Published on February 21, 2014
EquiCorp Associates Advocates & Solicitors Collective Investment Scheme & SEBI www.equicorplegal.com
Collective Investment Scheme An investment scheme wherein several individuals come together to pool their money for investing in a particular asset(s) and for sharing the returns arising from that investment as per the agreement reached between them prior to pooling in the money
Is CIS a Ponzi Scheme??? Many companies especially in semiurban and rural areas are accepting deposits in their firm’s name and also promising two to three times returns in two to four years without taking any legal permissions. These ponzi schemes are running on the false promise of doling out high returns to the gullible investors. Ponzi scheme may be treated as either a chit fund or a collective investment scheme. But then a further complication arises who will regulate a ponzi scheme????
SEBI’s Action In light of a lot of news relating to sham entities garnering funds through fraudulent investment schemes with promise of huge returns mainly in the name of property development and agriculture, SEBI has in the last few years, intensified its scrutiny of investment structures that raise domestic capital on an unregulated basis. Securities Appellate Tribunal (hereinafter the “SAT”) recently passed an order upholding SEBI’s findings against Alchemist Infra Reality Limited. The SAT order along with recent pronouncement by the Supreme Court have probed unregulated investment arrangements to conclude whether or not they constitute CIS, as Schemes are required to be registered with SEBI in pursuance to Securities And Exchange Board Of India (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as the “Regulation”).
Maitreya Services Private Limited SEBI issued an order in March 2013 against the company in March 2013 directing to wind up its CIS and refund the money to its subscribers. SEBI barred the company and its directors from the securities market till the time all its CIS were wound up and decided to initiate prosecution proceedings against them. Charges like offences of fraud, cheating, criminal breach of trust and misappropriation of public funds have been filed. Securities Appellate Tribunal (hereinafter referred to as “SAT”) upheld the SEBI order against SAT
Alchemist Infra Realty Limited The Company accepted contribution from investors for collective utilization and pooled the investment with the object of carrying out the overall scheme/ arrangement because the Company had the discretion to allot such area in its project as it considered appropriate. Further, under a conveyance deed the area of plot for each individual was denoted as ‘proportionate undivided interest’. The purchaser was thus not entitled to claim division and/or partition of the said proportionate undivided interest. The purchasers could not either interfere with the working, managing, controlling and supervising of the said plot in any manner whatsoever. This in SEBI’s view, were not limbs of a buy-sell arrangement, but a pooling of money pursuant to a scheme or arrangement. Based on these findings, SEBI concluded that the company’s activity were in the nature of a CIMC and held it to be in violation of the Regulation as the company didn’t have the requite approvals from SEBI. SEBI accordingly passed directions to the Company and its directors to wind up the existing Scheme and further ordered the Company to refund all the collected money. SAT confirmed SEBI’s finding and upheld the SEBI order under appeal which was made by the Company and its directors, by adopting the reasoning similar to that provided by SEBI in the SEBI order.
Collective Investment Scheme or CIS CIS is defined in Section 11AA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “Act”) as per which CIS is any scheme made or offered by a company under which – Contribution made by individuals are pooled and utilized solely for a common scheme or arrangement; Contributions and payments made by individuals with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement; Property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; and Investors do not have day to day control over the management and operation of the scheme or arrangement.
Exclusions to CIS There are many types of schemes and arrangements to collect funds from individuals which has been excluded by SEBI from the definition of CIS. CIS will not include schemes and arrangement – Offered by Co-operative Societies or societies registered under any state or central act; Offered by Non-Banking Financial Companies to accept deposits; Contract of insurance to which Insurance Act applies; Providing for pension or insurance schemes under Employees Provident Fund and Miscellaneous Provisions Act, 1952; Under which deposits are accepted under Section 58A of the Companies Act, 1956; Under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956; falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982; and Under which contributions made are in the nature of subscription to a mutual fund.
Collective Investment Management Company or CIMC As per the Regulation no other entity other than a CIMC registered with SEBI can launch a CIS. The eligibility criteria for an entity to be granted SEBI approval for operating as a CIMC are as follows:Registered as a company under the Companies Act, 1956; Memorandum of Association specifies managing of CIS as one of its main objectives; Net worth of not less INR 5 crores, provided at time of making application the net worth can be INR 3 crores which is to be increased by applicant to INR 5 crores within three years of date of registration as a CIMC; Fit and proper person for grant of such certificate; Has adequate infrastructure to enable it to operate CIS in accordance with the provision of these regulations; Directors or key personnel shall have relevant experience and have not been convicted for an offence involving moral turpitude or for any economic offence or for the violation of any securities laws; At least 50 percent of the directors are independent; No person directly or indirectly related to the applicant entity has been refused registration by SEBI under the Act; and At least one director not subject to retirement is representative of the trustee.
Setting up a CIMC
Launch a CIS As per the Regulation, a CIS shall only be constituted in the form of a trust and the instrument of trust shall be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the CIMC in favour of the trustees named in such an instrument. The trustee shall hold the assets of the Scheme for the benefit of the unit holders. Credit Rating and Appraisal Requirement - No scheme shall be launched by the CIMC without obtaining rating from a credit rating agency (“CRA”) and getting the CIS appraised by an appraising agency (“Appraising Agency”). CRA as per the Regulation means a body corporate registered under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. Appraising Agency means an agency empanelled with the SEBI for the purpose of conducting technical or financial appraisal of the CIS. Appraising Agent’s appraisal report shall form part of offer document.
Launch a CIS contd. Close ended scheme and duration – CIS has to be a close ended scheme with duration not lesser than three years. Insurance – CIMC to obtain insurance for protection of CIS’ property. Returns – CIMC shall not provide guaranteed returns. Offer document can only mention indicative returns assessed by Appraising Agency. Filling Fees – CIMC to pay filling fees to SEBI as prescribed in the Regulation; Disclosure in offer document - Offer Document has to contain information as set forth in Sixth Schedule of the Regulation and all information provided shall be true and enable investors to take an informed decision. SEBI may in interest of investors require CIMC to carry out changes to the offer document. CIMC can file offer document if SEBI doesn’t suggest any changes within 21 days from date of filling.
Launch a CIS contd. Advertising material – Advertisement in respect of CIS have to comply with code provided in Seventh Schedule of the Regulation and shall disclose investment objectives and periodicity of valuation of the CIS property. Offer period – CIS shall not be open for more than 90 days for subscription. Allotment of units and refunds of money – CIMC to disclose in offer document the minimum and maximum subscription amount under the CIS along with allotment process in case of oversubscription. Application money has to be refunded within six weeks of closure of subscription list if CIS fails to receive minimum subscription. Unit Certificates – CIMC has to issue unit certificates to accepted applicants no later than six weeks from date of closure of subscription list.
Launch a CIS contd. Transfer of Units – Unit certificates shall be freely transferable and CIMC shall register any such transfer within thirty day of production of unit certificate along with instrument of transfer. Account and utilization of money – Subscription amount received shall be kept in a separate bank account in name of the CIS and shall be utilized only for the objectives of the CIS. Listing of CIS - The units of every CIS shall be listed immediately after the date of allotment of units and not later than six weeks from the date of closure of the CIS on each of the stock exchanges as mentioned in the offer document.
Consult the Experts Complete assistance for making the necessary filings, applications etc. for obtaining SEBI’s approval to operate as CIMC and to launch CIS. Informal discussion with contact personnel within SEBI so as to perfect the application before the same is submitted. Follow up support at various points in time during and after the pendency of the application so as to ensure that any additional documents/records requested by SEBI is submitted in a systematic and timely manner. Updating Company on a regular basis as to the status of the pending application.
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