CS EXECUTIVE COLLECTIVE INVESTMENT SCHEMES (CIS) – SEBI

CS EXECUTIVE COLLECTIVE INVESTMENT SCHEMES (CIS) – SEBI

In general understanding, A Collective Investment Scheme (CIS) is typically an investment plan wherein assets/ funds of several individuals are pooled in together for investing into specific assets and for sharing the benefits or profits arising out of that investment as agreed initially during the pooling of such assets/ funds.

The aforesaid meaning is no different from the legislative meaning brought in by SEBI (Collective Investment Scheme) Regulations, 1999 (Scheme). In simple, words A CIS is any scheme or arrangement which pools funds from investors and involves a corpus amount of ₹100 crore or more. The Scheme mandates that every CIS has to compulsorily register itself with SEBI, file offer documents for its schemes and obtain a credit rating from a recognized rating agency, before it launches a scheme.

A collective investment scheme is a scheme that comprises a pool of assets that is managed by a collective investment scheme manager and is governed by the Collective Investment Schemes Regulations given by SEBI. Now, let’s get to know more about the need for the Collective Investment Scheme – SEBI, its regulatory framework, its obligations to perform, restrictions and submission of information and documents, Trustees and their obligations, etc.

NEED FOR COLLECTIVE INVESTMENT SCHEME – SEBI

The history of CIS dates back few decades. During 1990s there were various instances of collection of money by numerous agro-based and plantation companies promised around 18-30% returns, which eventually failed to provide any return on the investments including the repayment of principal amount.

Eventually, the Government of India decided that an appropriate regulatory framework for regulating entities which issue instruments like agro bonds, plantation bonds etc., will be put in place. The government decided that the schemes through which such instruments are issued would be treated as “Collective Investment Schemes” (CIS) coming under the provisions of the SEBI Act.

In 1997 SEBI, prohibited collective investment schemes from sponsoring any new scheme till the CIS regulations are notified. Subsequently, the notification of SEBI (Collective Investment Schemes) Regulations 1999 was issued on October 15, 1999.

SEBI CIS REGULATIONS – the Regulatory Framework

SEBI (Collective Investment Schemes) Regulations, 1999 defines Collective Investment Management Company to mean a company incorporated under the Companies Act, 2013 and registered with SEBI under these regulations, whose object is to organize, operate and manage a collective investment.

As indicated by Section 11AA of the SEBI Act, CIS is any plan or course of action, which fulfills the following conditions:

• The commitments or payments made by the investors, by whatever name called, are pooled and used exclusively for the reasons for the plan or course of action
• The commitments or payments are made to such plan or arrangement by the investors with a view to get benefits, income, produce or property, regardless of whether portable or resolute.
• The property, commitment or investment forming part of plan or course of action, regardless of whether recognizable or not, is managed on behalf of the investors;
• The investors don’t have day to day command over the administration and activity of the plan or course of action.

Pursuant to Securities Laws (Amendment) Act of 2014, any pooling of funds under any scheme or arrangement, which is not approved or registered with SEBI, which involves corpus amount of one hundred crore rupees or more will be deemed to be a collective investment scheme.

No person other than a Collective Investment Management Company which has obtained a certificate under the regulations should carry on or sponsor or launch a collective investment scheme.

OBLIGATIONS OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY (CIMC)

Every Collective Investment Management Company is vested with certain obligations, it should:

• be responsible for managing the funds or properties of the CIS on behalf of the unit holders (i.e.) the investors and take all reasonable steps and exercise due diligence to ensure that the CIS is managed in accordance with the provisions of these regulations, the offer document and the trust deed.

• be diligent in managing assets and funds of the CIS. It also responsible for the acts of commissions and omissions by its employees or the persons whose services have been availed by it

• remain liable to the unit holders for its acts of commission or omissions

• be incompetent to enter into any transaction with or through its associates, or their relatives relating to the CIS. However, in case the CIMC enters into any transactions relating to the CIS with any of its associates, a report to that effect shall immediately be sent to the trustee and to SEBI

• appoint registrar and share transfer agents and should also abide by their respective Code of Conducts

• give receipts for all monies received and report of the receipts and payments to SEBI, on monthly basis

• hold a meeting of Board of Directors to consider the affairs of CIS, at least twice in every three months and also ensures that its officers or employees do not make improper use of their position or information to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the CIS

• obtain adequate insurance against the properties of the CIS and comply with such guidelines, directives, circulars and instructions as may be issued by SEBI from time to time on the subject of Collective Investment Scheme i.e. as the end of March, June, September and December.

