HDFC Capital Affordable Real Estate Fund - I, a category II alternative investment fund (AIF), and its investment manager HDFC Capital Advisors Limited have paid Rs 36 lakh to settle alleged violations of AIF Regulations.
The settlement order was an order passed by the Securities and Exchange Board of India (SEBI) on April 6.
The order signed by SEBI's two whole-time members Amarjeet Singh and Kamlesh Varshney said, "Applicants were alleged to have failed to exercise independent professional judgment and act in the interest of investors, having placed the interest of the Sponsor of Applicant no. 2 (HDFC Ltd. is the sponsor of the AIF) above the interest of its investors. Further, Applicant no. 1 (the investment manager) was alleged to have failed to implement policies and procedures to appropriately mitigate conflict of interest throughout the scope of its business".
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Brief facts of leading to the alleged are as follows:
1.The AIF fund had invested Rs. 200 crore in Non-Convertible Debentures (NCDs”) of Acme Realties Pvt. Ltd. (ARPL) on September 8, 2016, while Rs. 99 crore was further invested in NCDs issued by Ascent Construction Private Limited (ACPL) to ARPL.
2.ACPL and ARPL are related companies and subsidiaries of Acme Housing (India) Pvt. Ltd. (AHIPL). HDFC Ltd. (now HDFC Bank), which was a sponsor of the AIF, was an existing senior lender to ARPL and ACPL at the time of investment of the AIF in ARPL. The amount invested by the AIF in the NCDs of ARPL, was in turn transferred by ARPL and AHIPL into their respective Lines of Credit accounts in HDFC. Such amounts were utilized not only for construction costs/project expenses but also for interest and debt repayments.
3.The NCDs issued by ACPL to ARPL for Rs. 99 crores were pledged in favour of the AIF and a separate security cover was created in favour of the AIF. It was also observed that the investments of the AIF in NCDs of ARPL was secured by a charge created on certain areas/projects which were earlier under charge with HDFC Ltd. As per the Debenture Trust Deed, HDFC Ltd provided its NOC on September 19, 2016 releasing its charge on the aforesaid areas/projects, before a charge on the said areas/projects was created in favour of the AIF.
4.The Investment Advisory Board (IAB) of the AIF that approved its investments at the relevant period of time comprised entirely of senior personnel of HDFC Ltd. In the presentation made to the IAB, Rs. 60 crore and Rs. 55 crore out of the investment of the AIF in Acme group was stated to be meant for payment of existing creditors and repayment of short term borrowings respectively.
5.The Investment Procedure Manual of Applicant no. 2 as on June 2016 provides for the Investment Memorandum to be inter-alia sent to HDFC Ltd. within 5 business days upon entering into a non-binding term sheet for a proposed investment.
6.As per the details of sources and utilization of amounts released from the Line of Credit accounts of ARPL and AHIPL, Rs. 61 crore was used towards repayment of an ICD facility availed from HDFC Ltd and Rs, 91 crore mentioned as ‘Interest costs’ also included interest payments to HDFC Ltd.
7.HDFC Ltd., which is also a sponsor of the AIF, is stated to have released the charge in favour of the AIF since ARPL and ACPL repaid part of their loan from HDFC Ltd using the investment made by the AIF and also to enable ARPL and ACPL to raise additional funds to complete mortgaged projects which would help them in repaying their loan obligations to HDFC Ltd.
8.Thus, HDFC Ltd. was alleged to have significant influence on the decision making process of the investment of the AIF in ARPL and ACPL while simultaneously being a senior lender and having outstanding loans with ARPL and ACPL.
9.The investment of the AIF in ARPL and ACPL was not referred to the Conflict Resolution Committee as per the terms of Conflict of Interest Policy applicable at that time, even though the preliminary and final Information Memorandum (containing debt profile of Acme group including outstanding debt position of HDFC Ltd.), summary of due diligence findings, Debenture Trust Deed etc. were shared with investors.
10.In the Compliance Test Report (CTR) for FY 2016-17 submitted by the AIF's investment manager to the trustee, it was inter-alia mentioned that no conflict of interest arose during the year ended March 31, 2017. Yet, there appears to be a conflict of interest in the decision making process by the AIF for investment in ARPL and ACPL.
11.Thus, the AIF's investment manager is alleged to have submitted inaccurate information in its CTR for the FY 2016-17
12. Given these, the AIF and its investment manager were alleged to have failed to exercise independent professional judgement and to act in the interest of the AIF's investors. They were alleged to have placed the interest of the sponsor of the AIF, which was HDFC Ltd (now known as HDFC Bank) above the interest of the AIF's investors.
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