Introduction: Understanding Collective Investment Schemes (CIS) involves delving into pooled funds, legal frameworks, and SEBI regulations. This comprehensive guide explores CIS operations, judicial backing, certification processes, and the consequences of rule violations.
COLLECTIVE INVESTMENT SCHEMES:-
A Collective Investment Scheme (CIS) in law refers to a pooled investment fund where investors contribute funds for a common investment objective. These funds are managed by a professional fund manager or management company. The participants in the scheme share the profits or losses in proportion to their investments. The legal framework surrounding CIS varies by jurisdiction, but typically involves regulatory oversight to ensure investor protection and market integrity. Judicial support may be sought in cases where legal issues or disputes arise related to the operation or management of the collective investment scheme. A Collective investment scheme is any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act. Collective Investment Schemes falls under the purview of the SEBI. SEBI regulates it through the SEBI Act, 1992 and CIS Regulation, 1999. There are four main participants in the scheme- Collective Investment Management Company, Trustee, Shareholder and Fund Manager. As the schemes are included in securities, hence SEBI automatically becomes the regulatory body who will regulate these collective investment schemes. A registered Collective Investment Management Company is eligible to raise funds from the public by launching schemes. Such schemes have to be compulsorily credit rated as well as appraised by an appraising agency.
COLLECTIVE INVESTMENT SCHEME CAN BE RUN BY COMPANY NOT TRUST
A Collective Investment Scheme can be operated by a company rather than a trust, providing a flexible structure for pooling funds from multiple investors. That the said lines was legally framed by the Supreme Court in case of [1]OSIANS CONNOISSEURS OF ART PVT. LTD. VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA, Where it was held by the court that, the legal framework stipulates that a collective investment scheme, as defined, can only be established in the form of a collective investment management company. This requirement is evident in Section 11AA, which specifically uses the term “company” in Sub-section (2) instead of “person.” The legislation, enacted on 22.02.2000, was prompted by the existence of CIS Regulations from 15.10.1999. Consequently, it is apparent that the Appellants’ operation of a collective investment scheme through a private Trust contradicts the statutory scheme and is deemed illegal in accordance with the law and CIS Regulations.
OBTAINING CERTIFICATE FOR RUINING COLLECTIVE INVESTMENT SCHEME
Obtaining a certificate for sabotaging a collective investment scheme involves engaging in illicit activities that undermine the integrity of the financial system. This unethical pursuit can lead to severe legal consequences and financial penalties. The Supreme Court legally formulated the aforementioned statements in the case of [2]SECURITIES AND EXCHANGE BOARD OF INDIA VERSUS GAURAV VARSHNEY, Where An examination of the conclusions articulated in the preceding two paragraphs, where we have expounded on the interpretation of Section 12(1B) of the SEBI Act, indicates that individuals falling under the substantive provision (non-proviso category) were authorized to initiate activities related to collective investment only upon acquiring a registration certificate. On the other hand, individuals falling under the proviso category (those already engaged in such activities) were allowed to persist in their activities related to collective investment. However, after the pertinent Regulations were formulated, they were required to obtain a registration certificate to continue these activities.
SEBI RULE IN VIOLATIONS OF COLLECTIVE INVESTMENT SCHEMES
In cases of SEBI rule breaches concerning Collective Investment Schemes, authorities have the option to utilize corrective actions and penalties as outlined in section 19 of the Securities and Exchange Board of India Act, 1992, along with sections 11 and 11B and regulations 65 and 73 of the SEBI (Collective Investment Schemes) Regulations 1999. The objective is to enforce compliance and protect the investors’ interests. The timely implementation of enforcement measures and clear communication are crucial aspects in handling such violations, promoting market integrity, and instilling confidence among investors. That Securities appellate tribunal Mumbai in case of [3]ALCHEMIST INFRA REALTY VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA set an example to restrain the fraud in collective investment scheme such as: Alchemist Infra Realty Limited is barred from collecting funds or initiating collective investment schemes. The company and its directors must conclude existing schemes within three months, refunding collected funds and due returns to investors. Non-compliance triggers the following actions:
A. SEBI will launch prosecution and adjudication proceedings against Alchemist Infra Realty and its directors.
B. SEBI will involve State Government/Local Police in civil/criminal cases for offenses like fraud, cheating, criminal breach of trust, and misappropriation.
C. SEBI will refer the case to the Ministry of Corporate Affairs for Alchemist Infra Realty’s winding-up process.
D. The company and its directors are barred from the securities market until schemes are wound up, and all funds are refunded to investors with due returns.
