Why fractional real estate platform Strata surrendered its Sebi licence

The Securities and Exchange Board of India (Sebi) on Wednesday said Strata has surrendered its small and medium real estate investment trust (SM Reit) licence, and cautioned investors about the dispute over the company’s project in Hosur. 

Strata had not launched any SM Reit scheme under the licence, Sebi said in a post on social media platform X on Wednesday.

A Strata spokesperson said the company had voluntarily surrendered its SM Reit licence without admitting or denying any wrongdoing, and that it intended to apply for a fresh licence after the litigation is concluded.

The Hosur warehouse project, launched in 2020-21, was developed by builder Avigna and funded through multiple rounds by Strata’s fractional real estate investors. However, disputes between Strata and Avigna have since spiralled, according to persons familiar with the matter who have invested in Strata Reit projects.

Strata founder Sudarshan Lodha obtained anticipatory bail from the Madras high court on 22 April amid allegations that a company official had impersonated a Sebi officer to get information from Avigna. Mint has seen a copy of the bail order.

What happened with the Avigna project?

Strata raised money for various portions of the project, Avigna Industrial Parks in Hosur, over the past few years. While several tranches were sold over time, two key components—Box 6(c) and a planned mezzanine floor—faced issues. Box 6(c) and mezzanine floor are separate warehouses within the overall project.

Construction delays hit Box 6(c), and Strata later signed a memorandum of understanding (MoU) with Avigna and the tenant to add a mezzanine floor. To fund this addition, Strata raised ₹19.5 crore from 60 new investors. These investors were added to the special purpose vehicle (SPV), which already had 120 investors in Box 6(c), effectively diluting the stake of the original investors, according to an investor in the project who declined to be named.

However, the mezzanine floor was never constructed due to Strata’s disputes with the builder. According to the investor mentioned above, the dispute stems from Avigna and Strata failing to agree on a price for selling back the warehouses to Avigna.

The result: the original investors faced a nine-month rent loss, while the new investors received neither ownership nor any rental income. While the tenant has now taken possession of Box 6(c) and resumed rent payments, these flows are going only to the original investors, leaving the mezzanine investors in the lurch, according to people familiar with the developments. 

Arbitration proceedings between Strata and Avigna have been dragging on for months with no outcome yet.

Investors’ concerns have also mounted over the fees taken by Strata for the incomplete project. Several investors raised the matter with Strata in meetings, but the inherent illiquidity of the asset class makes exit difficult. To make matters worse, there are conflicts of interest.

According to a letter from Avigna, a copy of which Mint has seen, Avigna had extended a ₹2.5 crore loan to Strata founder Sudarshan Lodha. Additionally, Lodha’s brother-in-law reportedly acquired property in the same project at a price lower than what Strata’s own investors paid. Mint has seen a copy of the document. Strata, though, termed it a “personal transaction”.

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What Strata said

“In light of the ongoing matter, we have voluntarily surrendered our SM Reit licence, without admitting or denying any wrongdoing, as a measure of abundant caution. Upon the conclusion of the current litigations, we intend to apply for a fresh licence at a future date. This matter does not affect the existing investments with Everstrat (the real estate platform),” the company said in response to Mint’s queries.

On the ₹19.5 crore fundraise from new investors, the company said it was carried out via shareholder-approved extraordinary general meetings for the respective SPVs, with detailed communication sent to all investors, including the revised capitalization table and participant list.

“Existing investors also had the opportunity to and did participate in this round. While shareholding was diluted, the returns on original investments have remained unchanged.”

Strata also claimed that the builder, Avigna, received ₹11.5 crore but failed to deliver the mezzanine floor.

“Once arbitration commenced, they admitted before the tribunal to having received the funds and not constructing the mezzanine. They have committed to refunding the amount, and this resolution is currently being finalized through mediation,” Strata said.

The company added that rental payouts had resumed and continued to be disbursed, and that Avigna had agreed to refund the mezzanine funds.

“The reconciliation of fund flows between the SPVs and Avigna is also under review by the Tribunal, and an order for repayment is expected shortly,” Strata said.

Regarding the ₹2.5 crore loan from Avigna, Strata said it was a voluntary contribution by Avigna’s director in a separate business context as part of an advance deposit arrangement between the two entities in 2022.

“There is no evidence to suggest this was a loan, except Avigna’s unilateral and misleading statements made later. The Tribunal has already acknowledged this issue and the amount is to be returned by Avigna in parallel with the mezzanine fund recovery,” Strata said.

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How fractional real estate works

Fractional real estate platforms like Strata, Propshare, and Hbits pool investor funds to buy real estate through SPVs, which hold the underlying assets. Investors typically receive shares or convertible debentures in the SPV and earn returns from rental income or appreciation.

The rapid growth of such platforms prompted Sebi to bring them under a formal regulatory framework in 2023, introducing the SM Reit structure. These are a lighter version of mainstream Reits, with a minimum asset size of ₹50 crore (versus ₹200 crore for traditional Reits). Sebi’s rules mandate skin in the game, a minimum investment of ₹10 lakh per investor, and allow only completed, income-generating assets into SM Reits.

Propshare has already launched an SM Reit and filed for another, while Hbits also holds a licence. Strata, which claims to manage ₹2,000 crore in assets, was initially granted a licence but has now surrendered its SM Reit licence.

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