INVESTMENT LAW

COLLECTIVE INVESTMENT SCHEME (CIS)

Adyasha Nanda

BA-LLB (A)

3rd Year, 6th Semester

1783307
ABSTRACT

The term “collective investment scheme” can be defined as a vehicle, which permits the pooling
of assets by a group of investors with a common investment objective. The objective is to invest
the money in securities or other assets, with the aim of generating and sharing a specific type of
return, such as capital growth or income. In India a collective investment scheme is a trust based
scheme that comprises a pool of assets that is managed by a collective investment scheme
manager and is regulated by the Collective Investment Scheme Regulations promulgated and
regulated by Securities and Exchange Board of India (SEBI). Collective Investment Schemes
(CIS) are a popular form of investment, and they are accessible to all. Each investor has a
proportional stake in the Collective Investment Scheme portfolio based on how much money he
or she contributed. The SEBI who is also known as investor protector plays an important role in
regulating CIS.

This paper attempts to give a brief idea on the working of the collective investment schemes.
The chapter outlines the history of origin of the first collective investment and highlights the
purposes, functioning, challenges, risks and general awareness of collective investment schemes.
The paper also discusses the difference between CIS, Mutual Fund and Chit Fund. The paper
also highlights some of the latest cases involving CIS.

Keywords: Collective Investment Schemes, SEBI, Company Law, SEBI Act of 1992, Investor
Protector.
CHAPTERISATION

1. Introduction

1.1 History & Origin of Collective Investment Scheme

2. CIS Participants
3. Purpose and Objective of the Scheme
4. Functioning of CIS
5. Opportunities, Risk and General Awareness about CIS
6. SEBI Regulations
7. Procedure to Register CIS
8. Difference between CIS, Chit Fund and Mutual Fund
9. Case Laws
9.1 Saradha Scam
9.2 Rose Valley Real Estate Matter
10. Conclusion
1. INTRODUCTION

Collective Investment Scheme (CIS) is governed by the Securities and Exchange Board of India
(Collective Investment Schemes) Regulations, 1999 (CIS Regulations) and Securities and
Exchange Board of India Act, 1992 (SEBI Act).

According to SEBI, a Collective Investment Scheme (CIS) is any scheme or arrangement, which
satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act. Any
scheme or arrangement made or offered by any company under which the contributions, or
payments made by the investors, are pooled and utilised with a view to receive profits, income,
produce or property, and is managed on behalf of the investors is a CIS. Investors do not have
day to day control over the management and operation of such scheme or arrangement.

Therefore, a Collective Investment Scheme is an investment scheme or arrangement where

various individuals come together and pool their money in order to invest their whole fund
collection in a particular asset. The returns and profits arising from this investment would be
shared as per the agreement finalized amongst the investors prior to the act.

The following do not constitute a collective investment scheme:

i. any scheme or arrangement made or offered by a co-operative society or a society

being a society registered or deemed to be registered under any law relating to co-
operative societies for the time being in force in any State;
ii. any scheme or arrangement under which deposits are accepted by non-banking
financial companies
iii. any scheme or arrangement being a contract of insurance to which the Insurance Act,
applies
iv. any scheme or arrangement providing for any Scheme, Pension Scheme or the
Insurance Scheme framed under the Employees Provident Fund and Miscellaneous
Provisions Act, 1952
v. any scheme or arrangement under which deposits are accepted under section 58A of
the Companies Act, 1956 (1 of 1956)
vi. any scheme or arrangement 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 (1 of 1956)
vii. any scheme or arrangement falling within the meaning of Chit business as defined in
clause (d) of section 2of the Chit Fund Act, 1982 (40 of 1982)
viii. any scheme or arrangement under which contributions made are in the nature of
subscription to a mutual fund
1.1 History and Origin in India

In 1990s many agro- based and plantation companies in India started pooling money from the
public promising them high return of about 18- 30% but most of them defaulted in payment of
promised return and subsequently vanished from the market, leaving the gullible investors at a
loss. Therefore, to protect the interest of investors vide press release dated 18 th November, 1997
SEBI prohibited collective investment schemes from sponsoring any new scheme till the CIS
Regulations are notified. The press releases further stated that instruments such as agro bonds,
plantation bonds would be treated as CIS coming under the SEBI Act, 1992. All the companies
having such activities were required to file all prescribed information with SEBI relating to the
existing Scheme(s). Moreover, general public was also informed that no person can sponsor or
cause to be sponsored any new collective investment scheme and thereafter raise further funds.
Meanwhile, a committee was formed under Dr. S.A. Dave to examine and finalize the draft
regulations for CISs. The committee submitted its report on 5th April 1999. SEBI (Collective
Investment Scheme) Regulation was notified on October 15, 1999.

