The High Court has issued stay orders against the Capital Markets Authority (CMA) over its attempt to limit Cytonn High Yield Fund (CHYF) to 10 percent investments into Cytonn managed projects.
Recently CMA asked that CHYF, which is regulated by CMA, to reduce its investments into Cytonn managed projects to a maximum of 10 percent of CHYF, allegedly as per regulation 16 (2) of the Collective Investments Schemes regulations.
This prompted a court case filed by Cytonn Investments CEO Edwin Dande seeking to quash the directive from CMA.
In court documents seen by this writer, Dande argues that the regulation only applies where the key governance participants in a fund, which are the fund manager, the trustee and custodian are under common shareholding, hence related.
Where the three are related, Dande argues, the regulation reduces fund exposure to in-house projects to 10 percent, in an effort to protect investors from potential in-house dealings.
“But in the case of CHYF, the Fund Manager – Cytonn, the Custodian – NatBank, and the Trustee – SBM, are not related. Consequently, the limit does not apply to the fund. The policies of CHYF, as approved by CMA, specifically clause 7.4.11 of the Information Memorandum does not allow the fund to invest in projects not managed by Cytonn,” says Dande.
The directive by CMA was issued June 3, 2020, ordering the Trustee, National Bank, not to allow any investments into Cytonn affiliated loan notes until the Trustee receives a go-ahead from the CMA. The effect would have forced Cytonn to invest in other developers, which Cytonn contends is risky and would contravene the Fund’s rules.
“The purported malicious directive dated 3rd June, 2020 and the subsequent email dated 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 be and is hereby suspended pending the hearing and determination of this application,” ruled Justice F Tuiyott.
Also, the court has issued a conservatory order staying the CMA’s decision to limit the investment of the CHYF’s portfolio funds to 10% and its further directive through the Trustee not to allow theCytonn Asset Management Ltd to invest any further funds held at SBM Bank and in Cytonn affiliated notes pending the hearing and determination of the Application.
The case will be heard on October 6, 2020.