What is a Collective Investment Scheme?

Collective Investment Schemes (CISs), much in the news since the Saradha scam, are those in which people invest to create a pool of money which is then utilised to realise some income for the investors, or acquire some produce, or some properties which are then looked after by a manager on behalf of the investors. In some countries, a mutual fund is also called a collective investment scheme. But in India, the definition of a CIS excludes mutual funds or unit trusts. Collective Investment Schemes are regulated in India by SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999.

Under the definition of Section 11AA of SEBI Act, CIS is any scheme or arrangement, which satisfies the following conditions:

• Call it by whatever name, but Money is pooled and utilized by the contributors / investors.
• Such contribution is made to earn material profits.
• The investors don’t have day to day control over the management or operation of the scheme / arrangement.
• According to a SEBI ordinance of July 2013, any pooling of funds which involves a minimum of Rs. 100 Crore corpus, is deemed to be a Collective Investment Scheme.

History of Collective Investment Schemes in India

In the 1990s, several agro-based and plantation companies in India started pooling money from people, promising them high returns of about 18-30%. However, these companies could not pay back any return or even principal amount to their investors. The Government of India, through a press release in 1997, announced its intention of putting in place an appropriate regulatory framework of regulating such entities which issue instruments such as plantation bonds or agro-based bonds to people. It decided to treat schemes through which such instruments are issued as “Collective Investment Schemes”, to be regulated by SEBI. To this direction, it finally came out with the notification of “SEBI (Collective Investment Schemes) Regulations, 1999” for the regulation of CIS.

So far only one company – Gift Collective Investment Management Co has registered with SEBI as a CIS after complying with the regulations. This is a Gujarat government PSU which is building the International Financial City in the Ahmedabad-Gandhinagar region.

At the same time, data presented in parliament in March last year showed that 660 entities were probed by SEBI for violating CIS regulations. They had collected close to Rs. 7500 crore under their CISs. Out of these, several have been prosecuted and even convicted, while a few have refunded the collected money to their investors.

So how were so many CISs functioning without SEBI’s approval?

Many factors are responsible for this.

• Primarily, the entities floating such CISs exploit the loopholes in the regulatory system. While the intention of some of these entities is purely to cheat investors, others find it a hassle to comply with regulatory norms and thus do not register with SEBI.
• Apart from this, the other reason for proliferation of CISs outside the regulatory framework of SEBI is because SEBI does not have enough teeth to deal with them. The orders of SEBI are not binding like those of courts. Also, its infrastructure in terms of staff and offices is woefully short of the requirement. Most of the time, it starts its investigation only after being tipped off by some other law enforcement agency. Again, whenever SEBI has asked companies running CISs or related schemes to refund money to investors, the latter have contested the order in court saying passing such orders was beyond SEBI’s legal authority.
• Then the lack of an investors’ charter often leads to the concerned agencies (including SEBI) wasting time in pinning the blame on each other and thus not giving quick relief to the defrauded investors. Thus, the perpetrators of such fraudulent schemes are not deterred from running their schemes outside the SEBI’s regulations, in spite of knowing that this is illegal.
• Finally, the banks are also to share the blame. In the case of Saradha scam, banks did not raise any alarm even when crores of rupees were being deposited everyday in some of the accounts. Raising an alarm in the initial stage could have stopped the scam from growing. The poor surveillance of banks in districts as compared to the cities is one of the reasons cited for this failure on part of the banks.

The New Norms

The summary of the new norms on CISs is as follows:

• Money for such CISs will have to be paid through cheque, draft, or any other banking channel but not through cash. This prohibition from using cash will prevent the misuse of CIS for the purpose of money laundering. Besides, it will also improve transparency in fund garnering activities through CISs and facilitate easier identification of the source of funds and real investors in such schemes.
• Also, a person wanting to launch a CIS will have to apply for registration as a Collective Investment Management Company (CIMC).
• The Collective Investment Management Company will have to register with a depository for dematerialization of the units of the scheme proposed to be issued. Additionally, the CIMC will have to comply with Know Your Client norms.

These regulations of SEBI come on the heels of several cases of fraudulent Collective Investment Schemes coming to light in which scores of gullible investors were robbed of their money, while the operators of these schemes claimed to have paid back the money, when probed by regulators and law enforcers. One of these scams that have come to light recently are the Saradha Group Financial scam that was caused by the collapse of a Ponzi scheme run by the Saradha Group, a consortium of Indian companies that was believed to be running a variety of Collective Investment Schemes in eastern India.

Related Posts