Principles for the Regulation of Collective Investment Schemes

Swetha Dhinesh

14 Mar, 2023

We have heard about how one person can work with others in a group to improve things for everyone. The Collective Investment Schemes are the same. The Collective Investment Schemes Regulations issued by the Securities & Exchange Board of India govern collective investment schemes, which are a plan of action that consists of a pool of assets that the collective scheme manager manages. 

Therefore, these are the techniques that the Securities & Exchange Board of India is offering for the protection of investors. As a result, it is a collaborative effort in which a number of individuals pool their resources to invest in a specific asset and divide the profits obtained from it.

Collective Investment Scheme

A collective investment scheme is defined as “any scheme or arrangement made or offered by any company where the contributions or payments made by investors are pooled together with the objective of receiving income, profits, productivity, or property and is managed on behalf of the investors” (Section 11AA(2) of the Securities and Exchange Board of India (SEBI) Act, 1992^[1]). CIS is an arrangement or plan that must meet the following requirements:

• People combine their resources to invest in a specific asset or collection of assets.
• Earning returns on the money invested is the main objective.
• The agreement that the investors signed when they made the investment determines how the returns are split among them.
• Investors do not have any authority over the scheme’s management or functioning.

What is a collective investment management company?

A Collective Investment Management Company is a business that was established in accordance with the Companies Act of 1956 and registered with SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations of 1999 with the purpose of organising, operating and managing a Collective Investment Scheme.

Participants in collective investment schemes 

Collective Investment Management Company – A business registered under the 2013 Companies Act (or earlier, the Companies Act, 1956). Under the SEBI (Collective Investment Schemes) Regulations of 1999, the company is registered. The creation, administration, and management of a Collective Investment scheme are the main objectives.

Trustee – The Collective Investment Scheme (CIS) must be established as a Trust in accordance with the Collective Investment Scheme Regulations (CIS) of 1999. The Trustee follows the established rules and regulations, works for the interest of the unit holders, protects the assets, and makes sure that it remains compliant at all times. The Trustee who is in charge of the CIS’s property is chosen by the Collective Investment Management Company.

Fund Manager –  As implied by the title, the fund manager is in charge of managing the CIS’s funds as well as all investment decisions. The following tasks are also carried out by the fund manager:

• The unit price of the scheme.
• Assessment of the scheme.
• Managing the portfolio of the scheme.

Shareholder – These people, sometimes referred to as unit holders, are the ones that pool their funds into the plan. They consequently have the right to receive the investment returns as well as the right to the asset to the amount of their share and in accordance with the contract they signed when they joined the scheme.

Legal and Regulatory Framework

• Establishing, operating, and closing down a CIS in India is a regulated activity that must be carried out as per the relevant legislation, rules, and regulations. The government made the decision to consider the plans through which these instruments are issued as “Collective Investment Schemes” covered by the SEBI Act.

• The SEBI Act’s notified the provisions of section 12(1)(B), which forbids the sponsorship of Collective Investment Schemes without first obtaining a certificate of registration from the Board in accordance with the regulations. It is forbidden for anybody to continue, sponsor, or create a collective investment scheme other than a Collective Investment Management Company that has obtained a registration certificate under the CIS Regulation.

• To boost confidence and ensure greater openness in the scheme’s functioning, SEBI has also set forth additional requirements. A Collective Investment Management Company is required to disclose important information to its shareholders since it is important to keep them informed on any situation that could negatively affect their investments. The regulations mandate that no director of such a business may be appointed without the prior consent of the company’s trustee, thereby enhancing the trust’s level of control.

• Furthermore, it is legally forbidden to offer guaranteed or certain returns in order to prevent these businesses from engaging in fraudulent operations. According to the limitations on the company’s business activities, a collective investment management company is only allowed to manage collective investment schemes or serve as a trustee for other collective investment schemes.

Penal provisions for the violation of regulation

A registered collective investment management business may face action in the form of certificate suspension or cancellation if certain regulations are violated by the entity. In addition, SEBI may begin criminal proceedings under Section 24 of the SEBI Act in the interests of the securities market and “investors,” in addition to issuing directives like

• Prohibiting the person in question from collecting any money from investors or starting any scheme.
• Requiring the person in question to dispose of the scheme’s assets in a way that may be specified in the directions.
• Requiring the person in question to dispose of the scheme’s assets in a manner that may be specified in the directions. 
• Requiring the person in question to return any funds or assets to the concerned investors along with the requirement.
• Forbidding the subject from participating in or having access to the capital market for a predetermined amount of time.

Eligibility to register as a collective investment management company

• A corporation that is registered under the Companies Act of 1956.
• The management and operation of the Collective Investment Scheme must be listed as one of the company’s primary objectives in its memorandum of association.
• There must be a minimum net worth of five crore rupees. However, the network has to be at least 3 crore rupees at the time of making the application, which should be not less than five crore rupees within 3 years from the date of permission of registration.
• The necessary infrastructure is in place to operate the collective insurance plan in accordance with the relevant regulations.
• The individuals who hold the position of director are individuals of integrity, honesty, and stature who have a wealth of experience in the relevant fields. However, it is the fact that they have never been found guilty of any crime involving moral turpitude, as well as any other crime or legal violation.
• The Collective Investment Management Company should have at least 50% independent directors.
• The SEBI has never in the past denied registration to anyone who is related in any way.
• The required documentation and the required payments must be submitted with the Form A application for permission to register with the SEBI.

Conclusion

The Collective Investment scheme is a method of pooling resources and investing them in a particular asset so that every group member can benefit from its return or profits. It comes with numerous responsibilities and legal requirements that are overseen by the Securities Exchange Board of India. In this industry, proper corporate governance is also required.

Also Read:
Collective Investment Schemes: An Overview
Redressal Mechanism and Penalty Provisions against Collective Investment Management Company (CIMC)