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Collective Investment
Schemes – An
Overview
Vinod KothariVinod Kothari & Company
1012 Krishna224 AJC Bose RoadKolkata – 700017Phone 033-22811276/ 22813742/ 22817715
601C, Neelkanth, 98, Marine Drive, Mumbai-400002Phone: 022-22817427
www.vinodkothari.comEmail: [email protected]
Copyright and Disclaimer
• The contents of the presentation are intended solely for the use of the client to whom the same is marked by us.
• No circulation, publication, or unauthorised use of the presentation in any form is allowed, except with our prior written permission
• No part of this presentation is intended to be professional advice, or solicitation of professional assignment.
2
About Us• Vinod Kothari & Company,
Company Secretaries in Practice
▫ Based out of Kolkata, Mumbai
• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.
3
Our Organization’s Credo:
Focus on capabilities; opportunities follow
Related Articles• Articles on AIFs: http://india-
financing.com/alternative-investment-funds.html• Articles on Venture capital and PE: http://india-
financing.com/staff-publications-venture-capital.html
• Article on CIS: http://india-financing.com/collective-investment-schemes.html
• Articles on bonds and debentures at other articles on bonds and debentures at http://india-financing.com/staff-publications.html/capital-markets.html
• Articles on NBFCs at http://india-financing.com/staff-publications-nbfc.html
4
Various small savings schemes
Household savings in India
6
Household savings in India
(As per cent of GDP at current market prices)
2011-12 2012-13
1 Currency 1.6 1.6
2 Bank deposits 8.6 8.8
3 Non- banking deposits 0.1 0.1
4 Life insurance fund 2.9 2.9
5 Provident and pension fund 1.7 1.7
6 Claims on Government 0.8 0.8
7 Shares & debentures 1.2 1.3
8 Gross Financial Assets (1 to 7) 16.8 17.1
9 Gross Financial Liabilities 5.1 5.2
10 Net Financial Savings (8 – 9) 11.7 11.9
11 Physical Savings 11.5 11.7
12 Household total Savings (10+11) 23.2 23.6
Source: http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=662#4
Government savings schemesName of The
Scheme
Limits of Investment Amount
Outstanding at
end-Mar.2011 P
(Rs. Billion)
Since Sep.2,
1993
Post Office
Savings Bank
Accounts
Minimum Rs.50 and Maximum Rs. 1,00, 000 for an
Individual Account (Rs. 2 lakh jointly)
301.01 #
Public Provident
Fund 1968
Minimum Rs 500 and Maximum Rs. 70,000 in a Fiscal
Year
315.83 15
Post Office Time
Deposit Account
Minimum Rs 200 and no Maximum Limit 284.45 1,2,3 and 5
Post Office
Recurring Deposit
Account
Minimum Rs 10 per month or Any Amount in Multiples
of Rs. 5 and No Maximum Limit
612.5 5
National Savings
Scheme 1992
Minimum Rs.100 and No Maximum Limit 4.78 4
Post Office
Monthly Income
Scheme
Minimum Rs 1500 and Maximum Rs 4.5 Lakh in Single
Account and Rs. 9 Lakh in Joint Account
2186.74 6
NSC VIII issue Minimum Rs. 100 and No Maximum Limit 546.42 6
Indira Vikas Patra No Limit 10.2 5 1/2
Kisan Vikas Patra Minimum Rs.100 no Maximum Limit 1585.84 5 1/2
Senior Citizens
Saving Scheme
Minimum Rs 1.000 and Maximum Rs.15 Lakh 309.13 -
7
Various collective investment devices
8
Collective investment
devices
Corporate form
Issue of securities
Deposits
Non corporate
form
public
Collective investment
schemes
Mutual funds
Private
Portfolio management
Alternative investment
funds
Mutual saving
schemes
Chit funds
Nidhi‟s
Barred devices
State-wise investments in small
savings in Government Securities*State 2007-08 2008-09 2009-10
Andhra Pradesh 387 323 1531
Arunachal
Pradesh27 24 54
Assam 72 115 163
Bihar 847 793 1852
Chhattisgarh 81 68 253
Goa 114 49 175
Gujarat 915 671 3829
Haryana 172 107 806
Himachal Pradesh 158 103 468
Jammu and
Kashmir62 43 127
Jharkhand 169 178 863
Karnataka 388 114 661
Kerala 180 13 72
9
* Source: http://finmin.nic.in
State-wise investments in small savings in
Government Securities contd..
State 2007-08 2008-09 2009-10
Madhya Pradesh 246 71 810
Maharashtra 2188 1538 4314
Manipur 203 203 2
Meghalaya 12 11 69
Mizoram 0 0 12
Nagaland 1 2 6
Orissa 169 161 756
Punjab 729 190 1576
Rajasthan 105 63 144
Sikkim 0 0 0
Tamil Nadu 534 62 695
Tripura 16 3 64
Uttar Pradesh 1956 1213 4985
Uttaranchal 230 189 777
West Bengal 1470 1654 7992
Delhi 746 429 1769
Pondicherry 16 22 38
10
Small Savings in West Bengal
11
-2000
0
2000
4000
6000
8000
10000
1200019
92
…
199
3…
199
4…
199
5…
199
6…
199
7…
199
8…
199
9…
20
0…
20
01…
20
0…
20
0…
20
0…
20
05
…
20
0…
20
07
…
20
0…
20
0…
20
10…
20
11…
Net collections of small savings in West Bengal (Rs
*Source: West Bengal Economic Survey 2012-13
CISs: Actions againts defaulting
companies*• As on December, 2012, there were 171 CIS companies against
which court proceedings have been initiated▫ Penalty imposed in such from 30,000/- t0 10,00,000/-
(depending upon the money mobilized in contravention of the CIS Regulations)
▫ Rigorous imprisonment up to 6 months• Recently, in March, 2013, proceeding against a company
named Maitreya Services Pvt Ltd and all its directors have been barred▫ Charges like offences of fraud, cheating, criminal breach of trust
and misappropriation of public funds have been filed• As per SEBI‟s latest data, around 664 entities collected Rs
3,518 crore in 1998-99▫ Among these 75 wound up their schemes and returned money to
investors▫ Prosecution action has been launched against remaining 589
entities
12
*Source: www.sebi.gov.in
An Overview
13
Overview of regulatory framework
Pooling of Money by way
of:
DepositsDeposit Rules,
NBFC Guidelines
Issue of securities
Refer next slide
CIS
Publicly offered
SEBI CIS Regs
Privately offered
SEBI AIF Regs
Mutual Funds MF Regs
Money circulation
schemes
Prize Chit and Money Circulation Schemes
(Banning) Act
Chit funds Chit Fund Act
Non Corporate
BodiesProhibited
14
Issue of Securities
• To 49 or less:▫ Privately placed issue
• To 49 or more [proviso to section 67 (3)]: ▫ Deemed public issue▫ Issue of prospectus and other public issue formalities to apply
• Whether deemed public offer rule apply to NBFCs?▫ As per general definition of a public offer, offer resulting into
securities being available to a person other than the one to whom the offer was made is regarded as public offer, applies to all companies. Hence, in our view, rule applies to NBFCs also
▫ However, taking benefit of the proviso, many chit funds use NBFC to raise money generally through debentures which are neither covered by
Deposit Rules nor comes into public offer due to proviso to sec 67(3)
15
Issue of Debentures (depending on nature of
the issuing company)Debenture
issue
By Public Cos
NBFC
Issue to 50 or more
sec 67 does not apply
But issue will be
public issue
Issue up to 49
Pvt offer
NBNC
Issue to 50 or more
Deemed public offer
Issue up to 49
Pvt offer
By Private Cos
cannot issue to public
16
Issue of Debentures (by NBNCs) – When
Deposit?Debentures
Secured by
Mortgage of immovable
property
Issue on or before March
20, 2013 -Exempted
Mortgage of fixed assets*
Having MV more or equal
to issue size
Exempted
Any other case
Deposit Rules apply
Any other case
Deposit Rules apply
Unsecured
Convertible
Exempted
Non Convertible
Deposit Rules apply
17
*As per MCA Notification dated March 21, 2013
18
Issue of Debentures by NBFCs- When Public
Deposit?Debentures
Secured by
Mortgage of immovable
property
Having MV more or
equal to issue size
Exempted
Any other asset
Having MV more or
equal to issue size
Exempted
Any other case
Directions apply
Unsecured
Convertible
Exempted
Non Convertible
Directions apply
Meaning of Deposit
• Simple meaning: money given/taken in advance to execute a monetary transaction
• Sec 45I(bb) of RBI Act provides inclusive definition as to include any receipt of money by way of deposit or loan or in any other form but excludes:▫ amounts raised by way of share capital; ▫ amounts contributed as capital by partners of a firm; ▫ amounts received from banks and financial
institutions▫ amounts received by way of security deposit or
advance against orders▫ any amount received from a registered money lender ▫ any amount received by way of subscriptions in
respect of a chit.
19
Meaning of Public Deposit
• Paragraph 2(i)(xii) of NBFC Directions defines „public deposit‟ as a „deposit‟ as defined by RBI Act but further excludes:▫ Amount received from Public financial institutions▫ Amount received from any other company▫ Share/debenture application money▫ Amount received from directors, or shareholders in case of a private
company▫ Amount received by issue of secured mortgage bonds, or convertible
bonds▫ Promoters‟ loans brought according to loan agreement with term lending
institutions▫ Amount received from mutual funds▫ Hybrid debt or subordinated debt, maturity not less than 60 months▫ Amount received on issue of commercial papers▫ Any amount received by SI-NBFC-ND by issuance of 'perpetual debt
instruments' in accordance with the rules framed by the RBI from time to time.
20
In-substance Deposit
• Money to money transactions to be treated as in-substance deposit
• Generally, where there exists debtor-creditor relation
• Some examples are:
▫ Share application money lying un-allotted for long time
▫ Advances received without any purpose
▫ Subscription money received for issue of preference shares
21
Deposits: Rules applicable
• RBI Act, 1934• Companies (Acceptance of Deposits) Rules, 1975
▫ Under these, companies can accept deposits upto 10% of capital and free reserves
▫ Minimum NOF of 1 crores required▫ A maximum of 12.5% interest can be charged
• NBFC Acceptance of Public Deposit (Reserve Bank) Directions, 1998 ▫ NBFC-D can accept upto 10 times of its NOF▫ Minimum credit rating: investment grade▫ Capital Adequacy: 15%▫ Rate of interest – max. 12.5% or as specified from time
to time
22
Collective Investment Schemes
(CIS): Meaning
• 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
▫ is managed on behalf of the investors.
• Investors do not have day to day control over the management and operation of such scheme or arrangement.
23
Schemes not treated as CIS• scheme or arrangement made or offered by a co-operative society;• scheme or arrangement under which deposits are accepted by
NBFCs;• scheme or arrangement being a contract of insurance to which the
Insurance Act, applies;• scheme or arrangement providing for any Scheme, Pension Scheme
or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952
• scheme or arrangement under which deposits are accepted under section 58A of the Companies Act, 1956;
• 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;
• scheme or arrangement falling within the meaning of Chit business as defined in section 2(d)of the Chit Fund Act, 1982;
• scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund;
24
SEBI (Collective Investment Schemes)
Regulations, 1999
25
Eligibility Conditions
• applicant is set up and registered as a company under the Companies Act, 1956
• applicant has a net worth of not less than Rs. 5 crores
• managing of collective investment scheme as one of its main objects is states in its MoA
• Atleast 50% directors shall be independent
• CIS company is not the trustee of any CIS
SEBI CIS Regulations contd..
26
Obligations before the launch of any scheme
• Scheme to be approved by trustee• Registered as debenture trustee are
eligible to be appointed as trustees • Appraisal by an appraisal agency and
credit rating by any such agency.• Duration of schemes shall not be less than
3 days• No scheme shall provide guaranteed or
assured returns• Scheme to be open for not more than 90
days• All unit certificates to be freely transferable• Listing of schemes allowed, if mentioned in
the offer document
Disclosures
• An annual report and annual statement of accounts to be prepared in respect of each financial year
• within two months from the date of closure of each financial year forward to SEBIa copy of the Annual Report
• Publish unaudited results within 1 month of end of each quarter in newspapers
SEBI CIS Regulations contd..27
Terms and conditions after issue
of certificate
inform SEBI of any
material change
director to be appointed
with prior approval of the trustee
no change in the controlling
interest without prior approval of
SEBI , trustee and 50% unit
holders
grievances redressal
within 1month
SEBI CIS Regulations
Restrictions on business activities
• undertake any activity other than that of managing the scheme
• act as a trustee of any scheme
• launch any scheme for the purpose of investing in securities
• invest in any schemes floated by it
Obligations of CIS company
• be incompetent to enter into any transaction with or through its associates or relatives relating to the scheme
• give receipts for all monies received by it and give a report to SEBI every month, particularly of receipts and payments
• hold a meeting of its BoD at least twice in every three months
• obtain adequate insurance against the property of the scheme
28
Meaning of Alternate Investment
Funds (AIFs)
• A fund
▫ established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which:
is a privately pooled investment vehicle collecting funds from investors, Indian and foreigners, both
is not a MF or any other fund as regulated by SEBI
29
AIFs: Categories
Depending upon the activities in which investment can be made and on the basis of power to borrow, AIFs has been divided into:
• Category 1 AIF: investing in starting or early stage ventures• Eg. social venture funds, SME funds, and infrastructure
funds• Category 2 AIF: which cannot borrow except for day to
day operations • Eg.,PE funds
• Category 3 AIF: employing diverse or complex trading strategies• eg., hedge funds, real estate funds, venture capital funds
30
Features of an AIF
• An investment vehicle▫ Must be engaged in investment activities with an objective of
generating a rate of return, other than by carrying on a substantive activity
• Segregating ownership of money and management of money• Pooling of money not in form of ownership capital
▫ Vehicle pooling money from persons other than its own shareholders is an AIF
• Collective and Managed vehicle▫ A fund managed by managers and a commingled pool of money
that collectively makes investment• Private vehicle
▫ Raising and pooling money on private placement basis However, no. of investors may go up to 1000
▫ Therefore, pvt placement will mean that accepting of offer by person to whom offer was made
31
AIF and CIS
• AIFs:
▫ Almost same as a CIS
▫ But pooling money on private placement basis
• CIS:
▫ Engaged in pooling of money through public offers
32
AIFs and VCFs
• AIFs:
▫ Privately pooled investment vehicle
▫ AIF Regulations defines VCFs as an AIF investing in unlisted securities of emerging business models
• VCFs:
▫ VCF Regulations were loose regulations resulting in AIF regulations
▫ A VCF is a fund raising and investing money in terms of VCF Regulations
33
Who cannot be an AIF?
34
family trusts set up for the benefit of relatives
employee welfare trusts or gratuity trusts
Other SPVs not established by Fund managers, securitization trust
ESOP Trusts
holding companies as per Companies Act
Funds managed by securitisation company or reconstruction co.
Any such pool of funds which is directly regulated by any other regulator in India
AIFs: Registration procedure
35
Application
• Application in Form A• Accompanied by non-refundable application fee as specified
in Part A• In the manner as in Part B
Requirements
• Board to consider all the requirements laid down in AIFRegulations for the purpose of grant of certificate
Validity
• Certificate of registration to be valid till the AIF is wound up.
AIFs: General investment
conditions
36
Companies outside
India
• •AIFs may invest in securities of companies incorporated outside India subject to such conditions
Category I, II and
III
• Category I and II to not invest more than 25% of corpus in one investee company
• Category III to invest not more than 10% of corpus in one investee company
Un-invested portion?
• Un-invested portion of the corpus may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality till deployment of funds as per the investment objective.• Thus, AIFs can invest funds according to their investment objectives
states in IM. In case of the un-invested portion, may be invested in liquid assets
Mutual Funds: Meaning
A fund registered under MF
Regulations
• established in the form of a trust
• to raise monies through the sale of units to the public
• under its schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets
37
Mutual Fund Regulations, 1996Eligibility criteria
• sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions
• Sponsor contributes at least 40% to the net worth of the AMC
• appointment of trustees, AMC , custodian
Application for registration
• Ensure that main objects of company allow carrying on of mutual fund activities
• Submit the following along with Form A:
• complete list of group/associate companies registered with SEBIin any capacity
• Whether any of the sponsor or its group/associate companies is listed?
• Details of any disciplinary action taken by RBI against the sponsor or group/associate companies
38
Mutual Fund Regulations, 1996
contd..
39
• Mutual fund may invest only in:• securities;• money market instruments;• privately placed debentures;• securitised debt instruments, which are either
asset backed or mortgage backed securities;• gold or gold related instruments;• Real estate assets
Investment obligations
• Not to borrow except to meet temporary liquidity needs for the purpose of repurchase, redemption of units or payment of interest or dividend to the unitholders
• Not to advance loans for any purpose• Restrictions on gold exchange traded fund scheme
provided separately.
Restrictions
40
What are chit funds
• The recent happenings in West Bengal (Sharadhascam and political bickerings thereafter) have painted the chit fund industry shady.
▫ Periodically, the chit fund industry has faced similar episodes
• Chit funds are perfectly legal, regulated instrument
• Declining over the past few years, but prevalent mainly in Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. To some extent in Delhi
▫ Unregulated, informal chit funds are countless
41
Chit funds are mutual savings
associations• Chit funds are what is globally known as
Rotating Savings and Credit Associations.
• These prevail in many countries.
▫ In Germany and Austria, Bausper-kassen is a well regulated model for mortgage financing
• In India, these are known by various names such as chit funds, kuries, Nidhis, mutual benefit companies, etc
42
Number of Chit Fund Companies*
• As on November 6, 2008, number of registered chit fund companies: 10269
• As on date, number has fallen down to 4256
*Source: www.mca.gov.in
43
Chit Funds
• The central act is The Chit Funds Act, 1982
▫ Having overriding effect on other acts and MOA/AOA of companies
• State wise laws prevalent
▫ Following states have their own laws:
Karnataka
Tamil Nadu
Delhi (U.T.)
44
Chit Funds: Meaning
• Meaning of “Chit”:
▫ a transaction by whatever name
▫ wherein a person enters into an agreement with a specified number of persons
▫ every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and
▫ that each such subscriber shall, in his turn, as determined by lot or by auction or in any other manner as in the chit agreement, be entitled to the prize amount.
45
Transactions not treated as “Chit”
• Transactions not to be treated as chit if in such transaction:
▫ some alone (not all) of the subscribers get the prize amount without any liability to pay future subscriptions, or
▫ all the subscribers get the chit amount by turns with a liability to pay future subscriptions
46
The Chit Funds Act, 1982
47A
pp
lic
ati
on
pr
oc
es
s 1. Application for the conduct of chit fund to be made to the State Government.
2. Certificate of commencement shall be provided after all the tickets specified in the chit agreement are fully subscribed and the Registrar is intimated of the same.
Fo
rm
at
of
Ch
it
Ag
re
em
en
t 1. Shall be in duplicate and signed by each of the subscribers‟ and the foreman.
2. Every chit agreement to be registered with the Registrar of Chit
Re
qu
ire
me
nts 1. Paid up capital of not
less than Rs. 1 lakh
2. Create and maintain a reserve and transfer a sum not less than 10% of such profit.
3. No foreman to continue chit business if the aggregate chit amount exceeds Rs. 25 lakhs
4. Minutes of proceeding of each draw to be filed with the Registrar within 21 days from the date of draw.
Chit Funds – registration in Delhi
Documents to be submitted
• Bank certificate for deposit of Rs. 1,00,000/- as paid-up capital• MOA, AOA, e-form 2, 18, 32• Resolution for appointment of foreman of the company• Net-worth certificate issued by CA of the company in respect of all the Directors• Balance sheet(s) of the company
Framing of bye laws
• Submit following particulars• name under which chit business is done• full details of the working of the chit• area of operation of the chit• mode of custody and investment of money.• rate of commission to which the foreman is entitled
Other obligations
• Change in registered office or director to be filed in e-form 18, 32 and submitted
• Chit can be pre-terminated if all the non-prized and unpaid subscribers consent in writing to the termination or foreman being an individual dies
48
Money Circulation Schemes:
Meaning
• Any scheme, by whatever name called,
▫ for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money
▫ on any event or contingency relative or applicable to the enrolment of members into the scheme,
▫ whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions
• Such schemes are BANNED
49
Prize Chit: Meaning
• Includes any transaction or arrangement by whatever name called ▫ under which a person collects through foreman, agent or in any other
capacity, ▫ Monies by way of : contributions or subscriptions or by sale of units, certificates or other instruments or as membership fees or admission fees or service charges
▫ in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement and
▫ utilises the monies so collected for following purposes: specified number of subscribers as determined by lot, draw or in any other
manner, prizes or gifts in cash or in kind not won any prize or gift, the monies collected, with or without any
bonus, premium, interest or other advantage, on the termination of the scheme
• Such chits are BANNED
50
Money Circulations Schemes:
Examples
• Multi level marketing or network marketing schemes▫ ways to sell the products directly to the consumers in which
the salesmen are compensated not only for the work done by them but also for the sales of people who have joined the company through them
• Pyramid Schemes▫ non-sustainable business which involves payments to
participants primarily to recruit other people into the scheme and there is no real investment or sale of products
• Ponzi Schemes▫ returns are paid to investors from their own money or
money of subsequent investors rather than actual profit earned.
51
Penalties provided in Regulations/Acts
52
Chit Funds: Penalty for violations
53
In Delhi
Starting any chit group without registration of Bye-laws by the R.C.F. Delhi
Imprisonment for a term which may extend to one year or with fine which may
extend to Rs.500/- or both.
