Collective Investment Schemes
Collective Investment Schemes
A Collective Investment Scheme is an investment scheme where various individuals come together and pool their money in order to invest their whole fund collection in a particular asset. The returns and profits arising from this investment would be shared as per the agreement finalised amongst the investors prior to the act. Collective Investment Schemes, on a global scale, has broader connotations which include mutual funds as well. However, the Schemes, as prescribed in Section 11AA of the SEBI Act of 1992, excludes mutual funds and other schemes in India. The Securities Exchange Board of India regulates them under the SEBI (Collective Investment Scheme) Regulations of 1999.
The following are the conditions under which schemes or arrangements would be considered as Collective Investment Schemes under the SEBI Act.
- The investments, contributions or payments made by the investors, or any other name that they are called, are pooled and utilised solely for the purpose of the scheme/ arrangement.
- The investments, contributions or payments are made to such a scheme or arrangement by the investors with the aim to gain profits, income, produce or property, regardless of being movable or immovable, from such a scheme or arrangement.
- The contribution, property or investment forming part of the scheme/ arrangement, whether identifiable or not, is managed on behalf of the investors.
- If the investors do not have day-to-day control over the management and operations of the scheme/ arrangement.
Currently, the Securities Laws (Amendment) Act of 2014 states that any funds pooled under any scheme or arrangement that is not approved or registered with SEBI shall be deemed to be a Collective Investment Scheme if it involves a corpus amount INR 100 Crores or more.
Exemptions from the CIS Regulations
According to the SEBI Act, the following activities have been exempted from being governed by the CIS Regulations.
- A scheme/ arrangement made or offered by a cooperative society.
- A scheme/ arrangement which is a contract of insurance.
- A scheme/ arrangement under which the deposits are accepted by Non-Banking Financial Companies.
- A scheme/ arrangement providing for any other scheme such as Pension Scheme or Insurance Scheme prescribed under the Employees Provident Fund.
- A scheme/ arrangement under which a company accepts the deposits as a Nidhi/ Mutual Benefit Society.
- A scheme/ arrangement under which deposits are accepted under Section 58A of the Companies Act, 1956.
- A scheme/ arrangement falling within the fields of a chit business as per Clause (D) of Section 2 of the Chit Fund Act, 1982.
- A scheme/ arrangement under which contributions that are made as an investment to a mutual fund.
The following are the major participants of collective investment schemes.
Collective Investment Management Company
Collective Investment Management Companies are entities incorporated under the Companies Act of 1956 and is registered with the SEBI under the SEBI (Collective Investment Schemes) Regulations of 1999. The objective of the regulations was to organise, operate and manage Collective Investment Schemes.
A person who holds the property of the collective investment scheme in trust for the benefit of the unit holders is called a Trustee. A trustee works in accordance with the relevant regulations and safeguards the assets as well as ensures compliance with the rules and regulations. It is essential that a collective investment scheme is constituted in the form of a Trust as per the CIS Regulations of 1999. Here, the instrument of trust would be in the form of a duly registered deed as per the provisions provided under the Indian Registration Act of 1908. A Collective Investment Management Company initiates this in favour of the trustees named in the instrument. Furthermore, such a company may appoint a trustee who could hold the assets of the collective investment schemes for the benefit of its investors.
A fund manager or an investment manager is a professionally qualified individual who manages the investment decisions of the collective investment schemes. This individual also offers trading reconciliations, valuation and unit pricing of the schemes.
The unitholder, or commonly known as the shareholder, are the individuals who contribute funds in the collective investment schemes. These shareholders have to rights to the assets involved in the schemes and to the associated income generated by the scheme.
Eligibility for CIS Registration
The following are the eligibility criteria to register for collective investment schemes.
- The applicant has to be set up and registered as a company under the Companies Act of 1956.
- The applicant has specified the management of collective investment schemes as one of the main objects in its Memorandum of Association.
- The applicant is fit and proper as an individual for the grant of such a certificate of registration.
- The applicant has a net worth of INR 5 Crores or more. However, this is under the condition that, at the time of making the application, the applicant shall have a minimum net worth of INR 3 Crores which shall increase to INR 5 Crores within 3 years from the date of grant of registration.
- The applicant has adequate infrastructure in order to enable it to operate collective investment schemes in accordance with the provision of the relevant regulations.
- A minimum of 50% of the directors of such Collective Investment Management Companies shall consist of individuals who are independent and are not directly or indirectly associated with the individuals who have control over the concerned Collective Investment Management Company.
- The directors/ key personnel of the applicant shall consist of individuals of honesty and integrity with adequate professional experience in the related field. They must not have been convicted for an offence involving moral turpitude, any economic offence or for the violation of any securities laws.
- No individuals, directly or indirectly connected with the applicant, has been refused registration by the Board under the Act in the past.
Rules and Regulations
It is mandatory for every CIS to be registered as per the CIS regulation. It has been mandated that no individual other than a Collective Investment Management Company which has obtained a registration certificate under the CIS Regulation shall carry on, sponsor or launch a collective investment scheme. A collective investment management company must initiate it through a registered trust by categorically stating that a collective investment scheme shall be constituted in the form of a trust.
SEBI has further prescribed other conditions to instil confidence in the contributor and to maintain more transparency in the operations of the scheme. It obligates a Collective Investment Management Company to disclose essential data to its shareholders as it is vital to keep them informed on every matter which may have a negative impact on their investments. The regulations further deepen the control of the trust by mandating that no appointment of a director of such a company shall be made without the prior approval of the company’s trustee.
Furthermore, to curb these companies from indulging in fraudulent activities, it has been strictly prohibited to provide guaranteed or assured returns. The restrictions on business activities of a Collective Investment Management Company prescribes that such a company shall not undertake any activity other than that of managing collective investment schemes or to act as a trustee for any other collective investment schemes.