13 investors have reported Cytonn Investments to the Capital Markets Authority (CMA) for defaulting on Ksh122.8 million payout in Cytonn High Yield Fund (CHYF).
As a result, CMA wrote to Cytonn directing that CHYF, which is regulated by CMA, to reduce its investments into Cytonn managed projects to a maximum of 10 percent of CHYF.
This prompted a court case filed by Cytonn Investments CEO Edwin Dande seeking to quash the directive from CMA.
According to CMA, CHYF and debt security raised from investors dubbed Cytonn Project Notes pose risks to investing public.
CMA believes that Cytonn is at risk of defaulting further on investors obligation, which is to pay the securities and interests on maturity.
“The risk of default has started crystallising,” Mr Abubakar Hassan Head Investigation & Enforcement at CMA said in an affidavit.
The Ksh122.8 million was 64 percent of the CHYF, and was invested in two real estate properties (Alma and Applewood) owned by Cytonn.
However, according to Dande who has already sued the regulator, CMA cannot limit the amount of funds from CHYF since the fund manager, the trustee and custodian are not related.
Dande argues that the regulation only applies where the key governance participants in a fund, which are the fund manager, the trustee and custodian are under common shareholding, hence related.
“But in the case of CHYF, the Fund Manager – Cytonn, the Custodian – NatBank, and the Trustee – SBM, are not related. Consequently, the limit does not apply to the fund. The policies of CHYF, as approved by CMA, specifically clause 7.4.11 of the Information Memorandum does not allow the fund to invest in projects not managed by Cytonn,” says Dande.
The court has already issued stay orders barring CMA from interfering with CHYF.
“The purported malicious directive dated 3rd June, 2020 and the subsequent email dated 15th June, 2020 limiting the 1st Interested Party, to invest not more than 10% of funds in its portfolio and subsequently freezing any investment of the funds held in SBM Bank awaiting a further directive from the Respondent be and is hereby suspended pending the hearing and determination of this application,” ruled Justice F Tuiyott.
Also, the court has issued a conservatory order staying the CMA’s decision to limit the investment of the CHYF’s portfolio funds to 10% and its further directive through the Trustee not to allow theCytonn Asset Management Ltd to invest any further funds held at SBM Bank and in Cytonn affiliated notes pending the hearing and determination of the Application.
The case will be heard on October 6, 2020.