[2021] KEHC 297 (KLR)

Dande v Capital Markets Authority; Cytonn Asset Managers Limited & another (Interested Party) (Petition E283 of 2020) [2021] KEHC 297 (KLR) (Commercial and Tax) (17 November 2021) (Ruling)

Neutral citation: [2021] KEHC 297 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Petition E283 of 2020

F Tuiyott, J

November 17, 2021

IN THE MATTER OF: ALLEGED VIOLATION AND INFRINGEMENT OF THE RIGHTS AND FREEDOMS IN ARTICLES 2, 3, 10, 19, 20, 21, 22(1), 23, 27, 28, 40, 47 48, 50 (1) &(2), 73, 75, 258 (1) & 259 (1) OF THE CONSTITUTION OF KENYA; AND IN THE MATTER OF: ALLEGED VIOLATION OF THE CAPITAL MARKETS ACT; AND IN THE MATTER OF: ALLEGED VIOLATION OF THE CAPITAL MARKETS (COLLECTIVE INVESTMENT SCHEMES REGULATIONS, 2001; AND IN THE MATTER OF: THE FAIR ADMINISTRATION ACTION ACT, 2015

Between

Edwin H Dande

Petitioner

and

Capital Markets Authority

Respondent

and

Cytonn Asset Managers Limited

Interested Party

Cytonn High Yield Fund

Interested Party

Ruling

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:-1. .......2. This Honourable Court be pleased and do hereby suspend the purported malicious directive dated 3rd June 2020 and the subsequent email dated Mon 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, pending the hearing and determination of this application.3. This Honourable Court be pleased and do hereby suspend the purported malicious directive dated 3rd June 2020 and the subsequent email dated Mon 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, pending the hearing and determination of the Petition.4. A conservatory order do issue staying the Respondent’s decision to limit the investment of the 2nd Interested Party’s portfolio funds to 10% and its further directive through the Trustee not to allow the 1st Interested Party to invest any further funds held at SBM Bank and in Cytonn affiliated notes pending the hearing and determination of this application.5. A conservatory order do issue staying the Respondent’s decision to limit the investment of the 2nd Interested Party’s portfolio funds to 10% and its further directive through the Trustee not to allow the 1st Interested Party to invest any further funds held at SBM Bank and in Cytonn affiliated notes pending the hearing and determination of this petition.6. The costs of this application be provided for.

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:-a.The fund was formed on the basis of the Trust Deed and rules formulated and agreed to by the Fund Manager and scrutinized by CMA.b.it conflicts with the objects of the Trust as set out in the information memorandum dated 7th May 2019. c.The variation destroys the substratum of the Trust.d.That the requirement only applies where both the Trustee Fund Manager and the custodian are related in terms of regulation 16(2) as applies to a Fund Manager, regulation 26(2) as applies to the Trustee and regulation 34 (2) as applies to the custodian.e.It is commercially impractical for the Fund Manager to withdraw funds it has already invested in its real estate projects.

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:-a.The applicant must demonstrate that he has a prima facie case with a likelihood of success.b.That there is a real danger that the Petitioner will suffer prejudice as a result of a violation or a threat of violation of the constitution if the order is not granted.c.The Court has to decide whether a grant or denial of the relief will enhance the constitutional values and objects of the specific right or freedom in the Bill of Rights.d.The Court must ensure that the conservatory orders fulfills the public interest dogma.

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:-(2)A fund manager of a collective investment scheme may in relation to the custodian or trustee of such collective investment scheme, be a holding company or a subsidiary company within the meaning of the terms as defined in section 154 of the Companies Act (Cap. 486) or be deemed by the Authority to be otherwise under control of substantially the same persons or consist substantially of the same shareholders, provided that the investment in a related company shall be limited to ten per cent of the total funds managed by the fund manager.

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:-“....we maintain that CMMF can invest upto 25% in CHYF according to CIS regulation 78(l) (d), the EGM resolutions dated 15th November 2018, the Trust Deed and Rules and the no objection from the authority dated 24th December 2018. ”

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:-“Further, in line with our letter dated March 24, 2020, also ensure compliance with the 10% limit provided for in regulation 16(2) of the Capital Markets (Collective Investment Schemes) regulation 2001. ”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: