Collective Investment Scheme & SEBI

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Information about Collective Investment Scheme & SEBI
Business & Mgmt

Published on February 21, 2014

Author: EquiCorp



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 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

EquiCorp Associates Advocates & Solicitors Collective Investment Scheme & SEBI

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.

About Us  Equi Corp Associates (ECA) is a mission driven, start-up law practice based in New Delhi, India and founded in 2012 for providing affordable access to legal counsel benefitting start-ups, small and growing businesses, social business enterprises, impact investors and non-profit organizations. Our boutique service offerings are primarily at the intersection of start-up, sustainable development, social enterprise and investment sectors, designed to help clients wade through laws that were not originally designed with them in mind.  The basic idea behind starting ECA was to be a part of India’s growth by reaching out to novel start-ups and established businesses, and helps them adapt best global practices/technologies in local conditions and in advising them about legal aspects involved in modern markets in order to keep our clients in pace with the dynamic competitive environment.  ECA is instrumental in advising various social enterprises and start ups in setting up their business in India.  ECA not only having some of the best legal minds, but the best business minds too: lawyers are intimately familiar with the business environment, and know the emerging risks and opportunities of their industries and practice groups.

ECA’s Network Presence Dehradun Delhi/NCR Jaipur Allahabad Guwahati Kolkata Mumbai Hyderabad ECA Bangalore Chennai Our Associated Office

WHY Equi Corp Associates?? • • • • • ECA is a multispecialty law firm, with its founding partners having a vast experience for providing legal services to a variety of domestic & international clients, corporations, financial entities & government agencies. Our respected clients - from individuals to small businesses to Fortune 500 companies -- turn to us for trusted legal counsel. ECA is equipped with required professional setup of Qualified, Experienced and Knowledgeable members. We advise and assist NRI’s/PIO’s, Foreign Investors and Indian entrepreneurs with legal services that enables them to compete with best in world in the modern economy characterised by technology based, venture capital funded, futuristic businesses governed by complex and ever evolving legal and statutory framework. ECA is also effective in providing match making partner/locating strategic alliance, follow up and representation with Government of India or any other incidental work related to investment or legal guidance in India.

The Verticals • Corporate & Commercial • Banking & Finance • Real Estate • Infrastructure & Project Finance • Employment & Labour • Media, Sports & Entertainment • Litigation & Arbitration • Tax & Consulting • Intellectual Property The Firm specializes in verticals such as IT, ITES, Bio-tech, Power, Water, Retail Trade, Education, Mining, Aviation, Tourism, Insurance, Telecom, Media & Entertainment

Corporate & Commercial Services  Foreign Investment in India / Abroad  Drafting and vetting of Joint Venture Agreements, Corporate Agreements, Management Agreement, Cross border transaction agreements etc.,  Compliance Audit, Due Diligence & Transaction Advisory;  Formation & structuring of business entities;  Mergers & Acquisitions & Private Equity;  Competition & Fair Trade Practice;  Corporate Governance & Restructure;  Venture Fund, Mutual Fund, RE Trust Funds.

Banking & Finance Services            Credit Co-operative & Financial Institutions; Quasi Banks & Nidhi Companies; Urban Credit Co-operative Banks; Micro Finance Institutions; Banks & NBFCs and other Financial Intermediaries; Alternative Investment Funds; Real Estate Finance including Collective investment Schemes; Structured & Asset Finance; National Pension Scheme Securitization; Debt recovery

Real Estate Services  Title Search & Property transactions  Joint ventures in Real Estate  Build to suit campuses  Development of Technology Parks, Integrated Townships, Warehouse & Logistics Parks, SEZ, Hotels, Multiplexes Entertainment Centres, Slum Developments, Rehabilitation Projects etc.  Sale deeds  Lease, Leave and License Agreements  Gift deeds  Mortgage & Finance Agreements

Infrastructure & Project Finance Services  Transaction Advisory: Energy, Oil and Gas, Highway, Road, Airport, Ports, Water & Sanitation and Telecommunications  Drafting, negotiations and review of financing & security documents  Tender Documents, Bidding process, PPP, Concession Contracts, PPA, EPC Contracts  Government Approvals & Liaisoning with statutory authorities  Structuring, negotiation & documentations of projects

Employment & Labour Services  Appointment/Offer letters, Termination practices  Employee Stock Option Plan  Employee Handbook  Labour Compliance  Service Bonds  Standing Orders & Service Rules  Migration & Emigration of Employees  Country specific employment relation  Grievance Settlement Procedures

Media, Sports & Entertainment Services  Television & News Channel;  Media & Production Houses;  Endorsements, Distribution, Event Sponsorship, Venue, Marketing Rights, Merchandise Agreements;  FM Radio Channels;  Publishing House;  Studios;  Sports Club

Litigation & Arbitration Services  Commercial Litigation  Recovery/Enforcement  Civil Litigation  Medical Negligence  IP Litigation  Arbitration  White Collar Crimes  Economic Offences  Bankruptcy/Insolvency  Criminal Litigation

Tax & Consulting Services  Company Secretarial Services: - Incorporation of companies/branches/liaison office/representative office - Maintenance of Secretarial Record and recurring secretarial services - Registration with Statutory Authorities including Income Tax,RBI,EoU, STPI, Custom Bonding, Central Excise etc.  Accounting & Payroll Services  Tax and Regulatory Services  Advising on Customs & Excise matters  Immigration Services

Intellectual Property Services  IP Portfolio Management  IP Auditing  IP Strategic Alliances  Collaboration  Licensing  Technology Transfer Agreements  Search, drafting, filing and prosecution in :  Patents  Trademarks  Copyrights  Industrial Designs

Our Commitment Value  One stop legal boutique where assignments carried out at a fraction of the cost of clients staff  Reduce client staff management time and overhead costs, and increase clients profitability  Enable clients staff to concentrate on more interesting and value-added work Service  Robust management and procedures to ensure delivery on time and on budget  Dedicated one-to-one communication with client, to ensure every project is right first time  Full service delivery is achieved by synergies of subject matter expertise of our in-house Lawyers, Chartered Accountants, Company Secretaries and Tax Consultants Quality  Two-level file review and signoff by expert Lawyers, even for the smallest assignment

Our Core Strengths  Dedicated team of legal professionals with strong deal exposure and knowledge of regulations of various sectors.  Proactive and structured approach  Well defined processes  Well defined Project methodology tailored to suit the needs of clients for service delivery  Talented team with experience of working with some of the largest companies in India exposure to leading cross border transactions in India  Experience & proven capabilities to handle Diversified Multi-national Clients i.e. Information Technology, Energy, Manufacturing, Consultancy, Oil & Gas Sector, Retail Trading, Hospitality, Restaurant and related sectors.  Competitive advantage of costing by virtue of expertise and experienced resources.

For further information Contact : Aashish Srivastava Partner Equi Corp Associates Advocates & Solicitors W-86, Classic House, GK-II, New Delhi T: +91 11 40573261 Mobile : +919958709189 E-mail

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