KellyGamma Fund, Related Entities Slapped with Rs8 Lakh Penalty for Violating AIF Regulations

Moneylife Digital Team 03 March 2025

Investor Interest

Market Regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs8 lakh on KellyGamma Fund, KellyGamma Advisors LLP, Sharvil Parikh and Vistra ITCL (India) Ltd for multiple violations of the SEBI Alternative Investment Funds (AIF) Regulations, 2012, during the period from 1 April 2019 to 30 March 2023.

The penalty stems from several breaches, including improper investment practices, failure to report key financial data, and non-compliance with investment limits, as highlighted in audit reports filed by the fund for FY19-20 through FY22-23.

In its order, SEBI adjudicating officer (AO) Asha Shetty said, "I find that noticees have failed in performing their duties as an AIF, manager of the AIF, key managerial personnel (KMP) of manager of the AIF and trustee of the AIF and also failed to comply with the provisions of AIF Regulations and SEBI circulars. Accordingly, such submissions of noticees are untenable. These violations are serious in nature and hence need to be dealt with suitable penalty under the provisions of section 15EAof the SEBI Act, 1992."

SEBI examination focused on violations related to fund investments in non-liquid assets, breaches of the 10% investment limit in multiple companies, failure to disclose net asset value (NAV) to investors, and improper reporting of financial data.

Notably, KellyGamma Fund violated Regulation 15(1)(f) of the AIF Regulations by investing in non-liquid funds such as the BNP Paribas Arbitrage Fund and the Aditya Birla Sun Life Low Duration Fund, despite rectifying this by December 2019 and March 2020. However, SEBI noted that the violations persisted during the examination period, and thus, the breach of Regulation 15(1)(f) was confirmed.

Further allegations included exceeding the 10% investment limit in companies like Kelton Tech Solutions Ltd, Kwality Ltd and Motherson Sumi Systems Ltd. The fund also failed to correctly compute investible funds for previous years, continuing to breach the limit from 2016 to 2022. Despite corrective actions being taken by the fund, including exiting investments in some companies, SEBI found the violation to be sustained and not fully rectified in time.

Another significant issue was the failure of the KellyGamma Fund to compute and report NAV quarterly, as required by Regulation 23(3) of the AIF Regulations. While the fund argued that its failure to disclose NAV did not harm investors due to the scheme's closed-ended nature, SEBI upheld the violation and rejected the argument of substantial compliance.

The fund was also found guilty of failing to file quarterly reports for some periods and not reporting violations in the correct financial statements. SEBI acknowledged the corrective actions taken but ruled that the non-compliance was still a breach of regulatory requirements.

Moreover, KellyGamma Advisors LLP and Sharvil Parikh, responsible for the fund's day-to-day operations, were found to have overseen these violations despite their claims of inadvertent errors. The persistent nature of the breaches during the examination period rendered these defences untenable.

Lastly, Vistra ITCL, the trustee of the KellyGamma Fund, was penalised for failing to act upon the violations highlighted in the fund's audit reports over four years. As per Regulation 20 of the AIF Regulations, the trustee is responsible for ensuring compliance with the Code of Conduct and other regulations. Vistra's inaction, despite receiving multiple reports of non-compliance, led to its failure to fulfil its fiduciary duties, SEBI says.

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