In re Indgrowth Capital Advisors LLP (SEBI)
The question that arises for consideration is whether the Noticee can be held liable for the error in computation of “investable funds”. As explained by the Noticee, the Noticee has set off the estimated expenditure against the estimated returns derived from temporary parking/ investment of funds and therefore the estimated expenditure got reduced, and as a consequence, the “investible funds” got increased to the extent of the returns. I find that in Ugro Capital Limited, the investment is just below the 10% cap of the higher investable fund, as computed by the Noticee.
At this juncture, I have taken a look at the periodic disclosure of “corpus” & “investable fund” of the Noticee, shown in Table No. 4 above. I find that throughout the period July-Sep 2017 to Jan-March 2022, the Noticee has been disclosing the higher “investable fund” based on its own understanding, as claimed. Since the understanding of the Noticee AIF was incorrect from the inception, the disclosures made were also incorrect. The Noticee has pleaded bonafide error in this method of computation. The Noticee has also relied on certain clauses of the Private Placement Memorandum (PPM) on “Temporary Investments” under Section V: Summary of Principal Terms of the PPM stated as under:
i. SECTION V: SUMMARY OF PRINCIPAL TERMS of the PPM on page 52-53 of the PPM. The paragraph on “Temporary Investments” under SECTION V: SUMMARY OF PRINCIPAL TERMS clearly states that:
“Until Capital Contributions received by the Fund are utilized towards Fund Investments, the Investment Manager shall be entitled to invest the Capital Contribution in Temporary Investments.
Any gains arising to the Fund from such Temporary Investments shall be distributed/allocated to the Contributors in proportion to their respective Beneficial Interest.
If such monies are not distributed, the Investment Manager shall have the right to adjust the Operating Expenses and/or Management Fee of the Fund against the gains from the Temporary Investments.”
The above cited clause undisputedly empowers the Noticee-AIF to utilize the returns on temporary investments, if undistributed, towards adjustment of Operating Expenses and or Management Fee of the Fund. In my view, the said clause is merely a contractual understanding between the Noticee and the investor/s and does not relate to any of the regulatory compliances attached to the Manager of the AIF under the Regulations. I also note that this clause too presupposes an estimated amount of Expenses or Management fee of the Fund. Applying the definition of ‘Corpus’ to arrive at the quantum of ‘investable funds’ has nothing to do with the inter se agreements that the Fund Manager may have with its investors for the appropriation of the said fees against any anticipated income or returns.
The object of providing for investment caps per investee company under the AIF Regulations is to arrest the risk of concentration in investments. When the computation of “investable funds” is left to the AIFs and if the Noticee follows a particular method of computation which is different from the normal method, then the investors continue to be exposed to the extent of the difference arrived at between the two computations. In this case, such difference in UGRO Capital Limited is INR 1.58 crore, and the exposure to that extent is not in accordance with the AIF Regulations and is a breach of the provisions contained in Regulation 15(d). I find from the set of facts before me that the investment cap with respect to Ugro Capital Limited was breached for the period 14 August, 2018 to April 7, 2021. The Noticee has pleaded its inability to rectify the investment limit breach due to the lock-in restrictions arising under the ICDR. Albeit, I find that there is a violation in the instant case.
I find that the Noticee AIF is manned by qualified and experienced financial experts and the explanation forthcoming in these proceedings such as bona fide error in understanding or lack of clarity in the expression “Expenditure” is not acceptable. The Noticee has only tried to maximise its “investable funds” and has adopted a convenient method to do so, disregarding the mandate in the AIF Regulations. To sum up, I find that the allegations in the SCN to the effect that the Noticee had exceeded the limit of investment by investing more than 10% of the investable funds in Ugro Capital Limited stands substantiated. Likewise, the allegation that the figures reported by the Noticee under the head “investable funds” is incorrect also stands proved. Thus, I find that the Noticee is in violation of the provisions of Regulation 15(1)(d) read with Regulation 20(5) read with Regulation 24(b) AIF Regulations read with SEBI Circular No. CIR/IMD/DF/10/2013, dated 29 July, 2013 read with SEBI Circular No. SEBI/HO/IMD/DF1/CIR /P/2017/87, dated 31 July, 2017.
After taking into consideration the quantum and percentage of breach of the investment limit and the duration thereof as well as the duration of wrong reporting of ‘investable fund’, I find it appropriate to impose a penalty of Rs. 10,00,000/- (Rupees Ten Lakhs only) on the Noticee, under Section 15EA of the SEBI Act. The penalty amount should not be passed on to the investors of the AIF in any manner whatsoever, excluding the sponsor.
