There are two kinds of people who were lured by the promise of high, tax-free, guaranteed returns on agriculture, promised by Growpital: a) those who are too young to remember the1990s when lakhs of people lost money in agriculture and plantation companies that had promised extraordinary returns; and b) those who have read very little about farmer suicides or farmer protests and think bumper, tax-free profits are easily earned in agriculture.
The numbers in both categories are large. About 5,200 investors put in over Rs184 crore in Growpital, an entity which skirted regulations that govern collective investment schemes (CIS) by on-boarding investors as partners in limited liability partnerships (LLPs).
On 29th January, based on investor complaints and some ingenious fact-finding, the Securities and Exchange Board of India (SEBI) issued an unusual interim order halting Growpital in its tracks.
It said this was a pre-emptive move to protect investors from ‘irreparable harm’ and deter the mushrooming of similar schemes adopting the Growpital model. That was over eight months ago. But now, far from appreciating SEBI’s action, investors are furious at the regulator because their money has been blocked and there is no clarity on when the investigation will be completed and the frozen money refunded.
The Growpital Model
Founded in 2020 by Rituraj Sharma and two others, Growpital positioned itself as a fast-growing agri-tech company offering tax-free, assured returns ranging from 11% to 14% or even more. This was through three investment plans (Leafy Eleven, Ever Green Returns and Harvest Bloom) of different tenures. Each investor was enrolled as a ‘partner’ in an LLP and the minimum investment could be as low as Rs5,000. However, many investors parted with several lakh rupees, often a big chunk of their life-time savings.
Growpital claimed to have 20,000 acres of farmland under management that ostensibly earned a margin of 60%-70%, after operating expenses, allowing it to guarantee returns to investor-partners. It used high-pitched sales, influencer marketed interviews, sponsored media articles as well as rewards and referrals to attract investors. In a Ponzi-like structure, the returns earned by investors were credited to Growpital wallets. Consequently, many investor-partners ploughed back their earnings and have ended up with larger amounts being blocked.
What was wrong with Growpital’s business structure that warranted drastic regulatory action of freezing its accounts and stopping new enrolment? According to SEBI, Growpital was operating a CIS structured disguised as an LLP. Growpital, registered as Farm Silo Tech LLP, was the main company. The set-up included YottaAgro Ventures Private Ltd, which was the main vehicle for property acquisition and leases; Zetta Farms (ZF) which had three LLPs – ZF Projects 1, 2 and 3, which raised funds from hundreds of Indian investor-partners, B2B (business-to-business) investors and non-resident Indians (NRIs), respectively.
Effectively, it was running an unregistered CIS. SEBI was also concerned that Growpital was making unverified and potentially misleading claims about its financial health and prospects and also planning a big expansion. It had already raised 'pre-IPO' equity funding in anticipation of an initial public offering (IPO).
The regulator noted that the lands were owned by YottaAgro Ventures, which ran actual operations, while the ZF Project LLPs, which raised funds, had no tangible assets and were “mere conduits for pooling of funds in the guise of capital contribution.”
V Ranganathan, tax expert and Moneylife columnist writes that LLPs are a handy structure for companies, such as Growpital, since there is no limit on the number of partners and the funds are ‘fungible and little traceability exists’ on how and where they move. How much money is taken out of the LLP and its purpose is rarely known, he says (https://ranganathan.substack.com/p/menace-of-unregulated-investment)
How Growpital Was Nailed
While investors have often complained about SEBI ignoring their complaints, its actions in this particular case have been remarkable. On receiving information about Growpital’s operations on 30 June 2023, Nobel Shukla, a SEBI official, enrolled as a partner in July in order to get access to their documents and statutory filings. He also participated in an interactive zoom call and questioned Rituraj Sharma about applicability of CIS rules. Less than six months later, SEBI issued a well-warranted interim order to stop Growpital. It went on to confirm this order in April 2024 but lifted the freeze on personal accounts of the founders—Rituraj Sharma, Gayatri Rinwa and Krishna Sharma.
SEBI wasn’t alone in investigating Growpital. Delhi-based chartered accountant Abhishek Modak began his own investigation by making a token investment in Growpital to get details; he later filed a complaint with the ministry of corporate affairs (MCA). Mr Modak says, start-ups operating as LLPs have their own people as ‘designated partners’ who call the shots. Although investors are LLP partners, they are completely disempowered once they sign a document making the designated partner the ‘authorised signatory’ on behalf of the LLP.
According to Mr Modak, one glaring non-compliance is that, each time a partner is added, the law requires a supplementary agreement by filling eForm3 and 4 with the MCA. Growpital didn't do this, blaming the buggy MCA software. But investor-partners, running into thousands, were on-boarded every month.
Based on Mr Modak’s complaint, MCA has reportedly imposed a penalty of Rs1 crore on YottaAgro and Rs23.78 lakh each on founders Rituraj Sharma and Krishna Joshi for violating Section 42(7) of the Companies Act which violates advertising of private placements (to the LLPs).
Meanwhile, Growpital had approached the Rajasthan High Court and the Securities appellate tribunal (SAT) for relief. Following their orders, SEBI was asked to consider a business continuity plan from Growpital, since its business involved perishable commodities with a fixed cycle. The company wanted permission to continue its business with an official administrator nominated by SEBI to monitor its operations and ensure compliance.
SEBI turned down the proposal and reaffirmed its interim order in April 2024. It said that Growpital’s proposal had various inconsistencies and inaccuracies and it was unable to satisfy the regulator on allegations that it had violated provisions on unfair trade practices and CIS regulations. Had SEBI accepted the proposal, it would have ended up giving some legitimacy to what was basically an illegal action to skirt existing regulations.
Which Way Forward?
While SEBI is correct in its views, it still leaves 5,200 investors who have over Rs184 crore blocked in Growpital in limbo. They are frustrated by the lack of information and charge that SEBI ought to have found less drastic ways to protect them. The investors are bombarding the regulator and the government with Right to Information (RTI) applications, emails and calls that are recorded and circulated in social media groups.
People who have lost money, naturally, tend to make self-serving arguments. Here, too, investors concede that Growpital ‘may be a culprit’ but ‘retail investors have done no wrong’. Such assertions are troubling. No matter how much one empathises with investors who have lost money, it exposes their lack of due diligence into the legality of Growpital schemes; continued failure to understand regulation, compliance, and legal processes; and the ability to see through false hype and disinformation. They are also unable to grasp that a simple unfreezing of accounts would have led to diversion of funds or sucked up their investment in legal fees, employee costs and fulfilment of contracts.
However, there is merit in the argument that SEBI owes it to investors to conduct a time-bound investigation that is focused on refunding their money. It must also ensure and clarify that the blocked funds are in interest-bearing investments, and their value will not diminish significantly as the investigation drags on. A quick refund is only possible if the promoters are willing to cooperate and avoid endless, expensive litigation. In this case, Growpital had apparently expressed interest in refunding money.
Perhaps SEBI needs to put in place operating procedures to ensure quick investigation in such cases, and make it a priority to secure investors’ money and refund it as quickly as possible. This will earn it well-deserved kudos, instead of brickbats.
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