Literal Translation Press article in BIZweek 02 August 2014
$103 Millions Claimed: A Mauritian Management Company at the
heart of a scandal.
Sixty-nine investors of the fund management company, Indian Advantage Fund III (IAFIII), all from diverse countries are suing the managers of the fund. They are blaming them, among other things, to have purposely omitted to provide them some information to encourage them to invest in the funds of ICICI Venture Funds Management Company Ltd (ICICI Venture) and who benefits of the services of the secretariat of the Mauritian company International Financial Services Limited (IFS)
"Abuse of Rights", "fraudulent conduct", "excessive negligence," "fraudulent tactics It is in those very harsh terms that the investors of the investment fund Indian Advantage Fund III (IAFIII) describe the acts and doings of the promoters of the said fund. Thus they brought the matter to the court to seek redress. The sixty-nine plaintiffs, who seem to have international financial ramifications, are investors coming from different countries.
The Dynamic India Fund III (DIF III) was established by the ICICI Venture Funds Management Company Ltd (ICICI Venture) for the purpose of enabling overseas investors invest their funds, through the intervention of The Western India Trustee and Executor Co Ltd (IAF III), in the real estate market of India.
The investment fund IAF III was established in February 2005 under Indian law to be registered as a venture capital fund with the Securities and Exchanges Board of India. IAF III was established to facilitate investment in real estate by financial institutions such as banks. It was pursuant to an investment management agreement that ICICI Venture was appointed as the manager of IAF III.
A single document required
The origin of the matter dates back to April 2005 when the ICICI Bank of India and ICICI Venture approached some investors, including the plaintiffs, all of diverse countries, namely the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman, the United States, Singapore, Hong Kong, Japan and East African countries, to invest in their project through IAF III. The project was to develop a real- estate fund, known as India Real Estate Fund (IAF III) costing 220 millions of dollars. The main aim of the fund was to develop commercial buildings and high-end residential to attract investors.
From the outset, the ones who lodge this case believe that the entire registration procedure of investors was made in a total lack of transparency. They explained that the marketing and the promotion of the Literal Translation Press article in BIZweek 02 August 2014
project was done in such a way so as to deceive the investor and make him believe that the only document required for the subscription process for the fund was the sheet of paper initially given to them.
It was not until 2013, after discovering that there was in fact a complete document constituting the subscription agreement, that a complete copy of the subscription agreement and the Private Placement Memorandum (PPM) have been finally submitted to them.
The plaintiffs complain that it is only after acknowledging the contents of the Subscription Agreement and the PPM that they realized that the documents should have been communicated to them well before their subscription to the investment fund. In their plaint, they aver they were shocked to discover the non-liability clauses and risk factors in the PPM, noting at the same time that none of these elements had been communciated to them at the time of subscription in the investment fund IAF III.
Hence, according to them the project was presented to them as a safe investment and commercially viable, while this was not quite the case.
They were shocked when they realized that the promoters of the funds had never informed them that their investments would be subject to the terms of the Subscription Agreement and the PPM, and that the investments would be routed to another fund, so they would have no information as to how this money would be used or managed.
The investors are also very angry towards the promoters as during the promotional meetings they were told that the minimum requirement was $500, 000, and they consequently learnt that the promoters accepted sums such as $50 000 from other investors. Thus the plaintiffs believe that this false declaration deprived them of this option.
They further stated that they regret that the only document to which they had access and on which they based their investment was the "Executive Summary" which had been given to them by ICICI Venture.
The investors also explain that on March 22, 2014, DIF III sent a letter to its shareholders, informing them that with the termination of the funds of IAF III on the 5th of June 2014, a special meeting of shareholders of DIF III was convened on April 14, 2014, to discuss the future strategy of the fund, as well as various liquidity options for investors.
Literal Translation Press article in BIZweek 02 August 2014
An obvious conflict of Interests
However, in response to the notice of the special meeting, the shareholders of DIF III, including the complainants, decided to send an email on the 31st of 2014, notifying International Financial Services Limited (IFS), the company secretary, that they could not make a decision on the resolutions proposed and that they would need additional information to better understand the basis of these resolutions.
They also allege that there were obvious conflicts of interest involving the directors of the Board. Moreover in their plaint, the plaintiffs made serious accusations against IFS averring that the special meeting of DIF III was conducted in an arbitrary and abusive manner.
Hence, its no surprise that they voted against the proposed resolutions. However, the investors then received a correspondence from the company informing them that the resolutions proposed at the special meeting of shareholders were passed by a majority of shareholders present or by proxy.
Moreover, the plaintiffs highlighted that after asking other questions to the managers on the management of funds, they had arrived at the conclusion that they pre-empted, i.e. that DIF III and its board of directors, IFS and ICICI Bank and ICICI Venture, have deliberately distorted the facts and concealed information and acted in violation of the mandate originally given to them.
In their plaint, the plaintiffs extended their theory concerning the deliberate concealment of project objectives / funds. They targeted the promoters, because initially the funds had been presented as a 'moderate risk fund. However, while the investments were supposed to be 'Class A world type properties', the promoters have made the investments in properties having a very low value.
In addition to this, while investments should have covered the whole of India, ICICI Venture has focused exclusively on two areas, which is against the fund's strategy.
According to the investors, another "subterfuge" was that they had been informed during the campaign promoting the fund, that his term would be five to seven years, without mentioning anything about the two-year extension.
According to them, DIF III and IFS should act in the main interest of the shareholders, but failed to provide the required services and thus failed to meet their obligations. They listed some of these shortcomings: Literal Translation Press article in BIZweek 02 August 2014
- Knowledge and on-going acceptance of deliberate misrepresentations to investors of material facts. - Lack of any responsible oversight of the serious incompetence and management turnover of ICICI Venture. - Potential knowledge of fraud or corrupt practices by the ICICI Bank and ICICI Venture. - Unreasonable denial of access to books of records, accounts and financial statements. - Non-adherence to project timelines concerning the various investments.
The investors are not lenient as to the role of IFS, which they say have failed in its fiduciary duties as secretary, and this since the incorporation of the funds. They blamed the Mauritian company of not keeping them regularly informed of the fund's operations. In addition, despite numerous requests, the shareholders have not received the minutes and other resolutions passed since the incorporation of the company shareholders.
The plaintiffs summarizing their plaint in these terms cannot be more explicit: It is the case of the plaintiffs that the acts and doings which constitute a fault, were not accidental but constitute fraudulent tactics, misrepresentations, deceits and fraudulent schemes and perpetrated by ICICI Bank and ICICI Venture by themselves and by and through DIF III and its board of directors and ultimately IFS, of which they are the controlling minds, to get their hands on the funds by the plaintiffs and managed same negligently.
The plaintiffs believe that the all defendants acted frivolously, and this when they were supposed to show a 'duty of care' towards investors, and as well as investments that had been entrusted to them. They are convinced that ICICI Bank has acted negligently and in an abusive manner when it used its reputation to attract investment, and this without ensuring that ICICI Venture has the capacity and resources required to manage such funds effectively and professionally.
Thus, by way of reparation for damage sustained, the plaintiffs claim damages in the amount of $103, 699, 376 (See text below) from the promoters and managers of the investment fund.This will most probably be regarded as a scandal in the financial world, given the seriousness of the case.