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Regulating the Collective Investment Schemes in India

Collective Investment Scheme (“CIS”)- 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.
Many companies especially in semi-urban 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???? Collective investment scheme as a subject for monitoring came under the SEBI ambit after amendment to the SEBI Act, however there are several exemptions for schemes such as chit funds, nidhi funds, co-operatives, NBFCS. They are exempted with a very on the idea was that those would be reporting at small level and there would be local level authorities who would be taking care of them. As at present, we don’t have a single regulator and  the innocent victims don’t know where to go after been cheated by ponzi schemes.
Entrepreneurs from rural regions wants to operate a legally recognized CIS for their locality get confuse in the web of these complex regulations which amends frequently. Earlier for registration of a Multi-State Credit Co-operative Society, you need to get approval from Central Government i.e. Ministry of Agriculture, Delhi, however after the Shardha scam in West Bengal, instead of making the regulations water tight to prevent further scams and frauds, Ministry of Agriculture issued a notification, where a multi-state society needs to get no objection certificate (“NOC”) from State Registrar, Co-operative for registration of a Multi-State Credit Co-operative Society and when these gullible societies reach to State Registrar, Co-operative, they simply refuse to give NOC on the ground that they are state employees and are not bound by any central ministry notification till the time it is been directed to them by their State Ministry.
And, the major motive behind this is to curb the registration of new multi-state credit co-operative society…. Will this solve the problem of ponzi schemes or will it increase them further???
Today, even nationalized banks had not been able to penetrate and make a stand to the rural market whereas people operating CIS via mechanism of multi-state credit cooperative societies in these regions had already established their network through their agents who come from the same locality.
Is there any way out to operate a legally recognize CIS???
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’s regulations has been revised and strengthened.
The SEBI (CIS) Regulations specifically state that no entity can carry on or sponsor or launch a CIS without obtaining a certificate of registration from SEBI. The other regulations are as follows:
              i.        The CIS should be set up and registered as a public company registered under the provisions of the Companies Act, 1956/2013, and the memorandum of association should specify the management of the CIS as one of its objectives.
             ii.        The company at the time of registration as CIMC should have a minimum net worth of INR 5 crore (provided that at the time of making the application, the applicant should have a minimum net worth of INR 3 crore, which should be increased to INR 5 crore within three years from the date of grant of registration).
            iii.        iii. The offer document should disclose adequate information to enable investors to take informed decisions. The       offer document should also indicate the maximum and minimum amount expected to be raised. No scheme should be kept open for subscription for more than 90 days.
           iv.        Each scheme has to obtain a rating from a recognized CRA, and the projects to be undertaken should be appraised by an appraising agency.
            v.        The CIMC should obtain adequate insurance policy for the protection of the scheme’s property.
           vi.        Advertisements for every single scheme should conform to the SEBI’s advertisement code.
          vii.        The CIMC should issue unit certificates to all applicants whose applications have been accepted as soon as possible, but not later than six weeks from the date of closure of the subscription list; if the units are issued through a depository, a receipt in lieu of the unit certificate will be issued as per the provisions of the SEBI (Depositories and Participants) Regulations, 1996, and the byelaws of the depository.
         viii.        The units of every scheme should be listed immediately after the date of allotment of the units, and not later than six weeks from the date of closure of the scheme on each of the stock exchanges as mentioned in the offer document.
           ix.        A scheme should be wound up on the expiry of duration specified in the scheme or on the accomplishment of the purpose of the scheme. The scheme can also be wound up if the unit holders of a scheme holding three-fourth of the nominal value of the unit capital pass a resolution to that effect; if in the opinion of the CIMC, the purpose of the scheme cannot be accomplished, then through the approval of at least three-fourths of the nominal value of the unit capital of the scheme, the scheme can be wound up. However, for winding up the schemes, approval has to be obtained from SEBI. Further, if in SEBI’s opinion the continuation of the scheme would be prejudicial to the interest of the unit holders, then the scheme can be wound up. When a scheme is to be wound up, the trustee should give notice disclosing the circumstances leading to such a decision in a daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Collective Investment Management Company is registered.
            x.        The trustee should dispose of the assets of the scheme concerned in the best interests of the unitholders of that scheme. If the scheme is wound up because of any event that in opinion of the trustee requires the scheme to be wound up, then the proceeds realized should be utilized towards the discharge of such liabilities as are due and payable under the scheme, and after making appropriate provisions for meeting the expenses connected with such winding up, the balance should be paid to the unitholders in proportion to their unit holding.
           xi.        After completion of winding up, the trustees have to forward to SEBI and the unitholders the report on the steps taken for the realization of assets of the scheme, the expenses for winding up, and the net assets available for distribution to the unitholders, together with a certificate from the auditors of the scheme certifying that all the assets of the scheme have been realized, and the details of the distribution of the proceeds.
          xii.        The unclaimed money, if any, at the time of winding up should be kept separately in a bank account by the trustee for a period of three years for meeting investors’ claims, and thereafter, should be transferred to an investor protection fund, as may be specified by SEBI.
         xiii.        On behalf of the scheme, before the expiry of one month from the close of each quarter (i.e., March 31, June 30, September 30, and December 31), the CIMC should publish its unaudited financial results in one daily newspaper having nationwide circulation and in a regional newspaper of the region where the head office of the CIMC is situated.

If  you are interested in further details and inclined to know the procedure of CIS registration, click on the link below or contact us:


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