2. CIS Participants1

1
SEBI Act, 1992, Sec 11AA
Collective Investment Management Company
A Collective Investment Management Company is a company incorporated under the provisions
of the Companies Act and registered with SEBI under the SEBI (Collective Investment
Schemes) Regulations, 1999, whose object is to organise, operate and manage a Collective
Investment Scheme.

Trust

A collective investment scheme shall be constituted in the form of a trust and the instrument of
trust shall be in the form of a deed duly registered under the provisions of the Indian Registration
Act, 1908 (16 of 1908) executed by the Collective Investment Management Company in favour
of the trustees named in such an instrument.

Trustee
A person who holds the property of the collective investment scheme in trust for the benefit of
the unit holders, in accordance with SEBI (Collective Investment Scheme) Regulations, 1999.
Trustee is responsible to safeguard the assets and ensure compliance with the Laws & Rules.
Trustee is to be appointed by the Collective Investment Management Company

Fund manager

A fund manager or investment manager who is a professionally qualified person and manages
the investment decisions of the scheme and also provides the trading, reconciliations, valuation
and unit pricing of the scheme.

The Shareholders 

The Shareholders or unit holders who contribute the money in the scheme and are the owner of
the assets and associated income generated by the scheme.

3. Purpose and Objective of the Scheme

Collective Investment Schemes work differently around the world and there are many ways in
which small investors can now be accommodated through the pooling of their resources. Earlier,
the only thing to be considered for the CIS was enabling small investors to enter into particular
capital market and get benefited. With the passage of time there have been better and new
reasons & objectives to evolve collective investment schemes. Now, around the world, CIS are
introduced for a particular region, for a particular industrial segment, for a whole industry or
investment in performing stock or indexes. There have been different mechanism derived
through which these schemes have become easily accessible as well as advantageous to
everyone.

4. Functioning of CIS
 Generally the responsibility of managing the funds that have been pooled through the
different collective schemes is given to professional people who know their jobs very well.
These include the Manager(s) responsible for investment decision and compliances and their
support staff. The Manager and support Staffs in turn are supervised & regulated by the
Trustees and Board of Directors.

5. Opportunities, Risk and General Awareness about CIS

The potential of Collective Investment Scheme is enormous. Collective Investment Schemes

provide an opportunity to ordinary people to invest their meager savings in the Scheme and
reap the benefit of collective investments.

With the opening of economy in India, the CIS has no more remain an investment
opportunity in Equity/financial instrument but in various other business opportunities.

Having said that the CIS is also fraught with risk and uncertainties. The Scheme is managed
by some professionals and their decisions can make or break the entire Scheme. The
investors do not have any access or control to the day to day functioning of the Company and
primarily depends on the Managers for updates. Further, even though CIS are mandatorily
required to be registered with SEBI, however, in India many such schemes are being floated
& in operation without being registered. Such Schemes offer lucrative returns to the gullible
investors and very often the Schemes fail to deliver the promised returns resulting in losses to
the investors.

6. SEBI Regulation in Brief

It is mandatory for every CIS to be registered as per the CIS regulation. It has been mandated
that no individual other than a Collective Investment Management Company which has obtained
a registration certificate under the CIS Regulation shall carry on, sponsor or launch a collective
investment scheme. A collective investment management company must initiate it through a
registered trust by categorically stating that a collective investment scheme shall be constituted
in the form of a trust.

SEBI has further prescribed other conditions to instill confidence in the contributor and to
maintain more transparency in the operations of the scheme. It obligates a Collective Investment
Management Company to disclose essential data to its shareholders as it is vital to keep them
informed on every matter which may have a negative impact on their investments. The
regulations further deepen the control of the trust by mandating that no appointment of a director
of such a company shall be made without the prior approval of the company’s trustee.

Furthermore, to curb these companies from indulging in fraudulent activities, it has been strictly
prohibited to provide guaranteed or assured returns. The restrictions on business activities of a
Collective Investment Management Company prescribes that such a company shall not
undertake any activity other than that of managing collective investment schemes or to act as a
trustee for any other collective investment schemes.

A CIMC cannot invest the funds for the purpose other than the objective of the Scheme as
disclosed in the offer document. Furthermore, the CIMC cannot invest the corpus of a scheme in
other scheme nor transfer funds from one Scheme to another activity.

SEBI has also prescribed detailed procedure for registration, launching, maintenance & audit of
accounts, management and winding up of the Scheme.

Besides the SEBI (CIS) Regulations and Securities and Exchange Board of India Act, 1992, the
scheme, the Trustee Company and the collective investment management company (CIMS) are
organized and supervised in India principally under the following Laws/regulations

(a) The Companies Act, 2013

(b) The Indian Trust Act, 1882
(c) The Indian registration Act, 1908
(d) Guidelines & Notifications issued by Reserve Bank of India.

7. Procedure to Register in CIS in Brief

 Collective Investment Management Company which has obtained a certificate from SEBI
(the Board) under these regulations shall only be eligible to carry on or sponsor or launch a
collective investment scheme.
 Therefore, anyone planning to start the activity of a Collective Investment Management
company shall file an application to the Board for registration in prescribed Form A along
with a prescribed document and a non-refundable fee as prescribed in schedule 11 of the
Regulations.
 After receiving the application, the Board may reject the incomplete one or the one which
does not conform to the requirements specified in respective regulations. Before rejecting
any such application, an opportunity shall be given to removing all discrepancies within one
month. The time period can also be extended if sufficient cause is shown to the Board or the
Board may also even direct the applicant to furnish such further information or clarification
as required or even direct the person to appear in person before the Board in connection with
the grant of a certificate.
 The Board shall take in view whether the eligibility criteria of the applicant is as per
regulations as prescribed below before granting the certificate:
 Applicant is registered as a company under the Companies Act, 1956 or Companies Act 2013
 Memorandum of Association specified main object as managing collective investment
scheme:
 net worth of company should not be less than INR Five Crores;
 fit and proper person for the grant of such certificate;
 Applicant should have adequate   infrastructure to   enable   it   to   operate   collective
investment scheme in accordance with the provision of these regulations;
 the directors or key personnel should be the persons of honesty and integrity having adequate
professional experience in related field and have not been convicted for an offense;
 at least fifty percent of the directors of such Company shall consist of persons who are
independent and are not directly or indirectly associated with the persons who have control
over the Collective Investment Management Company;
 Once the Board is satisfied that applicant complies the above eligibility criteria then the
applicant is intimated to pay the requisite fees. After receiving of the requisite fees, the Board
grants the certificate of incorporation in Form B.

8. Difference between CIS, Chit Fund and Mutual Fund

Mutual Fund Chit Fund Collective Investment

Scheme
Money is raised by It is a type of saving Money is raised by
selling the units to scheme wherein the selling the units to
general public under money is contributed general public under
any scheme or by individuals not any scheme or
arrangement with the with the purpose of arrangement which
objective of investing investing rather for involves pooling of
in Financial the purpose of saving. funds which is
instruments. The fund is utilized for the
withdrawn by any one purpose of the scheme
of the contributor at and is managed on
the discounted rate. behalf of the investors
It targets retail It targets low to It targets retail
investors however a middle income group Investors
high percentage of people for the purpose
of depositing in
investment is from
saving scheme.
non -retail investors.
Entry size is low Entry size is low Entry size is often low

CASE LAWS

 SARADHA SCAM

The Saradha groups of companies were incorporated in the year 2006. In 2008, at the time of
economic slowdown when the government and regulatory authorities were engaged in
protecting the economy from external factors, the group expanded its activities and also
 started collecting money from the Public. It collected around 30,000 crores from people
spreading from West Bengal to Assam. In 2009 it formed a consortium of more than 200
companies.

The Group raised funds from thousands of investors by promising high returns which were
much more than returns in other modes of investments. It had plans with investment as low
as Rs.100 per month to plans with investment as high as Rs 1 lakh. All the plans had different
interest rates attached to it. The average rate of return was between 12-24%. In the beginning
the company collected money by issued debentures and bonds however after 2009 it the
adopted the method of collective investment scheme for raising funds. Saradha Group in
order to build brand image appointed Peerless General Investment and Finance co. The
Saradha Group paid commission as high as 20% and in some cases even to the tune of 40%
of the total fund collected by the agents. This lured the agents to attract more and more
people for Investment.

The company without obtaining permission from SEBI had collected money from more than
50 investors. SEBI issued notice to the company challenging its activities as it violated the
provisions of Companies’ Act which mandatorily require a company raising funds through
public issues to issue prospectus and get permission of the company.

SEBI received information from the Economic Offence Investigation Cell; West Bengal on
23rd April 2010 stating that Saradha group of companies is illegally raising funds especially
from the people in rural areas of West Bengal in violation of SEBI Act and regulations made
there under. In 2011 SEBI issued letter to Government of West Bengal warning it regarding
chit fund business of this group.

On 23rd April 2013, SEBI passed following orders against Saradha Group2

1) Restrainment of Directors of the companies from any access to capital market and also
prohibition on any dealing with securities.
2) Winding up of collective investment schemes and refund of money to the investors.
3) It also initiated prosecution proceedings under section 24 of SEBI act against the present
directors as well as those who were directors at the time illegal funds were mobilized by
the company.
4) It made a reference to Local police to resister a case for fraud, cheating,
misappropriation of public funds and criminal breach of trust against Saradha Reality.