RESTRICTIONS OF CIMC

A Collective Investment Management Company should not-

• undertake any activity other that of managing the CIS
• act as trustee of any CIS
• launch any CIS for the purpose of investing in securities
• invest in any CIS floated by it.

Note: However, it has been provided that a CIMC may invest in its own CIS, if it makes a disclosure of its intention to invest in the offer document of the CIS, and does not charge any fees on its investment in that CIS.

Submission of Information and Documents

The Collective Investment Management Company should

• prepare quarterly reports of its activities and the status of compliance of SEBI regulations and submit the same to the trustees within one month of the expiry of each quarter
• file with the trustees and the SEBI, particulars of all its directors along with their interest in other companies within fifteen days of their appointment
• furnish a copy of the Balance Sheet, Profit and Loss Account; a copy of the summary of the yearly appraisal report and such other information as may be required, to the unit holders, to the SEBI and the trustees within two months from the closure of financial year.

TRUSTEES AND THEIR OBLIGATIONS

As per CIS Scheme,a scheme should be constituted in the form of a trust and the instrument of trust should be framed in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908 executed by the CIMC in favour of the trustees named in such an instrument. It can appoint a trustee under the deed to hold the assets of the scheme for the benefit of unit holders.

Rights and Obligations of the Trustee

• The Trustee so appointed has the right to obtain information as is considered necessary and to inspect the books of accounts and other records relating to the scheme. The trustee shall ensure that the CIMC has;
• the necessary office infrastructure
• appointed all key personnel including managers for the schemes and submitted their bio-data which shall contain the educational qualifications and past experience in the areas relevant for fulfilling the objectives of the schemes
• appointed auditors from the list of auditors approved by SEBI to audit the accounts of the scheme
• appointed a compliance officer to comply with the provisions of the Act and these regulations and to redress investor grievances
• appointed registrars to an issue and share transfer agent
• prepared a compliance manual and designed internal control mechanisms including internal audit systems
• taken adequate insurance for the assets of the scheme
• not given any undue or unfair advantage to any associates of the company or dealt with any of the associates in any manner detrimental to the interest of the unit holders
• operated the scheme in accordance with the provisions of the trust deed, these regulations and the offer document of the scheme(s)
• undertaken the activity of managing schemes only
• taken adequate steps to ensure that the interest of investors of one scheme are not compromised with the object of promoting the interest of investors of any other scheme
• minimum net worth on a continuous basis and shall inform the SEBI immediately of any shortfall
• Been diligent in empanelling the marketing agents and in monitoring their activities.

Accountability of Trustees

The trustee is accountable and responsible-

• forthwith take such remedial steps as are necessary and immediately inform the SEBI of the action taken where the trustee believes that the conduct of business of the scheme is not in accordance with the regulations
• act as the custodian of the funds and property of the respective schemes and should hold the same in trust for the benefit of the unit holders in accordance with these regulations and the provisions of trust deed
• For calculation of any income due to be paid to the scheme and also for any income received in the scheme to the unit holders
• Required to convene a meeting of the unit holders on requisition of SEBI or unit holders holding at least one-tenth of nominal value of the unit capital of any scheme or when any change in the fundamental attributes of any scheme which affects the interest of the unit holders is proposed to be carried out. However, no such change should be carried out unless the consent of unit holders holding at least three-fourths of nominal value of the unit capital of the scheme is obtained.

PERIODICAL REVIEW

The trustee should review on a quarterly basis i.e. by the end of March, June, September, and December every year that

• all activities carried out by the CIMC
• periodically all service contracts relating to registrars to an issue and share transfer agents and satisfy itself that such contracts are fair and reasonable in the interest of the unit holders
• investor complaints received and the redressal of the same

This periodical reviews ensures early detection of adversities and that net worth of CIMC is not deployed in a manner which is detrimental to interest of unit holders and also that the property of each scheme is clearly identifiable as scheme property and held separately from property of the CIMC.

SUGGESTED READING:

Introduction to Company Law CS Executive
Legal Framework Governing Company Secretaries

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