In today’s Finshots, we tell you why the Securities and Exchange Board of India (SEBI) has frozen the bank accounts of a startup called Growpital.
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It’s quite easy to sell the idea of owning farmland to urban Indians these days. Many people dream about leaving their high-pressure corporate jobs and living off of the land.
But it’s a risky proposition and not everyone has the stomach for it.
So what can you do about it if you’re someone with some entrepreneurial flair? Maybe you can build a business out of this dream?
- Tell people you’ll give them the thrill of owning a fraction of farmland. The investment amount could be as low as ₹5,000. And say that you’ll manage the farms and the crops.
- Next, offer them a high guaranteed return of nearly 15%. Or rather, that’s a profit share from selling crops.
- Then throw in the cherry on top — declare that agricultural income is exempt from taxes. So investors get to keep every penny.
Quite exciting, no?
And that is the playbook followed by an agri-investment startup called Growpital.
The sales pitch was — “Think of it as a mutual fund, where diversified crops are grown over the farm projects instead of equities and bonds.”
Tack on the tax-free nature of the returns and they began selling this dream to investors in 2021. The media picked up on this craze too. And soon, investments started pouring in. By the end of 2023, Growpital claimed to have raised a tidy sum of over ₹180 crores from investors.
Things were looking good for the startup.
But on Monday, everything came crashing down…because SEBI got involved.
See, a few months ago, the capital markets regulator received a complaint about Growpital. And they decided to pay closer attention to the startup. And let’s just say that they’re not happy. They’re calling it a ‘veiled’, ‘illegal’ and ‘fraudulent’ investment scheme based on their initial investigation.
Okay, let’s explain.
When Growpital mobilised money from investors, it told them it would make them partners in the business too. Not in the core entity, of course. But it would set up new Limited Liability Partnerships (LLP) where each investor would become a co-owner. This LLP would further invest in agricultural projects to generate income.
But this sort of structure also meant that it escaped regulations by SEBI. It was only answerable under the LLP Act of 2008. And since the law does not specify how many partners can be onboarded or how much capital they can all invest, Growpital used the loophole to attract investors.
Now SEBI’s problem was simple. They believe anyone who mobilises funds from a group of investors might have to be regulated under the Collective Investment Scheme (CIS) Regulations of 1999. Otherwise, it’s tantamount to fraud. So they needed to decide if Growpital was actually just a CIS masquerading as an LLP.
And if we break down SEBI’s order a bit, we get two core factors.
For starters, there’s the question of whether these are “pooled investments that distribute profits.”
And that seems pretty evident as per SEBI. Growpital used a payment aggregator called Cashfree Payments India Pvt Ltd. This firm received money on behalf of Growpital. And then transferred it to Growpital’s special bank account at Yes Bank. However, SEBI didn’t find any evidence that the final investments were segregated.
This meant it was a pooled sum of money at play here which would be invested into agricultural projects.
And about the matter of sharing profits, Growpital even made tall claims and promises of ‘assured returns’. That it would bear the losses.
So yeah, the matter seemed quite clear-cut that it should be classified as a CIS.
Also, the rules say that if such a fund manages over ₹100 crores, it should be a CIS. And since Growpital says it has over ₹180 crores under its belt, it slots nicely into the CIS category too.
Secondly, there’s a matter of control.
Now Growpital says that all investors are partners in the LLP and that makes them co-owners. But, these co-owners also end up transferring all their rights to Growpital. They’re not involved in decision-making. So the startup retains the authority to do as it pleases. The investors don’t have any say.
And to take things even further on the point of control, SEBI notes that in a YouTube video, the founder of Growpital says it can’t reveal all the farms it manages in the country. Investors have to trust the startup at face value when it claims that farms are spread over 14 states.
That doesn’t evoke a lot of trust, does it?
So yeah, that’s why SEBI believes Growpital’s a Collective Investment Scheme.
And since it hasn’t registered itself as one, that’s a problem. For one, this means whatever money Growpital’s raised from investors is illegal. Also, there’s no one really to safeguard the investor’s interests if things go wrong right now.
So SEBI wants to act before everything goes downhill.
And the instructions in the order are clear — Growpital cannot solicit investments anymore. They cannot touch the money that’s lying in the bank accounts currently and everything will be frozen. Nor can they dispose of any existing investments. They even have to scrub off all their websites and marketing materials so that there’s nothing that can mislead the public.
This means that investors are also now in limbo. They have no way of getting their money back. And they have to wait until SEBI completes a full investigation and decides how to deal with this matter.
Who knows what SEBI will find!
But wait…why did SEBI lay down the gauntlet and issue such a strict initial order?
Well, it might be due to a sense of deja vu. And I want to tell you one more story about India’s tryst with agricultural schemes.
In the late 1990s, Anubhav Plantations, a Tamil Nadu-based company was gaining a lot of attention. The firm had amassed over ₹120 crores from investors after promising a 60 times return. Anyone could invest — the starting price was just ₹6,000. In return, they’d be allotted a 300-square-foot piece of land with 3 teak saplings. Anubhav Plantations would take care of the trees for the next 30 years. And the investor would get a payout. They’d receive —
₹1,000 every year for the first 6 years
An additional ₹6,000 at the end of the 6th year
Another ₹12,000 after the 12th year
Finally, at the end of the 20th year, the investor could choose between a payout of ₹3 lakhs or a certain portion of the teak.
Sounds great, eh?
But soon, people began to question these claims.
See, the company claimed that the investors’ monies were used to buy land and saplings. But we know that teak plants don’t provide a crop-like return. There’s no output. Yet, the firm managed to pay regular sums of money to the investors.
Now this could only mean two things — either the entire sum didn’t go into the plot and plants and it was invested elsewhere. Or else, it was a pyramid scheme where money raised from a new investor was used to provide cash flow to the older set of investors.
And the problem was that there wasn’t anyone to really regulate these schemes. They were only registered under the Companies Act of 1956. And SEBI couldn’t do much since these companies invested in land and not securities.
And guess what…by 1998, everyone’s worst fears began to come true. It turned out to be a pyramid scheme. The cheques issued by Anubhav Plantations began to bounce. The founder was picked up by the police. And hundreds of investors lost their hard-earned money.
It wasn’t just a one-off problem by the way. The 1990s were rife with such plantation firms. But gradually, the noose tightened around them and many vanished.
In fact, some reports say that SEBI’s rules around these Collective Investment Schemes which were formulated in 1999 were thanks to these schemes.
It was quite the Wild West of investing back then. And it looks like SEBI’s worried that today’s agri-investment schemes are in a similar vein.
Anyway, we’re not saying that Growpital is a sham. We don’t know that yet and guess it’s up to SEBI and the others to unearth what’s going on here. We just hope that this time, unlike the 1990s, investor money remains safe and unharmed.
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