SEBI

Enhanced Net worth Criteria for CIS: SEBI

In order to strengthen the regulatory framework for the Collective Investment Schemes (CIS), the Securities and Exchange Board of India (SEBI) has enhanced net worth criteria for CIS and also the track record requirements for the entities that have been managing such entities.

Before the said notification from SEBI, there was no mandate in the CIS Rules regarding minimum number of investors or regarding the minimum and maximum subscription amount or holding from a single investor. However, with the introduction of these notifications, the government has enhanced the net worth criteria for CIS and many more changes have been introduced in the regulatory framework for CIS.  

This article shall discuss highlights of the notification brought by SEBI enhancing the net worth criteria for CIS.    

What Is A Collective Investment Scheme (CIS)?  

A Collective Investment Scheme is a pooled investment vehicle for the investors where their money is invested in assets and the revenue earned from such assets are shared among the investors as per their agreement. 

What is Collective Investment Management Company (CIMC)?  

The structure of the CIS comprises of a two tier structure where two entities are involved in managing the affairs of CIS. These two entities include (i) Collective Investment Management Company (CIMC) and (ii) Trustees. The CIMC is the entity that created to manage, organise and operate the CIS and takes decisions where to make the investments. A trustee is appointed as the guardian of the said assets which are purchased on the decisions of the CIMC.

Highlights of the Notification to Enhance Net worth Criteria for CIS   

The following changes have been introduced in the SEBI’s notification to strengthen the regulatory framework for CIS:

Minimum no. of investors: The new regulatory framework has mandated a minimum of 20 investors in a CIS.

Minimum subscription for CIS: SEBI has set a minimum subscription amount of Rupees 20 crores for each CIS.

Cap on Cross shareholding in CIS: SEBI has put a cap on the cross-shareholding in a Collective Investment Management Company (CIMC) up to a maximum of 10 per cent in order to avoid the chances of conflict of interest.

Eligibility Criteria: According to SEBI,

1. The applicant or its promoters need to have a sound track record and carry the general reputation of integrity and fairness in all their business transactions;
2. The applicant should have been carrying on the business in the relevant field in which CIS scheme are proposed to launched for a period of at least 5 years;
3. The net worth of the applicant should be positive in all the immediately preceding 5 years; and the applicant should have profits in at least three out of those five years.

Enhanced net worth criteria for CIS: SEBI has mandated that CIMCs are required to have a minimum net worth criteria of not less than Rupees 50 crores. The previous minimum net worth requirement was Rupees 5 crores. It must be noted that applicant should have the minimum requirement of Rupees 50 crores on a CONTINUOUS basis provided the applicant does not have a net worth of more than Rupees 100 crores till it has profits for 5 consecutive years, in case the requirement related to profit is not fulfilled.

Before this notification, there was no such requirement related to relevant business, net worth or profitability. Since there was no limit on the minimum number of investors, retail investors have been made the primary target base for CIS.

According to the new framework floated by SEBI, each CIS needs to have a minimum subscription amount of Rupees 20 crores and each CIS needs to have a minimum of 20 investors. Additionally, no single investor can hold more than 25 percent of the total assets under the management of the scheme.

Further, restrictions have also been imposed on the CIMC where a CIMC and its group/ associates and its shareholders’ shareholding in a scheme cannot exceed more than 10 percent or representation on the board of the rival CIMC. These restrictions have been put in place in order to avoid conflict of interest in future.

Investment to be aligned with the interests of CIS: The mandatory investment from CIMC and its designated employees in the CIS should be aligned with the interests of the CIS. 

Restrictions on subscription: According to SEBI^[1], CIS will not be open for more than a period of 15 days for the purpose of subscription. However, the scheme can be kept open for a further period of 15 days subject to a public notice issued by the CIMC before the expiry of 15 days. At present the limit is for 90 days.

Rationalisation of fees: SEBI has also made changes towards rationalisation of fees and expenses to be charges for the scheme.

Time limit for allotment of unit certificates: the regulator has also put a time for the allotment of units against acceptance of application. The regulator says the allotment should be as soon as possible but not later than 5 working days from the date of closure of the initial subscription list. 

In order to give effect to the above changes, SEBI has made necessary amendments to the CIS Regulations which have not gone under amendment. The CIS Rules were first notified in 1999 and have not been reviewed since then. 

Conclusion 

The above changes related to enhanced net worth criteria for CIS have been brought after a proposal has been approved by SEBI in its board meeting in March. These rules are aimed at strengthening the regulatory framework for the Collective Investment Schemes as well as to empower the Collective Investment Management Companies to effectively discharge their responsibilities towards their investors.     

Read Our Article: Collective Investment Schemes: An Overview