For the last few years,
Securities and Exchange Board of India (“SEBI”),
the Indian securities regulator, has intensified its scrutiny of investment
structures that raise domestic capital on an unregulated basis. It
shall be noted that the Collective Investment Scheme (“CIS”) activities hereunder covers various relevant legislations,
regulations and rules, for the time being in force in India and the legal
entity has to obtain approval/register itself with SEBI as a Collective
Investment Management Committee (“CIMC”)
to be able to launch a CIS.
In
last few years, SEBI has intensified its scrutiny of investment structures that
raise domestic capital on an unregulated basis wherein various entities garner
funds through fraudulent investment schemes with promise of huge returns mainly
in the name of property development and agriculture.
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”).
SEBI Action against
Defaulting Companies
(i)
As per SEBI’s latest data,
around 664 entities collected INR 3,518 crores in 1998-99.
Ø Among
these 75 companies wound up their schemes and returned money to investors.
Ø Prosecution
action has been launched against remaining 589 entities.
(ii)
As on March 31, 2013, there
were 171 CIMCs still operating without SEBI approval against whom court proceedings
have been initiated.
Ø Penalty
imposed in such from INR 30,000/- to INR 10,00,000/- (depending upon the money
mobilized in contravention of the Regulation.
Ø Rigorous
imprisonment for promoters and associates of upto 6 months.
(iii)
Various courts in the country
slapped convictions in 14 cases related to illegal CIS in fiscal year 2012-13,
taking the total of such verdicts to 138.
Update on certain
cases relating to illegal CIS
(i)
Maitreya Services Private
Limited – SEBI issued an order in March 2013 against
this company in March 2013 directing to wind up its CIS and refund the money to
its subscribers.
Ø 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.
Ø Charges
like offences of fraud, cheating, criminal breach of trust and misappropriation
of public funds have been filed.
Ø Securities
Appellate Tribunal (hereinafter referred to as “SAT”) upheld the SEBI order against SAT
(ii)
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.
Ø This
in SEBI’s view, were not limbs of a buy-sell arrangement, but a pooling of
money pursuant to a scheme or arrangement.
Ø 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.
Ø 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.
Ø 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 –
(i)
Contribution
made by individuals are pooled and utilized solely for a common scheme or
arrangement;
(ii)
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;
(iii)
Property,
contribution or investment forming part of scheme or arrangement, whether
identifiable or not, is managed on behalf of the investors; and
(iv)
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 –
(i)
Offered
by Co-operative Societies or societies registered under any state or central
act;
(ii)
Offered
by Non-Banking Financial Companies to accept deposits;
(iii)
Contract
of insurance to which Insurance Act applies;
(iv)
Providing
for pension or insurance schemes under Employees Provident Fund and
Miscellaneous Provisions Act, 1952;
(v)
Under
which deposits are accepted under Section 58A of the Companies Act, 1956;
(vi)
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;
(vii)
falling
within the meaning of Chit business as defined in clause (d) of section 2of the
Chit Fund Act, 1982; and
(viii)
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:-
(i)
Registered
as a company under the Companies Act, 1956;
(ii)
Memorandum
of Association specifies managing of CIS as one of its main objectives;
(iii)
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;
(iv)
Fit
and proper person for grant of such certificate;
(v)
Has
adequate infrastructure to enable it to operate CIS in accordance with the
provision of these regulations;
(vi)
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;
(vii)
At
least 50 percent of the directors are independent;
(viii)
No
person directly or indirectly related to the applicant entity has been refused
registration by SEBI under the Act; and
(ix)
At
least one director not subject to retirement is representative of the trustee.
For further details w.r.t.setting up of CIMC/CIS,
please click on the link below:
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