Market regulator Sebi has decided to share with the Ministry of Corporate Affairs the names of over 500 companies, which have garnered money from investors in violation of its Collective Investment Scheme (CIS) rules.  Sebi would also give the names of the directors of such entities to the MCA, so that necessary actions can be taken to prevent these companies and persons from being associated with any new company, a senior official said.

The Collective Investment Schemes, where an entity pools in money from investors for certain pre-specified purposes and later distributes the profits or income, come under the ambit of the Securities and Exchange Board of India (Sebi).

There are estimated to be more than 500 entities in the country that have undertaken CIS activities without complying with the Sebi regulations and the regulator has initiated necessary action against many of them in the past.

 Many of these entities and their operators and directors tend to restart similar business under a new name and numerous investors are taken for a ride before they come under the Sebi scanner, the official noted.

Sebi has now decided to request the MCA to circulate the names of defaulter CIS entities and their directors among all the ROCs (Registrars of Companies) in the country to prevent them from being associated with any new company, he added.

Sebi is also of the view that a complete overhaul of the current CIS regulations was needed, as loopholes in the existing rules allow for the gullible investors being taken for a ride, the official said.

The capital market regulator will take up the issue of these regulatory gaps at the meeting of Financial Stability and Development Council (FSDC), which is chaired by Finance Minister and includes top financial sector regulators such as RBI Governor and Sebi Chairman.

While hundreds of the companies have engaged in the CIS activities in the country, just one such entity is registered with Sebi to undertake such kind of business.

 Generally, the operators of such schemes offer impressive returns in their initial days to lure unsuspecting investors and then suddenly disappear after some time, leaving their investors in a lurch.

Some of the most common CISs are related to investments for real estate properties, plantation and agriculture industry, art funds, time-sharing schemes and multi-level marketing (MLM) schemes, among others.

As per Sebi data, more than one lakh investor complaints are currently pending with it in connection with such schemes, and the matter is sub-judice since long in most of the cases.

While Sebi is the regulatory authority for such schemes, a number of other government agencies and departments also govern similar investment products and a lack of clarity in this regard comes in the way of bringing the guilty to book.

Certain exemptions in the current regulations also leave scope for people to take a stand that their scheme is not a collective investment scheme and that they have got relevant approvals from the competent authorities.

Sebi has said that there was an urgent need to have one single principal regulator to deal with all the cases where pooling of money is taking place and investments are made.

The government had first decide to frame CIS regulations and named Sebi as a regulator in 1997, after a number of agro-based and plantation companies in 1990s started raising money from public through agro and plantation bonds.

Thereafter, it was made mandatory for all such companies to register with Sebi. The existing entities were also asked to get registered with Sebi, and those not being able to get a go-ahead were asked to wind up their operations.

As per Sebi data, 664 CIS entities had raised Rs 3,518 crore in 1998-99. Out of these 664 CIS entities, 54 CIS entities wound up their schemes and refunded investors’ money.

None of the companies that applied for registration at the time were found to be eligible for final registration as a Collective Investment Management Company under the SEBI (CIS) Regulations.

SEBI had issued directions to the remaining 610 entities directing them to refund the money collected under the schemes with returns due to investors as per the terms of the offer within a period of one month from the date of the Order.

Subsequently, another 21 CIS entities wound up their schemes and repaid the investors.

Sebi has said that the CIS regulations were incorporated at a time when large scale funds were mopped up by plantation and agro companies and investors lost money.

It is of the view that regulations have remained unaltered, although there has been a sea change in market dynamics of investment management activities since then.

The regulator has also sought tightening the definition of CIS activities, as the existing one leaves room for many entities to claim being outside its purview.

Sebi often receives complaints against certain CIS-type activities such as those of Multi Level Marketing (MLM) Companies, art funds, time sharing operators, but they claim being outside the domain of its regulatory authority.


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September 2021