That the same was also followed by the Supreme Court and penalties was pronounced in the same manner in case of [4]SECURITIES AND EXCHANGE BOARD OF INDIA VERSUS GAURAV VARSHNEY That Regarding Regulation 73(1) of the mentioned Regulations, if an established collective investment scheme neglects to apply for registration with SEBI, it must conclude the current schemes and reimburse the funds obtained from investors. Additionally, as per Regulation 74 of the same Regulations, a collective investment scheme that chooses not to seek provisional registration from SEBI must create a repayment plan and execute the repayment to existing investors following the guidelines outlined in Regulation 73.
INVESTMENTS WHICH WILL BE ENCOMPASSED BY THE SCOPE OF A COLLECTIVE INVESTMENT SCHEME
The collective investment scheme broadly includes a diverse range of investments that pool together funds from multiple investors. These may encompass various financial instruments such as stocks, bonds, and securities. The primary objective is to provide investors with a diversified portfolio, managed by professional fund managers, thereby spreading risk and optimizing returns. The inclusivity of collective investment schemes allows individuals with varying risk appetites and investment preferences to participate, fostering a more inclusive and dynamic investment environment. The Rajasthan High Court, in the case of [5]PACL India Ltd. versus Union of India, briefly outlined the criteria for determining whether a company’s activities qualify as a ‘Collective Investment Scheme’ under Section 11AA of the Act, 1992. The court emphasized that for a scheme or arrangement to be considered a ‘Collective Investment Scheme,’ it must meet all four conditions specified in Sub-section (2) of Section 11AA. The language used in Sub-section (1) implies that the scheme or arrangement should satisfy all these conditions for it to fall within the defined scope of a ‘Collective Investment Scheme.’
Condition No. (i) Stipulates that investor contributions should be pooled and utilized for the scheme’s purposes. In the present case, the petitioner engaged in an agreement to sell a specific piece of land, subsequently transferring ownership to the customer through a registered sale deed. The land for sale is clearly identified, and the customer becomes the absolute owner upon registration of the deed, having no rights to other company assets. Payments made do not support the company’s business operations, and there is no provision to share business profits akin to shareholder arrangements.
Condition No. (II) Requires investor contributions for the purpose of receiving profits, income, produce, or property. However, in this case, contributions were primarily made for land purchase and development, not with the intent of receiving income, profit, produce, or property gratuitously from the company.
Condition No. (iii) Mandates that the customer’s property be managed by the company on their behalf. However, the company’s scheme involves more of a development scenario than active management. The customer purchases land, pays for development services, and expects the company to develop and deliver the land.
Condition No. (iv)While the customer may lack day-to-day control over land development activities, this doesn’t negate their specific rights to the piece of land.
In summary, the company’s scheme does not meet the criteria for a ‘Collective Investment Scheme,’ as it fails to fulfill the first three conditions. This contrasts with cases involving bonds, such as plantation and agro plantation bonds, where all four conditions may be met. The company in question is involved in land purchase, sale, and development, with the land registered in the customer’s name per the agreement terms.
CONCLUSION
In conclusion, it is crucial to recognize that investments falling within the parameters of a Collective Investment Scheme (CIS) are characterized by pooled contributions serving a common purpose. The case at hand, involving the sale and development of land, does not align with the conditions outlined for a CIS, as it lacks pooling, profit-oriented contributions, and managerial oversight by the company on behalf of investors.
The Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating Collective Investment Schemes, ensuring compliance with defined norms. Any deviation from these regulations may lead to legal implications and violations of SEBI rules, emphasizing the need for strict adherence to established guidelines to protect investor interests.
It is noteworthy that Collective Investment Schemes are typically run by companies rather than trusts, as illustrated in this scenario. The distinct nature of the business involving land transactions and development, with customers becoming absolute owners, further highlights the deviation from the collective pooling and profit-sharing characteristic of a typical CIS.
In the broader context, obtaining certification for operating a Collective Investment Scheme is imperative to maintain transparency, safeguard investor rights, and ensure adherence to regulatory frameworks. The certification process serves as a crucial mechanism for monitoring and preventing potential abuses within investment schemes, promoting a secure and compliant environment for investors.
[1] (2020) 16 SCC 745
[2] (2016) 14 SCC 430
[3] Appeal No. 203 of 2016
[4] (2016) 14 SCC 430
[5] 2003 SCC ONLINE RAJ 208
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Author: Devesh Agarwal, a fifth-year student at Apex School of Law, Apex University Jaipur, pursuing B.A.L.L.B.
