LONG ANSWER – COLLECTIVE INVESTMENT SCHEME

INTRODUCTION
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 governed by the Collective
Investment Schemes Regulations given by 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 CIS portfolio based on how much money he or she contributed.
The word ‘unit’ refers to the portion or part of the CIS portfolio that is owned by the investor.
The ‘trust’ is the financial instrument that is created in order to manage the investment. The
trust enables financial experts to invest the money on behalf of the CIS investor. Collective
Investment Schemes provide a relatively secure means of investing on the Stock Exchange,
and other financial instruments.

The sum of money that are exchanged on the Stock Exchange and in the Money Markets
make them too pricey for most people. With a CIS, the money or funds from a group of
investors are pooled or collected together to form a CIS portfolio. In order to strengthen the
hands of SEBI to protect interests of investors in plantation companies, the Securities
Laws (Amendment) Act, 1999 amended the definition of ’securities’ in the SC(R) Act, so as
to include within its ambit the units or any other instruments issued by any CIS to the
investors in such schemes. The Act also inserted a definition of the CIS in the Securities and
Exchange Board of India Act, 1992.

According to SEBI Act, 1992, ‘Collective Investment Scheme’ means any scheme or
arrangement which satisfies the conditions specifies in section 11AA. Section 11AA provides
that any scheme or arrangement which satisfies the conditions referred to in sub-section
(2) or sub-section (2A) shall be a collective investment scheme. Provided that any pooling of
funds under any scheme or arrangement, which is not registered with SEBI or is not
covered under sub-section (3), involving a corpus amount of one hundred crore rupees or
more shall be deemed to be a collective investment scheme.

Sub-section (2) lays down that any scheme or arrangement made or offered by any person
under which,—

(i) the contributions, or payments made by the investors, by whatever name called, are pooled
and utilized for the purposes of the scheme or arrangement;

(ii) the contributions or payments are made to such scheme or arrangement by the investors
with a view to receive profits, income, produce or property, whether movable or immovable,
from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether
identifiable or not, is managed on behalf of the investors;
(iv) the investors do not have day-to-day control over the management and operation of the
scheme or arrangement.

SEBI (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS, 1999 – AN

OVERVIEW

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. 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. Any person proposing to carry any activity as a
Collective Investment Management Company on or after the commencement of the
regulations should make an application to SEBI for the grant of registration in the specified
form. “Close ended collective investment scheme” means any collective investment scheme
launched by a collective investment management company. In which the maturity period of
the collective investment scheme is specified and these is no provision for repurchase before
the expiry of the collective investment scheme. “Collective investment scheme property”
includes :

(i) subscription of money or money’s worth (including bank deposits) to the collective
investment scheme;

(ii) property acquired, directly or indirectly, with, or with the proceeds of, subscription of
money retired to in item (i); or

(iii) income arising, directly or indirectly from, subscription money or property retired to in
item (i) or (iii).

APPLICATION FEE TO ACCOMPANY THE APPLICATION

Regulation 4, 6, and 7

Every application for registration should be accompanied by a non-refundable application fee

as specified in Second Schedule. An application, which is not complete in all respects or does
not conform to the requirements, should be rejected by SEBI. However, before rejecting any
such application, the applicant is given an opportunity to remove within one month such
objections as indicated by SEBI. The regulation further provides that SEBI can extend the
time where sufficient reason is being given by the applicant that efforts have been taken to
remove such deficiency.
FURNISHING OF INFORMATION

Regulation 8

SEBI can direct the applicant to furnish such further information or clarification as may be
required by it, for the purpose of processing the application. SEBI, if it so desires can also ask
the applicant or its authorised representative to appear before SEBI for personal
representation in connection with the grant of a certificate.