FULL TEXT OF THE ORDER OF SECURITIES AND EXCHANGE BOARD OF INDIA
A. FACTS OF THE CASE
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) received a complaint against Indgrowth Capital Fund I (hereinafter referred to as “Indgrowth AIF”) wherein the complainant, inter alia, raised the issue of an asset allocation strategy and alleged that Indgrowth AIF had given undue weightage to Ugro Capital Limited— an investee company in its portfolio. Pursuant to the same SEBI examined the case and during the examination, it was observed that Indgrowth AIF vide its letters dated February 03, 2020 and February 05, 2020 has provided two different figures of its investable funds as INR 429 crore and INR 456.76 crore, respectively. Examination team observed that Indgrowth AIF had actively breached the permissible investment limit of 10% of investable funds while investing in the shares of Ugro Capital and Indgrowth AIF and was reporting the incorrect amount of investable funds to SEBI, in its quarterly reports. In terms of Regulation 20 and Regulation 24 of AIF Regulations, the manager of the Indgrowth AIF was responsible for every decision of the AIF, including ensuring that the decisions relating to compliance with the provisions of AIF Regulations, terms of the placement memorandum, agreements made with investors, other fund documents and applicable laws. Since, Indgrowth Capital Advisors LLP is the manager of Indgrowth AIF (hereinafter referred to as “Noticee”) was responsible for the compliance of provisions of Regulation 15(1)(d) read with Regulation 20(5) read with Regulation 24(b) AIF Regulations read with SEBI Circular No. CIR/IMD/DF/10/2013, dated 29 July, 2013 read with SEBI Circular No. SEBI/HO/IMD/DF1/CIR /P/2017/87, dated 31 July, 2017.
B. APPOINTMENT OF ADJUDICATING OFFICER
2. SEBI initiated adjudication proceedings and appointed me, as the Adjudicating Officer under section 15-I of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’) read with rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (hereinafter referred to as the ‘Adjudication Rules’) vide order dated 19.04.2022 to inquire into and adjudge under section 15EA of the SEBI Act, with respect to the allegations against the Noticee.
C. SHOW CAUSE NOTICE, HEARING AND REPLY
3. A notice dated 25.05.2022 was issued to the Noticee under rule 4(1) of the SEBI Adjudication Rules to show cause as to why an inquiry should not be initiated against Noticee and why penalty should not be imposed against Noticee under section 15EA of the SEBI Act for the alleged violation of the provisions of Regulation 15(1)(d) read with Regulation 20(5) read with Regulation 24(b) AIF Regulations read with SEBI Circular No. CIR/IMD/DF/10/2013, dated 29 July, 2013 read with SEBI Circular No. SEBI/HO/IMD/DF1/CIR /P/2017/87, dated 31 July, 2017.
4. The Show Cause Notice (hereinafter referred to as “SCN”) issued to the Noticee, inter alia alleged, that the Noticee has not properly computed the estimated expenditure to arrive at the quantum of “investable funds”, in terms of Regulation 2(1)(p) of the AIF Regulations; that the Noticee had exceeded the limit of 10% of the investable funds as prescribed in Regulation 15(1)(d) in Ugro Capital; and that by furnishing wrong figures under the head “investable fund” in its monthly and quarterly reports, the Noticee has failed to comply with the provisions in Sebi circulars of July 2013 and 2017.
5. The Noticee vide email and letter dated 17.06.2022 submitted its reply to the SCN. In the interest of natural justice an opportunity of hearing was granted to the Noticee on 21.06.2022 vide hearing notice dated 13.06.2022. The Noticee authorized Mr. Sushreet Pattanayak & Ms. Riya Chopra, Advocates from IC Universal Legal to appear in the matter along with the CEO and other Executive namely, Mr. Rajesh Singhal, Mr. Aayam Banerjee and Namit Arora. The Advocates and the representative of the Noticee reiterated the submission made vide reply dated 17.06.2022. The Noticee has submitted its additional submission vide email dated 27.06.2022
6. The relevant portion of the reply of the Noticee is summarized as under: Reply dated 17.06.2022
i. The Noticee submitted that under Regulation 2(d) of the AIF Regulations prior to August 13, 2021 defined ‘investable funds’ as “corpus of the Alternative Investment Fund net of estimated expenditure for administration and management of the fund.” It was further submitted that Regulation 2(d) was amended w.e.f. August 13, 2021 to define ‘investable funds’ as “corpus of the scheme of Alternative Investment Fund net of expenditure for administration and management of the fund estimated for the tenure of the fund.” Further Regulation 2(h) of the AIF Regulations defines ‘corpus’ as the “total amount of funds committed by investors to the Alternative Investment Fund by way of a written contract or any such document as on a particular date.”
ii. In view of the said provisions the Noticee submitted that it had calculated the ‘investable funds’ of Indgrowth Fund as per the following formula:
