SEBI penalises realty fund managers, trustees for failing to wind up, not returning investors monies

SEBI found that Unitech and its fund managers had illegally extended the schemes’ tenures beyond what their offer documents had mandated

Bringing cheer this year-end to scores of investors,  the capital markets regulator, the Securities and Exchange Board of India (SEBI), has imposed a penalty of Rs 1 crore on Unitech Advisors (India) Pvt Ltd and two of its directors, Ajay and Sanjay Chandra, for failing to wind up three real estate funds years ago, despite several extensions. The amount is to paid jointly by them.

SEBI has found a number of violations by the fund house, which is now known as Auram Asset Management Ltd. Apart from not winding up the schemes  on time, it observed that Unitech Advisors had invested investors’ monies in its group companies, made bad investment decisions, and still not returned the money of a majority of its investors.

SEBI has also imposed a penalty of Rs 10 lakh on- and to be paid jointly by- Sanjay Chandra, Hitendra Malhotra, another director of the company, and Deepak Bajaj, a director at Unitech Realty Investors (India) Pvt Ltd and a nominee of Unitech Advisors on the investment committee of the fund house. That's Rs 3.33 lakh to be paid by each of them, for failure to furnish information, return, and so on.

A further penalty of Rs 10 lakh, also to be paid jointly, has been imposed on Hitendra Malhotra and Deepak Bajaj; that's Rs 5 lakh each. This penalty is for failure to redress investors‘ grievances. SEBI has also slapped a penalty of Rs 10 lakh each on the fund house's three trustees - Vijay Tulshyan, Mahesh Kumar Sharma and Rakesh Dhingra.

Further, the market regulator has instructed Unitech Advisors to wind up the three realty funds within six months, and return the money to unitholders by valuing its underlying assets transparently to be able to decide the net asset value (NAV). Based on this, investors will be allowed to decide if they wish to exit using the in-specie method of distribution, or exit at NAV. In-specie distribution means that assets of the fund will be distributed among investors in proportion to their capital investments.

Investors still waiting for their money

SEBI found that Unitech and its fund managers had illegally extended the schemes’ tenures beyond what their offer documents had mandated. The fund had launched three schemes, CIG Realty funds I, II, and IV around 2006-07. These are high-risk, high-return, close-ended schemes  sold to select investors who put in money over a period of time. This works something like a mutual fund's new fund offer (NFO) period, but usually lasts over months to a handful of years, as and when the fund manager finds opportunities and then device to 'call' for fresh inflows. The investments are made either in equity or debt instruments, and aim to generate returns of 15-25 percent. But the story turned out to be quite different.

Over time, many such funds went south as several real estate projects across the country could not be completed on time. In October 2019, Moneycontrol had carried out a two-month long investigation that documented the mess in several such real-estate funds in the country at the time, after reviewing the offer documents of real estate funds, studying investor communications, assessing portfolios from whatever little information was available with a few investors who had willingly shared the data in the hope of getting their money back. These funds are opaque and not much information is available in public domain. CIG Realty funds were a part of that story, and at the time its investors’ monies were stuck. Moneycontrol had attempted to get in touch with its directors and investments managers, but its managing director at the time, Sanjay Chandra, and his brother Ajay Chandra, were in prison at the time for allegedly cheating home buyers.

SEBI’s order dated December 29 provides clarity about their present whereabouts. When SEBI sent them notices to appear before it and didn’t hear back, it scoured newspaper articles and found they might be in judicial custody. When SEBI wrote to four Mumbai-based prisons earlier this year, it found that Ajay Chandra was currently lodged in Taloja Central Jail near Mumbai. SEBI then sent the summons (show-cause notice or an opportunity of personal hearing) to Taloja Central Jail for Ajay. Since Sanjay's whereabouts don't appear to be known- as per a reading of SEBI's December 30 order, it sent the summons to his last known address.

How Unitech broke laws

While CIG Realty Fund I and II were seven-year schemes, CIG Realty Fund IV was a six-year scheme. The first two could be extended by two one-year  terms, and CIG Realty Fund IV could be extended by two years, as per their offer documents. According to SEBI’s order, the final closing date of the three funds (after extensions) was to be between 2016 and 2017. However, it noted that most investors have still not got their money.

SEBI also reiterated an earlier observation made by the Securities Appellate tribunal (SAT) that Unitech Advisors had fraudulently  misrepresented the approval it had obtained from unitholders to extend the schemes’ tenures. Per the erstwhile Venture Capital Fund guidelines (under which realty funds fell, now they are covered by the  SEBI Alternative Investment Fund regulations), if a fund wishes to extend its tenure, it needs the  approval of investors representing 75 percent of the capital contribution of the fund, in addition to the written consent of the trustees.

Unitech Advisors conveniently misinterpreted this rule, SAT has observed in its order. The total number of unitholders who had participated in the voting exercise were far less (74, representing just Rs 120.52 crore of the capital contributed), whereas 208 unitholders had contributed a total capital of Rs 262.50 crore. Thus, it took the consent of 75 percent of the contributors present at the voting exercise, instead of investors representing 75 percent of the total capital contribution.

During SEBI’s investigation, some trustees claimed that the fund had passed resolutions to pay off investors and wind up the schemes, and that  the company had also submitted plans to sell some of its investee properties to generate cash to pay off unitholders. However, SEBI observed that the trustees couldn’t substantiate this with any proof that such properties had indeed been sold.

The SEBI order also says that despite repeated notices, the fund officials haven’t responded or appeared before it to defend the allegations. Apart from imposing monetary penalties, SEBI has also banned the officials and the trustees from the capital markets for two years. The trustees have also been banned from any new trusteeship positions at any alternative investment fund (AIF) for a year, and they will also have to disassociate themselves from any mutual fund or other SEBI-registered entity for a year.