Inside Cytonn’s ‘war’ with the Capital Markets Authority
Published on: September 28, 2020 03:08 (EAT)
Cytonn Investment Chief Executive Officer Edwin Dande is putting up a spirited fight with the Capital Markets Authority (CMA) over the deployment of proceeds from its high yield fund. At the heart of the contention is the capping of proceeds from the investment firm’s Cytonn High Yield Fund (CHYF) which are largely invested in-house through the Cytonn Asset Managers Limited. According to the CMA, Cytonn should limit its in house investments to no more than 25 per cent after granting the fund exemptions to the Capital Markets (Collective Investment Schemes) regulations of 2001 through a letter issued on August 17. On the contrary, Cytonn argues the regulations do not apply in its case under Regulation 16 (2) as the funds trustee-the National Bank of Kenya (NBK) and custodian SBM Bank Kenya are not related companies. Cytonn Investments created the high yield fund in December last year with the aim of raising Ksh.30 billion from high net worth investors and got the requisite approval to do so by the CMA. On February 20 this year, Cytonn wrote to the CMA requesting for exemptions on Regulation 78 (2) (c) of the Collective Investment Schemes (CIS) regulations which restricted investments into a single issuer to no more than 25 per cent. On June 3, CMA indicated the waiver could not be progressed and later gave Cytonn six months to remedy its investment portfolio effective from August 17. In its argument, the regulator says the refusal of the exemptions were geared at safeguarding investor interests should an adverse eventuality confront Cytonn Investment Management PLC and its other related entities. Malice? Cytonn CEO Edwin Dande has however argued of the ruling’s maliciousness while indicating the trust deed and incorporation documents establishing the high yield fund had provisions allowing more than 25 per cent of proceeds to be invested in a single project. While replying to Cytonn’s application, the CMA through an affidavit by its Acting Director of Markets Operations Abubakar Hassan has argued the accusations are baseless and premature and that Cytonn seeks to circumvent regulatory safeguards. The CMA has further distanced itself with the CHYF trust deed and incorporation documents indicating the pair of documents do not supersede existing laws. “CMA assumes no responsibility for the correctness of any statements or opinions made or reports contained in this information memorandum,” said Abubakar Hassan in court filings. Investor exposure In arguing its case for the need to protect investors from concentration risks, CMA has presented letters of complaint by investors in Cytonn High Yield Solutions (CHYS). According to court filings by the CMA, Cytonn failed to meet contractual obligations defaulting on investor redemption requests valued at Ksh.122.8 million. Cytonn has however clapped back accusing the regulator of presenting evidence unrelated to the existing court case. “CHYS is a different fund, not regulated by CMA and has nothing to do with the matter in court. CHYS is a fund invested in real estate and whose board of investors approved an extension of maturities by 12 months for Pre-COVID funds. The decision is binding to all CHYS Pre-COVID investors. Out of 4,000 investors, about 13 of them were unhappy and approached CMA, and that is the letter that is making rounds in the news,” Cytonn said in a notice issued on Friday. The CMA has further fingered Cytonn for its slow transition of investors in the CHYS and Cytonn notes to a new Development Construction Real Estate Investment Trust (D-REIT). The regulator says Cytonn has been indolent in completing the switch having sought approval for the D-Reit in October last year. Edwin Dande will be hoping for a favourable ruling allowing his company Cytonn the leeway to invest more than 25 per cent of funds from the CHYF into a single real estate issuer. Meanwhile, CMA will be hoping the courts rule in favour of the restraints in what it terms as maintaining safeguards for the investing public. Presently, Cytonn has an estimated 64 per cent of pooled funds in a single real estate issuer.