CONDITIONS FOR ELIGIBILITY

Regulation 9

The applicant should satisfy the following eligibility criteria:

(a) the applicant is set up and registered as a company under the Companies Act, 2013;
(b) the applicant has specified the managing of collective investment scheme as one of its
main objects in its Memorandum of Association;

(c) the applicant has a net worth of not less than rupees five crores. However, at the time of
making the application, the applicant shall have a minimum net worth of rupees three crores
which has to be increased to rupees five crores within the time period of three years from the
date of grant of registration;

(d) the applicant is a fit and proper person for the grant of such certificate;

(e) the applicant has adequate infrastructure to operate collective investment scheme in
accordance with the provision of these regulations;

(f) the directors or key personnel of the applicant should consist of persons of honesty and
integrity having adequate professional experience in related field and have not been convicted
for an offence involving moral turpitude or for any economic offence or for the violation of
any securities laws;

(g) at least fifty per cent of the directors of such Collective Investment Management
Company shall consist of independent directors and are not directly or indirectly associated
with the persons who have control over the Collective Investment Management Company;

(h) no person, directly or indirectly connected with the applicant has in the past been refused
registration by SEBI under the Act;

(i) at least one of the directors on the board of the Collective Investment Management
Company, who is not subject to retirement, is a representative of the trustee;
(j) the Collective Investment Management Company is not a trustee of any collective
investment scheme.

(k) in case the applicant is an existing collective investment scheme, it complies with the
provisions of Chapter IX of the these regulations.

TERMS AND CONDITIONS

The certificate granted should be subject to following conditions:

(a) any director of the CIMC should not be a director in any other CIMC unless such person
is an independent director and approval of the Board of CIMC of which such person is an
independent director, has been obtained;

(b) the CIMC should forthwith inform SEBI of any material change in the information or
particulars previously furnished, which have a bearing on the certificate granted by it;
(c) appointment of a director of a CIMC should be made with the prior approval of the
trustee;
(d) the CIMC should comply with provisions of the Act and these regulations;

e) no change in the controlling interest of the CIMC shall be made without obtaining prior
approval of SEBI, the trustee and the unit holders holding at least one-half of the nominal
value of the unit capital of the scheme.

(f) CIMC should take adequate steps to redress the grievances of the investors within one
month from the date of receipt of the complaint from the aggrieved investor.

PROCEDURE WHERE REGISTRATION IS NOT GRANTED

Regulation 12

SEBI may reject the application, if it does not satisfy the conditions specified in regulation. It
gives a reasonable opportunity of being heard to the applicant. The decision should be
communicated to the applicant by SEBI within 30 days of such decision, stating therein the
grounds on which the application has been rejected.

RESTRICTIONS ON BUSINESS ACTIVITIES

Regulation 13

The Collective Investment Management Company should not:

(i) undertake any activity other than that of managing the scheme;

(ii) act as a trustee of any scheme;

(iii) launch any scheme for the purpose of investing in securities;

(iv) invest in any schemes floated by it.

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

OBLIGATIONS OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

Regulation 14

Every Collective Investment Management Company should:

(i) be responsible for managing the funds or properties of the scheme on behalf of the unit
holders and take all reasonable steps and exercise due diligence to ensure that the scheme is
managed in accordance with the provisions of these regulations, the offer document and the
trust deed;
(ii) exercise due diligence and care in managing assets and funds of the scheme and also
responsible for the acts of commissions and omissions by its employees or the persons whose
services have been availed by it;

(iii) remain liable to the unit holders for its acts of commission or omissions, notwithstanding
anything contrary contained in any contract or agreement and be incompetent to enter into
any transaction with or through its associates, or their relatives relating to the scheme.

However, in case the CIMC enters into any transactions relating to the scheme with any of its
associates, a report to that effect should immediately be sent to the trustee and to SEBI;
(iv) appoint registrar and share transfer agents and should also abide by their respective Code
of Conducts as specified in the Third Schedule;

(v) give receipts for all monies received and report of the receipts and payments to SEBI, on
monthly basis;

(vi) hold a meeting of Board of Directors to consider the affairs of scheme, 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 scheme;

(vii) obtain adequate insurance against the properties of the schemes 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.
TRUSTEES AND THEIR OBLIGATIONS

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.

CONTENTS OF TRUST DEED

Regulation 17

The trust deed should contain such clauses as are specified and other clauses as are necessary
for safeguarding the interests of the unit holders. No trust deed should contain a clause which
has the effect of limiting or extinguishing the obligations and liabilities of the Collective
Investment Management Company in relation to any scheme or the unit holders; or
indemnifying the trustee or the Collective Investment Management Company for
loss or damage caused to the unit holders by their acts of negligence or acts of commissions
or omissions.

ELIGIBILITY FOR APPOINTMENT AS TRUSTEE

Regulation 18

The persons registered with SEBI as Debenture Trustee under SEBI (Debenture Trustee)
Regulations, 1993 are only eligible to be appointed as trustees of collective investment
schemes. However, no person is eligible to be appointed as trustee, if he is directly or
indirectly associated with the persons who have control over the CIMC. The CIMC shall
furnish to SEBI particulars in respect of trustees appointed in the prescribed form.
No person should be appointed as trustee of a scheme, if he has been found guilty of an
offence under the securities laws or SEBI or any authority to which SEBI has delegated its
power has passed against such person, an order under the Act for violation of any provision
of the Act or of regulations made hereunder.

The trustee and the Collective Investment Management Company should enter into an
agreement for managing the schemes’ property. The agreement for managing the scheme
property should contain clauses as specified and such other clauses as are necessary for the
purpose of fulfilling the objectives of the scheme.

RIGHTS AND OBLIGATIONS OF THE TRUSTEE

Regulation 21

The trustee have a right to obtain from the CIMC such information as is considered necessary
by the trustee and to inspect the books of accounts and other records relating to the scheme.
The trustee should ensure that the CIMC has;

(i) the necessary office infrastructure;

(ii) 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;

(iii) appointed auditors from the list of auditors approved by SEBI to audit the accounts of the
scheme;
(iv) appointed a compliance officer to comply with the provisions of the Act and these
regulations and to redress investor grievances;

(v) appointed registrars to an issue and share transfer agent.

(vi) prepared a compliance manual and designed internal control mechanisms including
internal audit systems;

(vii) taken adequate insurance for the assets of the scheme;

(viii) 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;
(ix) operated the scheme in accordance with the provisions of the trust deed, these regulations
and the offer document of the scheme(s);

(x) undertaken the activity of managing schemes only;

PROCEDURE FOR LAUNCHING OF SCHEMES

Regulation 24

No scheme should be launched by the CIMC unless such scheme is approved by the Trustee
and rated by a registered credit rating agency and appraised by an appraising agency.

DISCLOSURES IN THE OFFER DOCUMENT

Regulation 26

The CIMC shall before launching any scheme file a copy of the offer document of the
scheme with SEBI and pay filing fees as specified. The offer document should contain such
information as specified. The offer document should also contain true and fair view of the
scheme and adequate disclosures to enable the investors to make informed decision. SEBI
may in the interest of investors require the CIMC to carry out such modifications in the
offer document as it deems fit. In case no modifications are suggested by SEBI in the offer
document within 21 days from the date of filing, the Collective Investment Management
Company may issue the offer document to public.

LISTING OF SCHEMES

Regulation 36
The units of every scheme shall be listed immediately after the date of allotment of units and
not later than six weeks from the date of closure of the scheme on each of the stock
exchanges as mentioned in the offer document.

WINDING UP OF SCHEME

Regulation 37

A scheme should be wound up on the expiry of duration specified in the scheme or on the
accomplishment of the objective of the scheme as specified in the offer document. A scheme
may be wound up :

(a) on the happening of any event which, in the opinion of the trustee, requires the scheme to
be wound up and the prior approval of SEBI is obtained; or

(b) if unit holders of a scheme holding at least three-fourth of the nominal value of the unit
capital of the scheme, pass a resolution that the scheme be wound up and the approval of
SEBI is obtained thereto; or

(c) if in the opinion of SEBI, the continuance of the scheme is prejudicial to the interests of
the unit-holders; or

(d) if in the opinion of the CIMC, the purpose of the scheme cannot be accomplished and it
obtains the approval of the trustees and that of the unit holders of the scheme holding at least
three-fourth of the nominal value of the unit capital of the scheme with a resolution that the
scheme be wound up and the approval of SEBI is obtained thereto.

Where a Scheme is to be wound up, the trustee shall give notice disclosing the circumstances
leading the winding up of the Scheme in a daily newspaper having nationwide circulating and
in the newspaper published in the language of the region where the CIMC is registered.