Collective Investment Schemes: An Overview

Rajdeep Saini

19 Jan, 2021

A Collective Investment Scheme (CIS) is a system where a number of individuals mutually pool their money for the purpose of inventing it in a particular asset. Further, when profits are arising out of that particular investment, it gets shared between the investors as per the finalized agreement, prior to the act. This collective investment scheme is prescribed under Section 11AA of the Securities and Exchange Board of India Act of 1992.

Definition of Collective Investment Scheme (CIS)

A Collective Investment Scheme (CIS) means that any course of action or a plan which satisfies the conditions mentioned in Section 11AA of the SEBI Act^[1] comes under the definition of CIS. It further provides arrangements and plans offered by any company in which payments or the contribution are made and pooled by the group of investors and further utilize it with a view to receiving profits. It is further supervised on behalf of the Investors in a CIS.

SEBI (Collective Investment Schemes) Regulation, 1999

SEBI regulation on the collective investment scheme illustrates a Collective Investment Management Company which means a corporation incorporated under the Companies Act 2013 and also enrolled with the Securities Exchange Board of India, whose purpose is to manage, deal, work, and arrange CIS.

No Company, other than the Collective Investment Management Company which has obtained all the necessary certifications under the guidelines should only be allowed to support and continue the collective investment scheme.

The Collective Investment Scheme will incorporate:

1. Association of money or money worth which will also consist of bank deposits.
2. Property acquired either indirectly or directly, with the return of, the association of cash mention in point number one.
3. Income generated, either directly or indirectly, from the association of cash or by the acquiring of property in point number one and two.

Participants in the Collective Investment Scheme

The following are eligible to become a participant of collective investment schemes:

Investment Management Company for Collective Investment Schemes              

The Collective management corporations are the companies that are incorporated under the companies’ act of 1956 and are further registered with SEBI’s regulation on the CIS of 1999. The primary objective of the regulation was to manage, operate, and organize these collective investment schemes in India.

Fund Manager under the Collective Investment Scheme

A Fund manager is an expert and qualified person whose duty is to manage the investment resolution of the collective investment schemes. The person suggests trading valuation, reconciliations, and also the unit value of the schemes.

Shareholders of Collective Investment Scheme

A Shareholder is an individual who invests funds in the collective investment scheme. There are also known as the backbone of this scheme. These individuals have the primary right to that particular asset which is engaged in the scheme

The Trustee under the Collective Investment Scheme

A trustee is an individual whose main purpose is to hold the CIS in the trust to give its advantages to the unit holder is called Trustee. It is the duty of the trustee to work in accordance with the relevant regulation and ensure that rules and regulations have complied. The CIS is established as trust is respect to the CIS Regulations of 1999. A collective investment company initiates this support for the trustees named in the instrument. Furthermore, a business might appoint a trustee for the benefit of its investors and holds the assets of collective investment schemes.

Schemes do not constitute as a Collective Investment Scheme (CIS)

These following schemes are not treated as CIS:

• Any Scheme offered or made by any co-operative society or any registered society or deemed to be registered with respect to the law relating to the co-operative society.
• Any arrangements or schemes where a non-banking financial company accepts the deposits.
• Any arrangements or scheme where the insurance companies begin the contract of insurance.
• Any schemes such as insurance schemes or pension Schemes under Miscellaneous Provision Act and Employees Provident Funds 1952.
• Any Scheme which accepts the deposits under section 58A of the Companies Act, 1956
• Any arrangement or scheme falling under the Chit fund business as defined under section 3 of Chit fund act, 1982.
• Any arrangement or scheme where the deposits are collected by a company declared itself as a Nidhi Company.
• Any arrangements or schemes where contributions are made in the mutual fund in the nature of subscriptions.

Eligibility for collective Investment scheme Registration

The following are the qualified standard to register for CIS:

• An individual has to register its company under the Companies Act of 1956.
• The applicant must specify the objective of the management of collective investment scheme in the memorandum.
• The applicant must be proper and fit to get the registration certificate.
• The applicant shall have a net worth not less than Rs. 5 Crores
• The applicant must have adequate infrastructure to perform the duties to operate in collective investment schemes with respect to the rules and regulations.
• Directors in the collective investment companies should be a minimum of 50% who are independent and not associated with the persons who have control over the respected collective investment management company.
• The major personnel and the directors of the claimant shall consist of persons with high integrity, honesty and with the adequate personal and professional experience.
• No person shall be connected with applicant, who has declined the registration by the respective board in past.

Conclusion

Read our article:Redressal Mechanism and Penalty Provisions against Collective Investment Management Company (CIMC)