History of Collective Investment Schemes (CIS) in India

Collective Investment Schemes

In 1990s many agro-based and plantation companies collected the funds from the public but did not give any return to them as promised by them. On viewing this position in the market, a press release dated November 18, 1997, was issued by the Government of India that a proper regulatory framework for regulating such bodies issuing instruments shall be put in place. Further, the government resolved that the schemes under which such instruments are issued would be treated as "Collective Investment Schemes" (CIS) and such schemes would be regulated by the SEBI. (CIS) and such schemes would be regulated by the SEBI.

A registered Collective Investment Management Company (CIMC) is entitled to raise funds from the public for a particular Scheme. For such scheme, CIMC, in turn, issues them what are called "units" (which are essentially shares) of that Scheme and these units are given in proportion to the contribution made by the investor. Further, these units, by law, have to be compulsorily listed on the stock exchange platform.

In 2013, on the occurrence of Sahara/Sharada scams, SEBI modified the earlier definition of CIS to include any scheme/arrangement launched by any person (instead of a company as was defined earlier); and any such scheme with its corpus of more than Rs. 100 Crore shall also be lawfully considered to be a CIS by SEBI.

What is meant by Collective Investment Schemes?

It can be described that any scheme or arrangement, which satisfies the provisions under sub-section (2) of section 11AA of the SEBI Act, can be called a collective investment scheme. Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilized with a view to receiving profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors generally do not have a day to day control over the management and operation of such scheme or arrangement.

Which are the schemes not treated as CIS?

The following do not constitute a collective investment scheme as such:

Any scheme flouted by co-operative society or a society being a society, non-banking financial companies (NBFC), any scheme or arrangement is being a contract of insurance to which the Insurance Act applies, any Scheme like Pension Scheme or the Insurance Scheme or deposit acceptance under section 58A of the Companies Act, 1956, Nidhi Company and Chit Fund etc.

What is an existing Collective Investment Scheme?

Those companies, which were functioning as a collective investment scheme at the time of commencement of CIS Regulations i.e. October 15, 1999, are deemed to be an existing collective investment scheme as per the guidelines.

A registered Collective Investment Management Company is entitled to raise funds from the public by launching schemes. It is mandatory for such schemes to be compulsorily credit rated by the appropriate credit rating agency. Further, it is also compulsory for the scheme to be appraised by an appraising agency. Such schemes also have to be approved by the Trustee and contain disclosures to enable the investors to make an informed decision. The disclosures are provided in the Regulations. CIMC has to file a copy of the offer document of the proposed scheme with SEBI and if no modifications are suggested by SEBI within 21 days from the date of filing then the Collective Investment Management Company is entitled to issue the offer document to the public for raising funds from them.

Are the investors entitled to receive information about the schemes?

Yes, the investors are entitled to receive a copy of final accounts (Balance Sheet, Profit and Loss account etc.) and appraisal report from CIMC within two months from the closure of the financial year. Also, CIMC has to publish in a national daily newspaper scheme-wise un-audited quarterly financial results within one month from the close of each quarter.

Submission of offer document to SEBI by CIMC does not in any way guarantee that the same has been cleared or approved by SEBI. It is the responsibility of the CIMC to ensure that the documents submitted are adequate and as per the requirements of the regulator (SEBI).

It is observed that many of the existing collective investment schemes had collected funds from the public prior to existence of the regulatory jurisdiction of SEBI and any action by SEBI against defaulting entities does not necessarily ensure the refund of money invested by the investors in such entities.

As a regulator, SEBI cannot guarantee or undertake the repayment of money to the investors invested in any CIMC.

Whom to approach for Grievance Redressal?

For any grievance redressal, the investor should approach CIS in this matter and then SEBI, if not satisfied. An investor can also approach district consumer redressal forum in case non-commitment or any deficiency in service. An investor can also move the courts in certain cases also.

In certain cases, where a company fails to repay the deposits collected by it then under such case, it should be settled as per the provisions of section 58A of the Indian Companies Act, 1956 and SEBI in no way can help such investor as it is out of the purview of SEBI.

On obtaining the registration as CIMC, SEBI shall issue a Press Release furnishing the details of CIMC like the name and address and contact number of such registered entities and the same shall appear on SEBI's website i.e. www.sebi.gov.in

Further, if any registered CIMC violates any regulations of SEBI then such CIMC may lose its certification of registration as the suspension will be initiated against it.SEBI may also undertake a criminal action against such company if it is in the interest of securities market and investors by large.       

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