New Delhi, July 3 -- The Securities and Exchange Board of India has penalised the second real estate private equity-style fund of Essel Finance for violating norms governing alternative investment funds, less than a fortnight after imposing a fine on its first vehicle.
The capital markets regulator said Thursday that Essel Finance's India Asset Growth Fund-II was found to have invested nearly 43% of its corpus in a single company-Samruddhi Realty Ltd. This is far in excess of the 25% cap for a single company mandated under its rules. SEBI levied a fine of Rs 12 lakh on the fund for this and various other violations.
SEBI also fined the fund's manager, Essel Finance Advisors and Managers, and its key executives Vishnu Prakash Rathore (chief executive officer), Arpan Sarkar (AVP, Legal) and Jaykishan Kikani (Assistant Manager) another Rs 12 lakh.
Essel Finance was the financial services arm of media baron Subhash Chandra's Essel Group. It raised its first real estate fund during 2013-2015 and began raising the second fund in 2016. Both funds made debt investments in real estate projects across Delhi-NCR, Bengaluru, Mumbai and Pune. In 2022, Mumbai-based Credent Asset Management acquired Essel Finance's real estate fund business.
The SEBI order against the second fund follows the regulator's decision to impose a fine of Rs 11 lakh on India Asset Growth Fund, the first vehicle, and a penalty of Rs 12 lakh on Essel Finance and its key executives for various violations including failure to disclose disciplinary history of the sponsor, manager, trustee, and other executives in the private placement memorandum, and for delaying the winding up of the fund by two years and five months.
In the latest matter, India Asset Growth Fund-II and its management submitted to the regulator that the cap on investment in a single company was crossed due to "unforeseen" circumstances. The fund had initially planned to raise Rs 250 crore but failed to do so because of macroeconomic events like demonetization in November 2016, and implementation of the Real Estate Regulatory Act (RERA) as well as introduction of the Goods and Services Tax (GST) in 2017, it told the regulator.
The fund was closed at Rs 113.9 crore, without raising the full corpus. Due to the shortfall in the target fund size, the investment in Samruddhi Realty "inadvertently" exceeded the cap, the fund managers told SEBI.
The SEBI order noted that the investment in Samruddhi Realty was 30.78% of the total corpus at the time of the investment and 42.61% at the end of the regulator's investigation period. It stated that there was no record to show that the fund secured a commitment of Rs 250 crore and said that, in the absence of such commitment, it was not proper on the part of the fund and its executives to concentrate its investment beyond the prescribed limit in one company.
"The various macroeconomic conditions do not justify its failure to diversify the investment," the SEBI order added.
SEBI also found that the fund failed to ensure drawdown of the full committed amount from six investors, including the investment manager, and failed to take action as given in the private placement memorandum against these contributors.
In the SEBI order, Adjudicating Officer Amit Kapoor noted how this could affect the fund's performance.
Full drawdowns give the investment manager with predictable and stable capital to effectively execute an investment strategy. Managing partial drawdowns and chasing delinquent investors adds to the administrative burden and cost to the fund which then affect the fund's performance, the order noted.
The fund's investment manager, the order noted, did not do anything apart from sending a demand-cum-notice to the defaulting investors. This, the order said, gave "benefit to a select class of investors including the sponsor and manager."
"Thus, the fund has failed to operate and be managed in the interest of all investors," SEBI said.
SEBI also found other violations including providing valuation based on the underlying real-estate assets of the investee companies instead of valuing their non-convertible debentures, filing the memorandum audit report with a delay, failing to disclose distribution waterfall adequately to the investors, and appointing a benchmarking agency with a delay.
Published by HT Digital Content Services with permission from VC Circle.