Collective Investment Schemes – What precautions should you take as an investor?
Recently there are several comments on this blog indicating whether one can subscribe to fixed deposits of a company which they never heard. Even I could not hear such company name in my experience. Some companies are “Collective Investment Schemes”which are not registered with SEBI, but collecting funds from the public. What are these Collective Investment Schemes all about? How do they operate? Should you invest in Collective Investment Schemes? Which companies are banned by SEBI from collecting funds from public under this scheme?
Also Read: Best Company FD Schemes to invest now
What is Collective Investment Scheme (CIS)?
Collective Investment Scheme (CIS) is an arrangement whereby the funds collected from the investors are pooled together and then invested with a view to earn profits. The scheme is run by a company and the investments are managed on the behalf of the investors but they do not have control over the routine operations of the company. The company managing the CIS needs to be incorporated under the provisions of the Companies Act, 1956 and registered with SEBI under the SEBI Regulations, 1999. These companies are known as Collective Investment Management Companies (CIMS). A registered CIMC is eligible to raise funds from the investors by launching schemes. Such schemes need to be credit rated and appraised by appraising company compulsorily. The schemes should also contain disclosures, as per the regulations, to enable the investors to take wise decisions.
Few collective schemes were being operated before the commencement of CIS Regulations, i.e. October 15, 1999. Those schemes are deemed to be existing collective investment scheme. It cannot launch any new scheme or raise fresh investments from the investors even under the existing scheme, unless it obtains a certificate of registration from SEBI. It is to be noted that existing CIS had collected funds before the regulatory jurisdiction of SEBI came into force and any action taken by SEBI against defaulting entities does not necessarily ensure that the money would be refunded to the investors by such entities.
What are SEBI Guidelines about Collective Investment Schemes (CIS)?
SEBI has issued certain guidelines for the CIMCs which need to be followed strictly.
1) Any scheme or arrangement offered by any co-operative society, or non-banking financial institutions does not constitute a CIS.
2) A CIMC needs to be registered with SEBI.
3) A CIMC can raise funds only through schemes. A copy of the offer document of the scheme has to be filled with SEBI and if no modifications are made by SEBI within 21 days from the date of filing, then the CIMC is entitled to issue the offer document to the public for raising funds.
4) Any arrangement being a contract of insurance, or pension scheme or employee provident scheme does not fall in the category of CIS.
5) The investors are entitled to receive a copy of the balance sheet, P&L account and a copy of a yearly appraisal report from CIMC within 60 days from the closure of the financial year.
6) SEBI does not take the responsibility for the financial soundness of any scheme or for any correctness of the statements made or opinions expressed in the offer document. It is the responsibility of the CIMC to ensure that the disclosure made in the offer document is correct. The investors should read the whole document carefully, especially the risk factors.
7) As a regulatory body, SEBI cannot take the guarantee or undertake the repayment of money to the investors.
8) If a registered CIMC violates certain provisions of the regulations, then SEBI may take action in the form of suspension or cancellation of the certificate against the entity. In the interest of the security market and the investors, SEBI may initiate criminal prosecution also, if required.
9) Unit certificates have to be compulsorily listed on the stock exchanges as mentioned in the offer document.
What is the difference between Collective Investment Scheme (CIS) and mutual funds?
CIS and mutual funds, both are collective investment vehicles that allow the investors to pool their funds instead of investing them individually. The only difference between both of them is that mutual funds invest exclusively in securities (stocks, bonds and others) whereas CIS is confined to the plantation and real estate.
Is there any list of registered lists of companies under Collective Investment Schemes?
There is no registered list. If anyone is collecting fixed deposits, you should check about the CIS certificate and through open offer/prospectus only.
Are there any companies where SEBI has debarred / Banned from CIS?
Here is the list of companies which started collecting funds, but with SEBI lens, these are debarred /banned. Investors should be careful if any of these companies are collecting funds from the public indicating as an investment scheme.
Conclusion: “Money doesn’t grow on trees, but if someone says so, then he is running a CIMC”. These days CIMC has become yet another good concept of investing money. These companies generally provide good returns, if their base plan is good, but the investors need to be very careful while investing. One should read the offer document and analyze the risk factors.
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Collective Investment Schemes – What precautions should you take as an investor