SEBI takes disciplinary action against Essel Finance's second real estate investment fund
In a recent development, the Securities and Exchange Board of India (SEBI) has imposed a fine of ₹29 lakh on Essel Finance's India Asset Growth Fund-II (IAGF) for various violations of Alternative Investment Fund (AIF) norms. The penalties were issued following a stringent inspection period from April 2021 to March 2022.
The primary reasons for the penalty were IAGF's failure to disclose disciplinary actions and litigation histories of its sponsor, manager, trustee, and key officials in its placement memorandum (PPM), as required under SEBI's AIF regulations. Although the fund later submitted a revised PPM, it was neither approved by SEBI nor circulated to investors, thus breaching the disclosure framework set by the AIF code of conduct.
The fine was distributed among several parties. IAGF was fined ₹11 lakh, key personnel Arpan Sarkar and Jaykishan Kikani were jointly fined ₹10 lakh, Vistra ITCL (India), the fund's trustee, was fined ₹6 lakh, and Essel Finance Advisors and Managers (EFAM) and its CEO Vishnu Prakash Rathore were jointly fined ₹2 lakh.
IAGF, managed by EFAM, made debt investments in real estate projects across Delhi-NCR, Bengaluru, Mumbai, and Pune. The fund initially aimed to raise Rs 250 crore but fell short due to macroeconomic events such as demonetization in November 2016, the implementation of the Real Estate Regulatory Act (RERA), and the introduction of the Goods and Services Tax (GST) in 2017. As a result, the fund was closed at Rs 113.9 crore, without reaching its full corpus. This shortfall in the target fund size led to an "inadvertent" excess investment in Samruddhi Realty, which accounted for nearly 43% of the fund's corpus, far exceeding the 25% cap for a single company mandated under SEBI's rules.
Furthermore, the SEBI order states that IAGF has failed to operate and be managed in the interest of all investors. The fund has been found to have failed to ensure full drawdowns from six investors, including the investment manager, which could affect the fund's performance. Additionally, the fund failed to disclose the distribution waterfall adequately to the investors and filed the memorandum audit report with a delay. Lastly, the fund's investment manager did not take action against defaulting investors, giving "benefit to a select class of investors including the sponsor and manager."
It is worth noting that Essel Finance was the financial services arm of media baron Subhash Chandra's Essel Group. In 2022, Mumbai-based Credent Asset Management acquired Essel Finance's real estate fund business. The SEBI order did not mention any new acquisitions or changes in the management of Essel Finance's real estate fund business.
This penalty underscores SEBI's commitment to ensuring transparency and adherence to compliance norms in the alternative investment sector. The regulatory body continues to closely monitor AIFs to maintain investor confidence and promote a fair and efficient market.
[1] SEBI Order dated [insert date of the order] [2] India Asset Growth Fund-II Placement Memorandum [3] Essel Finance Advisors and Managers Limited Annual Report 2021-2022 [4] Vistra ITCL (India) Trustee Services Limited Annual Report 2021-2022
IAGF, in its dealings with real-estate investments, made debt investments in various cities, but the excessive investment in Samruddhi Realty, which accounted for nearly 43% of the fund's corpus, violated the 25% cap for a single company mandated under SEBI's rules.
Simultaneously, Essel Finance Advisors and Managers (EFAM), the fund's manager, failed to take action against defaulting investors, providing what appeared to be a selective benefit to certain investors, including the sponsor and manager.
