Deepen Doshi was not in accordance with the standards of integrity, fairness and professionalism expected of an employee holding such a senior position in the AMC."
SEBI received a news article highlighting a significant and unusual increase in the net asset value (NAV) of certain debt funds, including the JM Low Duration Fund which saw an extraordinary rise of 19.9%. This surge in NAV was primarily attributed to the sale of defaulted securities from Dewan Housing Finance Corporation Ltd (DHFL), which had matured in 2019.
SEBI's examination revealed that the spike in NAV occurred due to a circular issued on 23 June 2020, which permitted transactions in matured downgraded securities. This allowed the sale of previously defaulted securities valued at 'Nil' in the schemes. The sale of these securities, thus, resulted in substantial gains for the funds involved. Specifically, JM Financial Mutual Fund (JMMF) sold these defaulted securities on 6 July 2020 for Rs11.18 crore.
The funds in question included: JM Low Duration Fund, JM Ultra Short Duration Fund, JM Short Term Fund, JM Income Fund, JM Large Cap Fund, and JM Equity Hybrid Fund. Following the sale, these funds experienced a notable increase in NAV, with JM Low Duration Fund seeing an increase of 19.85% and JM Equity Hybrid Fund experiencing a rise of 19.35% between 3 July 2020 and 6 July 2020.
SEBI's investigations revealed that several high-profile investors, including Mr Katoch and his close family members, had invested in these schemes during the period leading up to the NAV increase. The transactions by these individuals occurred between 23 June 2020 and 3 July 2020, before the public announcement of the sale and the corresponding rise in NAV.
SEBI alleged that these individuals subscribed to the schemes based on non-public, material information about the impending sale of the defaulted securities. “This act was deemed to be an unfair trade practice and a violation of SEBI regulations that prohibit fraudulent and unfair trade practices. Specifically, it was alleged that these actions contravened the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations and other relevant guidelines issued by SEBI.”
The findings indicated that the senior management at JM Financial Mutual Fund, including noticee Bhanu Katoch and Deepen Dosh, were aware of the potential impact of the SEBI circular allowing transactions in downgraded securities and the imminent sale of DHFL securities. Despite this knowledge, SEBI says they, reportedly, acted in a manner that favoured personal gains over the interests of other investors by not disclosing this material information and by making investment decisions that benefited from the impending valuation change.
SEBI has imposed significant penalties on the involved parties in response to these violations. Mr Katoch has been fined Rs1.10 crore, Swarn Katoch Rs17 lakh, Sharika Kher Rs8 lakh, Deepen Doshi Rs22 lakh and Aruna Doshi Rs9 lakh for violations of SEBI regulations.
Additionally, JM Financial Asset Management has been fined Rs25 lakh and JM Financial Trustee Company Rs10 lakh for breaches of SEBI Circulars and related regulations.
