The High Court has dismissed a petition by Cytonn Asset Managers seeking to quash a directive of Capital Markets Authority (CMA) limiting investment in Cytonn related projects to 10 percent.
Cytonn had moved to court challenging the directive of the regulator arguing that the directive was unreasonable and irregular.
This was after the market regulator wrote to Cytonn Investments to reduce exposure of its high yield fund in two of its real estate properties citing a breach of investment guidelines.
Cytonn had put Sh123 million in the real estate properties which is 64 percent of the money pooled by investors in the Cytonn High Yield Fund, a Collective investment scheme (CIS).
This is contrary to the CMA regulations that only allow pooled funds to invest less than 25 percent in one single entity. Further, the law prohibits CIS funds from investing more than 10 percent in related parties which means Cytonn has breached both limits.
Upon receiving the letter, Cytonn sought the suspension of the directive and the subsequent freezing of the funds held at SBM Bank. Justice Francis Tuiyott, however, dismissed the case.
“In so far as the petitioner has not established that the fund manager is not in breach of the regulation, this court is unable to say that the petitioner has made out a prima facie case with a likelihood of success,” Justice Tuiyott said in a judgment read on his behalf by Alfred Mabeya.
The judge said courts should not interfere with the manner in which public bodies discharge or carry out their mandate unless it is shown that it was done in breach of the statute or the constitution.
The letter on June 3, directed Cytonn High Yield Fund through the trustee not to allow Cytonn to invest any further funds held at SBM bank and in any Cytonn affiliated notes, pending further directive.
The fund was further required to align its investment products with CMA regulations and only invest 10 percent of funds in its portfolio in Cytonn related projects.
But Cytonn through chief executive officer Edwin Dande said the directive will impact its investments as it will be unable to invest up to 80 percent in Cytonn related projects as initially consented by CMA.
The directive, he further argued was malicious and irregular as it destroys the “substratum of the trust” as it was commercially impractical for the fund manager to withdraw cash it has already invested in its real estate projects.
He further stated that the fund manager was not given a chance to inform its investors of the directive and have a say.
Cytonn said the fund manager is not related or even co-owned by the other key players of the fund, either at a subsidiary or holding company. But CMA said they are related and the fund manager is an affiliate of Cytonn Investment PLC in whose real estate the funds have been invested.
The regulator, however, said the move was meant to protect the investors from being exposed. The regulator said it allowed Cytonn to invest up to 80 percent in varied real estate projects and the special treatment allowing the fund to put money in its subsidiaries would concentrate risks and expose investors.
Following consultations, CMA allowed Cytonn to put 25 percent in related parties as a compromise but instead, Cytonn moved to court and lodged a petition stopping the directive from the regulator.
“The petitioner is trying to use the court process in order to get preferential treatment in the application of the Act and CIS regulations which CMA applies uniformly and impartially on all licensed and regulated entities including CIS,” Mr Abubakar Hassan of CMA said in an affidavit.
In the petition, Cytonn said it had pumped Sh96 million into Alma and Applewood between December and June and the CMA order may trigger a run on its investment and possible collapse.