MCA fines Growpital 1.48 cr for marketing unlisted securities on social media

The ministry said Growpital issued unlisted non-convertible debentures totalling  ₹1.47 crore to 183 holders with an interest rate of 19% a year.
The ministry said Growpital issued unlisted non-convertible debentures totalling 1.47 crore to 183 holders with an interest rate of 19% a year.

Summary

  • The ministry said co-founder Rituraj Sharma presented the company's background, services, performance, and growth opportunities during an 'ask-me-anything' (AMA) session on YouTube, and that its products were also marketed on X, LinkedIn and Telegram.

The ministry of corporate affairs (MCA) has fined agri-investment platform Growpital 1.48 crore for violating Companies Act, 2013 by marketing unlisted non-convertible debentures (NCDs) on social media. The ministry order was issued on 3 June, months after Sebi barred the company from the securities market pending an investigation into allegations that it made money through unauthorised investment schemes.

The fine was issued under Section 42(7) of the Companies Act, 2013, which says, “No company issuing securities under this section (read: unlisted securities) shall release any public advertisement or use any media, marketing or distribution channels or agents to inform the public at large about such an issue."

Founded by Rituraj Sharma and Krishnna Joshi, Growpital’s business model was straightforward: pool money from retail investors into a limited liability partnership (LLP) company they operated, use that money to lease agricultural land and engage in farming, and give investors the tax-free returns they were promised. The company advertised guaranteed tax-free returns as high as 20% for some deals.

Also read: Agri-investment comes with risks. Look at Growpital

MCA said Growpital had issued unlisted non-convertible debentures (NCDs) totalling 1.47 crore to 183 holders with an interest rate of 19% a year. It used fundraising platform Tyke Invest to issue these NCDs.

According to the MCA order, Tyke conducted an online 'ask-me-anything' (AMA) session on YouTube, during which Rituraj Sharma presented the company's background, services, performance, and growth opportunities, in violation of Section 42(7). Tyke has since made the video private. The order also said Tyke marketed the NCDs extensively on social media platforms including X (formerly Twitter), LinkedIn and Telegram.

Graphic: Mint
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Graphic: Mint

Twin crackdowns

On 29 January the markets regulator issued an interim order barring Growpital, formally known as Yotta Agro Ventures Pvt Ltd, its related entities and their directors from the securities market until it completed its investigation. Sebi issued a confirmatory order to this effect on 26 April.

According to Sebi's investigation, Growpital gathered 192 crore from retail investors for farming activities, closely resembling the operations of a collective investment scheme (CIS). Since Growpital did not have the licences needed to operate a CIS, the regulator froze its accounts and launched an investigation.

Also read: A legal perspective on Sebi’s crackdown on Growpital

The MCA order instructed Growpital to repay all debenture holders in full, along with the promised 19% interest, within 30 days. However, all its bank accounts have been frozen by Sebi. Some debenture holders have reported that Tyke bought back all the Growpital NCDs on 11 May, before the MCA order was issued, and repaid all investors in full along with interest.

The ministry fined Growpital 1 crore and its founders 23,78,500 each, but did not take action against Tyke. A source close to the Growpital founders, who wished to remain anonymous, said the company intends to challenge the order, arguing that it was not directly involved in the Tyke's marketing efforts. They believe the fine should be imposed on Tyke instead.

This isn't the first time Tyke has courted controversy either. Last year the company was under investigation for helping two other startups raise funds through an instrument called a community subscription offer plan. However, the MCA did not fine Tyke in either case as distribution agents are not covered under the Companies Act and the onus of compliance falls on the company raising money.

Karan Mehra, co-founder of Tyke, said, "Tyke was neither marked nor intimated by the ROC or Growpital in this proceeding. Upon becoming aware of the account freezing and the Sebi order concerning Growpital, Tyke made the decision to purchase the NCDs from all investors to safeguard investor wealth and confidence. We have prioritised the welfare of investors to ensure a smooth repayment process. Tyke has not incurred any penalties or derived any benefits from this order."

Growpital did not respond to an email seeking comment.

Investors beware

The entire episode highlights a few crucial points. For one, private companies must adhere to the Companies Act when raising funds. Secondly, retail investors who use digital platforms put money in private companies may face issues if the platforms they use are not Sebi-registered. Investors must also be aware that these investments carry significant risks, that unregulated platforms may lack the necessary risk-management and compliance expertise.

Anurag K Shukla, advocate and founder of Samvida Legal, Mumbai, said, “This order is another eye-opener for the companies seeking subscription to securities issued by them. Section 42 of the Companies Act is quite clear and MCA is now taking infringements quite seriously. A similar order was passed in April this year by the Registrar of Companies, Delhi, against Planify Capital Ltd. The company and its four directors were fined 7 crore. According to information available in the public domain, the company has challenged the order. In the present case too, Yotto Agro and its directors can appeal before the regional director of MCA within 60 days."

Also read | Mint Explainer: Sebi’s beef with virtual trading apps

Nikhil Aggarwal, co-founder and CEO of Grip Invest, a Sebi-registered online bond platform provider (OBPP) said, “When Sebi regulations on OBPP provide a viable framework for fintechs to offer regulated fixed-income products, it's surprising to see many online platforms continue to offer unregulated products like unlisted NCDs and even invoice discounting to retail investors. This MCA order sends a strong message to both issuers and platforms to comply with the rules. It is also important for retail investors to check whether the platforms they use are registered with Sebi."

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