The agro-mutual fund that crashed and burned

Akshara (0:04)

In today's episode, we'll do one deep dive and cover another story for the day. First, we'll talk about the agro-mutual fund that crashed and burned, and then we'll talk about the Indian Railways trying the highway.

Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Wednesday, 30th September. Coming to the first story. Another day, another case of fraud under SEBI's trained, keenly looking lens. So the subject of this SEBI investigation is Growpital, an agri-tech platform based out of Jaipur. So it called itself a mutual fund, but a much better one. It made grand claims of offering guaranteed tax-free returns of 10-15% per annum, with some plans seemingly going up to 18.5%.

These returns were seemingly funded by growing crops. Now if you know anything about the market, you know that anyone claiming to provide high, assured returns out of the blue is likely up to something questionable. So in that spirit, an unnamed individual sent SEBI an email to look into Growpital's mighty claims. So one such key claim was that Growpital earned Rs 62 crore in revenue by selling jeera seeds from a single 75-acre plot of land in Barmer, Rajasthan. And this, they said, made up 84% of their business. So SEBI executed a simple sanity check to see if this held up. As per government statistics, the average yield of jeera in Barmer is approximately 124 kg per acre. And in 2023, Monday prices for jeera in Barmer hovered around Rs 320 per kg. Now, put together, the maximum possible revenue from a 75-acre plot comes out to approximately Rs 30 lakh, give or take a few lakhs. In any case, that's literally a tiny fraction of the Rs 62 crore claim Growpital made. That calculation sits at the heart of SEBI's massive final order against Growpital, its founders, and a web of 28 other entities and individuals. So between 2020 and early 2024, Growpital raised Rs 193 crore from over 5,200 investors by promising them assured tax-free returns from farming operations. SEBI found that the farms were largely fictitious, the revenue was mostly fairy dust, and the money was being routed through layers of shell entities back into a company the founders controlled. Let's dive into how Growpital structured its camp and the aftermath of what SEBI found. Now Growpital's pitch was simple. It offered various investment plans ranging from Rs 5,000 to Rs 15 lakh per unit through its website and a telegram group with over 2,700 members. The plans had names like Leafy 11 and Blooming Seeds, and the FAQs on the website were remarkably blunt, saying the profits that Growpital provides on your investments is absolutely assured without any catch. Now how could anyone guarantee such returns? Growpital had an answer for that too. So the website claimed a gross margin of 60-70% from every farmland. And after paying out returns, land lease and operating expenses, they were still left with a 20-25% buffer. This was either a secret source that no farmer in India had ever heard of before, or it was complete nonsense. Any investment vehicle that pulls in other people's money is no light, no risk establishment. You give your hard-earned capital to a manager whose job it is to grow it further. It could be anything from a mutual fund to a teak plantation that's collectively owned. And exceptions to this rule exist, like cooperatives, but only because they're covered by other laws in India. So it makes sense then that SEBI requires all collective investment schemes or CIS to be registered. And a CIS legally has to fulfill four conditions.

Were funds pooled?

Were investors promised profits? 3 Was the scheme managed on their behalf? And 4 Did investors lack day-to-day control? Now by that logic, Growpital was certainly a CIS, but not only was it never registered as a CIS, its legal structure was also cleverly designed to avoid SEBI's radar.

So in Growpital's schemes, investors weren't sold securities in the traditional sense. Instead, they were onboarded as partners in three limited liability partnerships or LLPs. Each investor signed a consent letter, was added to an LLP agreement, and was told they were co-owners of farming projects. Partnerships are technically governed by the LLP Act, and therefore outside SEBI's jurisdiction. Furthermore, the consent letters told a different story. Every investor signed over all their rights and powers to Growpital, and they couldn't attend meetings, couldn't make decisions and couldn't access the bank accounts. All control rested with the designated partners, which were two companies.

Yoda Agroventures, which is the promoter's private company, and Farm Silo Tech LLP, which is the entity behind Growpital. The investors were partners in name, but passengers in fact. Interestingly, Growpital maintained throughout that, unlike a mutual fund that issues units to investors that are tradable, they never did the same. But the consent letters themselves betrayed their defense, since they contained a field called Number of Growpital Units Purchased.