Inviting the public to subscribe in a chit group, the Bye-laws of which are not registered with R.C.F. , making false statement
Not filing chit agreement Punishable with fine which may extend to one hundred rupees.
Not filing copy of the entry with the R.C.F.Delhi regarding substitution/removal of subscriber
For not furnishing proper security duly pledged with the RCF Delhi before the commencement of chit group
For not depositing the unpaid amount of subscription in the Statutory Deposit A/C. of an approved bank in respect of a non-prized subscriber.
MFs: Penalty for violations
54
Mutual Funds
Fails to furnish any information or furnishes wrong information relating to its activity as a mutual fund as required
Shall be dealt with in the manner provided under the Securities and
Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer
and Imposing Penalty)Regulations, 2002Fails to submit periodic returns
Fails to resolve complaints or give satisfactory reply
indulges in unfair trade practices in securities.
Violates the conditions of registration
CIS: Penalty for violations
55
Collective Investment Scheme
furnishes any information which is false or misleading or suppresses any material information
Shall be dealt with according to Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
fails to make an application for listing or fails to list units of a Scheme in a recognized stock exchange
fails to resolve the complaints of the investors or fails to furnish to SEBI a satisfactory reply in this behalf
AIFs: Penalty for violations
Alternate Investment Funds
Contravenes the Regulations Punishable under Securities and Exchange Board of India (Intermediaries) Regulations, 2008
fails to furnish any information to SEBI
Furnishes false or misleading information
Does not submit returns to SEBI
fails to resolve the complaints of investors
56
Money Circulation Schemes-
Penalty
• Contraventions punishable with
▫ imprisonment up to three years, or
▫ fine up to five thousand rupees,
▫ or with both
57
58
Suman Motels Ltd. vs SEBI
• Suman Motels Ltd. vs SEBI (2003 42 SCL 433 SAT)
▫ SAT affirmed the SEBI order passed to refund the public money
▫ Appellant Company cannot claim that it is not required to comply with the requirements of the CIS Regulations
59
Paramount Bio-Tech Industries Ltd.
vs UOI
• M/S Paramount Bio-Tech Industries Ltd. vsUOI (Civil Misc Writ Petition No 51911 of 1999 decided on November 25, 2003)
▫ Sizeable portion of amount mobilized paid for commission expenses
▫ View framed by SEBI that company was deploying the funds received from the public for non banking financial companies, real estate
▫ Allahabad HC ruled that SEBI has the legislative competence to frame the Act and Regulations and CIS Regulations applies to this case.
60
P.G.F. Ltd. vs Union of India
• P.G.F. Ltd. vs Union of India (2005 124 CompCas 201 P H)
▫ It was held that transaction for purchase of agricultural land in the name of several investors is a money circulation scheme
▫ Reason being that it was not proved whether land was actually bought at all, or registered in the name of the so-called investors.
▫ Hence, the Scheme was treated as money circulation scheme and not CIS by the Punjab Haryana HC
61
Amway India Enterprises
• Amway India Enterprises• AP High court ruling at :
http://indiankanoon.org/docfragment/1369717/▫ Company argued that : its networking scheme did not infringe the Prize Chits &
Money Circulation Schemes (Banning) Act since “there is no quick money involved”
And that money received by the sponsor members was not dependent on any event or enrolment of new members
▫ However, Court held that: Company‟s marketing scheme is “money circulation
scheme” as it allegedly provided inducement since a sponsor member‟s income partly also came through the commission earned by those made members subsequently
62
Other rulings on collective
investment schemes
• Brijeshwar Jaiswal vs SEBI (27th March 2012)[http://indiankanoon.org/docfragment/17567204
8/]• Ankur Forest and Project (8th Feb 2011)[http://indiankanoon.org/docfragment/36651229
]• PACL India vs Axis Bank[http://indiankanoon.org/doc/1670110/]• Rose Valley [on the question of SEBI’s
jurisdiction][http://indiankanoon.org/doc/13648517/]
63
Muddle of Regulations
• It is not clear who will regulate the schemes which takes various forms
▫ For example, money is raised by strange instruments like preference shares or debentures – which, arguably, is not a deposit at all – hence, comes another regulator, MCA
Money is raised in disguise of such instruments, regulators keep waiting, investors suffer
• LLPs- not regulated by SEBI, RBI or Deposit Rules
▫ Only AIF Regulations cover LLPs
64