1.Cytonn High Yield Fund (CHYF) is a unit fund established and regulated by the Capital Markets (Collective Investment Scheme) Regulation 2001. This Petition is in respect to certain directives issued by the regulator, The Capital Markets Authority (CMA) regarding the fund.
2.What is now before Court is the Notice of Motion dated 10th August 2020 for the following orders:-
3.The case by the Petitioner is that vide a letter dated 3rd June 2020, CMA wrote to Cytonn Asset Managers Limited (the Fund Manager) directing that the Fund Manager should align its investment products and activities of the fund with the provisions of regulation 16(2) of the Capital Markets (Collective Investment Schemes) Regulations 2001 as read together with regulation 78. The effect of the directive was that the Fund Manager was to only invest 10% of funds in its portfolio in Cytonn related projects.
4.Pursuant to that directive, the Fund Manager received an email sent on 15th June 2020 from Natbank who are the trustees of the fund making reference to the letter dated 3rd June 2020 in which it ordered the Fund Manager not to invest any funds in SBM Bank and in Cytonn affiliate loans notes until the Trustee receives a go ahead from CMA. Cytonn complains that the effect of the directive is that its investment capabilities are negatively impacted as it will be unable to invest up to 80% in Cytonn related projects as initially consented to by CMA.
5.The directive is criticized as being malicious, unreasonable, irregular and illegal because:-
6.The Petitioner also states that the directive is manifestly unreasonable and malicious because the Fund Manager was not given a chance to inform its investors of the directive; the investors were not given an opportunity to have a say in the decision which was fundamentally and economically altered, interfered and even jeopardized their right to property and CMA did not give practical reasons on how the Fund Manager will mitigate and manage the prejudice and expectations of the unit holders already in the fund.
7.The response by CMA is that on or about the 20th February 2020, the Fund Manager made an application to it for exemption of Regulation 78(2) (c) of the CIS Regulation 2001 which restricts investments into single issue real estate to 25%. That following subsequent meetings and discussions by all parties, CMA wrote to the Fund Manager on 3rd June 2020 indicating that the request for waiver will not be progressed on account of the fund being a collective investment scheme with exposure of upto 80% in real estate in diversified and non-related entities. CMA explains that if a further waiver was granted, the concentration risk will be high and consequently the investors will be exposed to noting a single asset class, that is real estate, but also real estate assets of a related entity.
8.CMA asserts that the funds have been invested in Cytonn Investment Management PLC real estate by the Fund Manager which is a regulated affiliate of Cytonn Investment Management PLC and the key beneficiary of the real estate is Cytonn Investment Management PLC.
9.The application before Court is a plea for a conservatory order. The principles for grant of such an order are well settled. As correctly pointed out by counsel for CMA, they are that:-
10.At this interlocutory session, the Court must be careful not to make findings that posture as final as that will embarrass the trial Court.
11.It seems to this Court that the substantial issue in question is whether the fund, as arranged, organized and managed, is subject to regulation 16(2) of the CIS regulations. A related question is whether CMA has dealt with the Petitioner in a manner that abridges his rights to fair administrative action.
12.Regulation 16(2) reads as follows:-
13.The key argument by the Petitioner is that the Fund Manager is not related or even co-owned by the other key players of the Fund (by dint of the incorporation documents) either at subsidiary or a holding company within the meaning of section 152 of the Companies Act. CMA insists that they are related and contends that the Fund manager is an affiliate of Cytonn Investment Management PLC in whose real estate the funds are been invested.
14.The Trial Court will have to make that call after receiving evidence and unravelling the entities involved. Yet for now, the Court is unable to downplay the contents of the letter of the Fund Manager dated 20th February 2020. It reads in part:-20th February 2020Mr. Wycliffe ShamiahAg. Chief Executive OfficerCapital Markets AuthorityEmbankment Plaza, Upper HillBox 74800 – 00200NAIROBIDear Sir,RE: CYTONN HIGH YIELD FUNDWe refer to the above subject matter, your letter dated 14th January 2020 (ref CMA/CMD/004) and the various discussions held.The Authority did cite that it has noted fund manager’s concerns regarding the 25% single issuer investment limit for the Cytonn High Yield Fund (“CHYF”) in accordance with regulation 78 (2) (c) of the Capital Markets (Collective Investment Schemes) Regulations, 2001 taking into consideration the ongoing transition exercise geared towards seamless migration of the existing investors in the Cytonn High Yield Solutions (“CHYS”) into the regulated CHYF.In an effort to ensure that CHYF provides a competitive and compelling interest rate comparative to similar rates that CHYS investors are accustomed to, the fund manager is seeking an exemption to Regulation 78 (2) (c) for a period of three (3) months to allow for investment in the Alma Loan Note instrument to the maximum permissible limit at this nascent stage of the transition process pending the securitization of the outstanding four (4) additional projects identified for purposes of investment by CHYF as had been communicated in earlier correspondence. The fund manager remains of the opinion that the above exemption will serve to encourage uptake of CHYF considering existing investors remain wary that the fund is not delivering similar rate of return albeit the fact that it is a regulated collective investment vehicle.We wish to reiterate our commitment to work closely with the Authority and the Principal Partner, Cytonn Investment Management Plc to ensure the transition realizes the desired results. We appreciate the Authority’s continued guidance and cooperation during this process and look forward to your favorable response.Yours faithfully,For and on behalf of: CYTONN ASSET MANAGERS LIMITEDVictor OdendoPRINCIPAL OFFICERcc: Timothy WambuiPrincipal OfficerNatbank Trustee and Investment Services Limited**O. Box 72866 – 00200**NAIROBI
15.It is the response to this letter that triggered the filing of the Petition. In the letter CMA raises concern that investors will be exposed not only to real estate asset class but also because they are real assets of a related entity.
16.The onus is on the Petitioner to show that the investments from the fund have not been made in a related company and if they are, then the investments are limited to 10% of the total funds managed by the Fund Manager. In another letter of 4th August 2020, Cytonn Investment Management PLC referring itself as the principal partner does confirm that Cytonn High Yield Fund has investments in Cytonn Money Market Fund. It further states that:-
17.Given this disclosure, the Court has not seen sufficient effort by the Petitioner to demonstrate that the investments do not breach the provisions of Regulation 16(2) of the CIS Regulation 2001.
18.A principal objection of the CMA is to protect investor interests (Section 11(1) (a) of the Capital Markets Authority Act). It has power to license, approve and regulate private equity and venture capital companies that have access to public funds ( Section 11 (3) (9a).In the letter of 3rd June 2020 CMA simply reminds the Fund Manager to comply with regulation 16(2) of the CIS Regulation. This is what it states:-In so far as the Petitioner has not established that the Fund Manager is not in breach of this regulation, the Court is unable to say that the Petitioner has made out a prima facie case with a likelihood of success. Courts should not interfere with the manner in which public bodies discharge or carry out their mandate unless they do so in clear breach of statute or the constitution.
19.The Notice of Motion dated 10th August 2020 is hereby dismissed with costs.DATED AND SIGNED THIS 11TH DAY OF NOVEMBER 2021F. TUIYOTTJUDGEDATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF NOVEMBER 2021A. MABEYA, FCI ArbJUDGEPRESENT: