CMA faces probe over defaults in Sh13.5bn Cytonn funds

Cytonn Investments chief executive Edwin Dande. FILE PHOTO | NMG

The Capital Markets Authority (CMA) faces a parliamentary probe in the wake of mounting complaints from investor reports of delayed payment of returns from Cytonn real estate investments.

Garissa Township MP Aden Duale wants the Finance and National Planning Committee to probe the regulator following the proliferation of unregulated and illegal investment funds that have led to loss of investor funds.

The CMA on Thursday said it has opened investigations into Cytonn High Yield Solutions (CHYS) and Cytonn Project Notes (CPN)—which have investments worth Sh13.5 billion.

The agency does not regulate the two funds, which have failed to pay investors upon maturity of their investments in properties developed by Cytonn.

The company has been marketing the funds as private placements, a closed shop of a few sophisticated investors, which do not fall under the ambit of the CMA.

But filings in court show that Cytonn had raised money from 3,000 investors in breach of regulations that demand funds raised through private placements to involve less than 100 people.

Mr Duale says the breach is a product of CMA sleeping on the job.

“This has brought into question the effectiveness and efficiency of the CMA in regulating the capital markets in Kenya,” he said.

Mr Duale cited instances which point to the failure of the CMA to regulate the capital markets effectively in total disregard of Section 11 of the Capital Markets Act. He said in 2005 the Imperial Bank Ltd allotted Sh2 billion to bondholders despite having ongoing financial fraud within the bank.

“The bank eventually collapsed together with investors’ funds under the watch of the CMA.”

Mr Duale said in the same year, the CMA cleared Chase Bank to issue Sh4.8 billion bonds ahead of the bank being placed under receivership, terming it poor regulatory oversight by the agency.

“In 2018, the Nakumatt Holdings Supermarkets issued Sh4 billion commercial paper and thereafter defaulted on the commercial paper resulting in write-offs by banks and suppliers,” he said.

The MP said the estimated total losses of innocent Kenyan investments due to the negligence of the CMA in terms of regulation is approximately Sh36.8 billion.

“The chairperson of the departmental Committee on Finance and National Planning should provide a statement on the total number of all the unregulated capital markets products in the country and the number of investors in the said products,” Mr Duale said.

He further wants the committee to provide details of the total number of firms penalised by the CMA in the past five years and remedial action taken for the lost funds.

Cytonn has since last year faced many legal suits from investors over contract breaches after the company asked them to postpone payment of their investments, citing liquidity problems following effects of Covid-19.

The CMA only regulates five funds under the company, including Cytonn Money Market Fund, Cytonn Balanced Fund, Cytonn Equity Fund, Cytonn Africa Financial Services Fund, Cytonn Money Market Fund (USD), and Cytonn High Yield Fund.

The five have put money in a mixed portfolio that includes stocks, foreign exchange, fixed income and real estate.

The CMA has asked investors affected by the two funds to file reports with Capital Markets Fraud Investigation Unit, a police unit attached to the regulator.

Cytonn’s two troubled funds invested in real estate properties that were not under the watch of the CMA. Some investors have sued the company for contract breach and raised issues about the operations of the two funds.

Kenneth Kasinga said he was lured to invest Sh3 million believing he was being made a partner in the private cash call involving less than 100 people only to discover Cytonn had raised money from 3,000 investors.

He said that the company disguised the Cytonn High Yield Solution as a private placement to avoid scrutiny yet it did not satisfy the conditions set out by the CMA to qualify as such.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.