In response to PIL filed by two of the investors of Saradha, Supreme Court has ordered
transfer of investigation from state police Agency to CBI. The court has also ordered the
investigation of other chit funds.3 The investigation is still going on. Many of the political
connections have also been established during the investigation

2
SEBI Order in the matter of Saradha Realty India Ltd.,23rd April,2013,available at http://www.sebi.gov.in/
3
SubrataChattoraj v. Union of India and Ors., 2014 (5) SCJ 586
 ROSE VALLEY GROUP

The Supreme Court of India in 2014 ordered the investigating agencies to examine other
companies which were involved in raising of funds from general public4. The Rose valley Scam
was exposed in this investigation. This group had solicited money from millions of investors by
launching illegal collective investment schemes. It is assumed that this scandal is one of the
biggest financial scam related to Ponzi schemes. This has shaken the very foundation of almost
sixty million houses in India. Reports say that the scam is much more enormous than Saradha
scam. The Rose valley Group was basically started by its ex-Chairman Kajal Kundu in 1990’s.
He started with incorporation of Rose valley hotels and entertainment ltd. Slowly and gradually
he expanded the business to real estate, media, entertainment and then in 2002 to agency of LIC.
It took almost 18 years’ time span to build the empire of Rose valley. The Rose Valley group
pooled money from the investors by offering exorbitant rate of returns. It solicited money from
thousands of investors by luring them with high return rates up to 21% of their investments.
These funds were collected as an installment towards purchase of property or holiday packages.

SEBI received a letter from the Directorate of economic offence investigation cell, West Bengal
on 7th December 2009 stating that the company seems to be violating SEBI Regulations. It again
received a complaint from Directorate of Income Tax on 27th July, 2011 disclosing that the rose
valley real estate is raising funds from the public without authorized permission of SEBI. It also
received complaints from other regulatory bodies as well as many investors regarding non-
Payment of dues, after which it started investigation into the matter. On Jan 3rd, 2011 SEBI
passed interim order against rose valley real estate prohibiting it to collect any money under the
old as well as new schemes as the same is in violation of Regulation 3 of CIS regulation
1999.Meanwhile it also received complaint from ADG of Police Assam stating that Rose Valley
real estate and rose valley hotels have together solicited Rs 1006.70 Crores from the public until
Feb, 2012.99 Rose Valley Real Estate had been violating the interim order passed by SEBI.

CBI and the Enforcement Directorate are separately investigating the Rose valley case. Gautam
Kundu, the Director of Rose Valley Group and two of the Trinamool congress leaders have been
arrested for alleged connection with the Scandal. Both CBI and ED have filed charge sheets for
cheating, fraud and criminal misappropriation of funds against the directors and other persons
involved in the case. The investigation is still going on. The CIS Regulations were brought in
force to regulate those financial entities which pooled money from the gullible investors,
tempting them by offering high interest rates and excessive publicity through agents. The basic
objective was to make an umbrella legislation to regulate all such pooled investments which
were at that period unregulated. However recent scams are evident that there still are many
entities engaged in financial activities which are able to escape the regulators. The SEBI in the
last three years, from 2013-2016, has passed interim orders against 72 entities who were
engaged in soliciting funds from public in the manner of collective investment schemes without
obtaining registration from SEBI. The Final orders were passed against 23 entities. So far only
one entity has been registered as collective investment Management Company with SEBI and
abundance of them have been operating collective investment schemes without any registration.
4
Id
CONCLUSION

Pooling of funds, through collective investment schemes, is one of the effective ways to
channelize small savings of investors from unproductive arenas to productive arenas. Thus in
order to protect interest of investors and build confidence of public in such funds, SEBI
formulated CIS Regulations in 1999. It was an initiative taken by the Government of India to
curb the illegal money pooling activities. The basic objective behind such a regulation was to
form an umbrella legislation so as to regulate all the unregulated investment funds. However,
despite the above, illegal money pooling schemes are operating in abundance. There has not been
much decline in the illegitimate pooled funds even after coming into force of these Regulations.
Recently only SEBI has issued a list of 91 entities cautioning investors from not investing in the
Scheme of those entities. These entities are debarred by an order of SEBI from collecting funds
from public by floating any scheme in nature of collective investment schemes. Numerous
families have already lost all their life savings in such fraudulent schemes. These statistics itself
are evident of the inefficacy of CIS Regulations in curbing illegal money pooling schemes. There
are certain grey areas in the Regulations which allow such dubious entities to flourish in Indian
financial market. It’s high time that the Governments along with regulatory authorities fix the
loopholes and deficiencies in existing regulations.

REFERRENCE

1) https://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846814724.pdf
2) https://www.indiafilings.com/learn/collective-investment-schemes/
3) https://www.mondaq.com/india/CorporateCommercial-Law/531736/Collective-Investment-
Schemes-Transitional-Trauma
4) https://enterslice.com/collective-investment-schemes-in-india
5) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3098029