Collective Investment Schemes- An Overview

Collective Investment Schemes is a particular scheme of investment where different individuals invest in a particular asset. This form of scheme is something similar to a mutual fund. However, it is not a mutual fund. Such provision is present under Section 11AA (2) of the Securities and Exchange Board of India (SEBI) Act, 1992, where a company offers some form of arrangement to collect the contributions made by different investors. The main objective of having this form of collective investment scheme is to get some form of income or profit as a result of this investment.

As per the SEBI Ordinance, 2013 if there is a collection or corpus of funds which exceeds the value of 100 crore, then it would be considered as a collective investment scheme. This would be considered as a CIS even if it is not registered with the SEBI. Such CIS is understood as a deemed CIS.

In the UK, Unit Trusts which are offered by different forms of financial companies are considered as CIS. However, in India, any form of mutual fund or unit trust is not considered as a collective investment scheme.

Benefits of Collective Investment Schemes

The following are the benefits of investing in a collective investment schemes:

• Portfolio of Securities

  An investor considering investing in a CIS would have a wide range of portfolio to consider. Hence an investor can choose a suitable portfolio to invest as per his requirements.

• Maximization of Profits

  Through this scheme profits can be maximized. Having different forms of investments in various collective investment schemes would definitely maximize the profits.

• Diversification

  One of the main aims of investing in such scheme is diversification of the portfolio. Through diversification, one can achieve good returns and reduce the risk avenues in the investment.

• Liquidity

  Collective investment schemes are highly liquid and marketable. Hence considering investing in such scheme would maximize the income of the investor.

Which are not considered as a collective investment schemes?

There are several schemes which are not classified as collective investment schemes. The following are the schemes which are not considered as a CIS:

• Any insurance transaction or insurance contract for which the provisions of the Insurance Act, 1938 would operate.
• Any form of deposits which are accepted by Non Banking Financial Companies (NBFC).
• Any scheme which is developed by a Co-operative Society or a Society under the Society Registration Act.
• Any contributions which are donated to a particular portfolio which comprises a mutual fund
• Any form of pension fund or insurance scheme in accordance with the requirements of the Employee Provident Fund and Miscellaneous Provisions Act, 1952.
• Any form of chit funds under the provisions of the Chit Fund Act, 1982.
• Any form of deposits which come under section 73 to 76 of the Companies Act, 2013.

Parties involved in Collective Investment Schemes

The following parties are involved in collective investment schemes:


• Shareholders

  These individuals are also known as 'Unit Holders'. Such individuals would subscribe to the asset. Unit holders would have the right to receive any form of return from the asset. Apart from this, any other return which is eligible to be received by the unit holder is the rightful property of the unit holder. This would depend on the initial agreement entered into by the unit holder and the company.

• Collective Investment Management Company

  This form of company has the sole purpose to manage the schemes related to CIS. Such entities can either be an entity which is registered under:

   The provisions of the Companies Act, 2013

   The provisions of the Securities Exchange Board of India, 1992.

  Unit holders under the scheme would enter into agreements with the companies to manage their securities.

• Trustee

  As this scheme is a portfolio of investments of different individuals; such CIS would be formed as a trust. To safeguard the interests of the unit holders a trustee would be appointed to act in the benefit of the unit holders. It is the responsibility of the collective investment management company to appoint a trustee to safeguard and act in the beneficence of the unit holders.

• Manager of the Fund

  Such a scheme would be managed by a fund manager. This individual would be responsible for advising the unit holders of the fund. Valuation of the fund and other functions would be carried out by the manager of the fund. Apart from this, the main responsibility of the fund manager is to manage the portfolio of securities.

Eligibility Criteria for Registering under Collective Investment Schemes

The following eligibility criterion has to be sufficed by the applicant for registering under Collective Investment Schemes:

• The company must be set up either under the provisions of the Companies Act, 2013 or the Companies Act, 1956.
• The main objects of the Memorandum of Association (MOA) must be to manage collective investment schemes.
• The net worth of the applicant must be 5 crores or more. At the time of filing the application, the net worth of the applicant can be 3 crores. However, within 3 years from the date of registering the application, the net worth should be 5 crores.
• The applicant has to satisfy the requirements as per the fit and proper person test.
• Infrastructural Facilities should be present with the applicant. This would mean, the applicant should have a leased premises or an own premises to carry out the activities under the CIS.
• Directors and other key management individuals of the company must have integrity.
• Directors and other key management individuals should not be convicted or charged with any offences involving moral turpitude or criminal convictions under any form of securities law.
• 50% of the directors should be independent. They must be related to the controllers of the Collective Investment Management Company.
• The applicant for registering under collective investment schemes must not be rejected in the past.
• One of the directors of the collective investment management company must be a representative of the trust. Such director should not be retired.
• The company (Collective Investment Management Company) must not be or act as a representative of any other form of scheme.
• Any applicant who already has an existing collective investment scheme should comply with the provisions of Chapter IX.

Procedure for Registering as a Collective Investment Management Company (Collective Investment Schemes)

If an applicant wants to handle collective investment schemes, then they must first set up a collective investment management company. As per section 3 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999, an applicant cannot manage a CIS without having an effective certificate of registration.

• Application

  An applicant must first make an application in 'Form A' to secure the certificate and grant of registration to act as a CIS company. Any applicant wanting to start a scheme, which would be deemed as a CIS should also make an application in 'Form A'. This would be in accordance with the requirements of section 11AA of the act.

• Fee

  As per section 6 of the act, the applicant must also pay the fees for registering as a collective investment management company. The fees to be paid by the application is a non-refundable amount of Rs. 25,000/-. Provisional registration fee has to be paid is Rs. 5 Lakh. An application for grant of Collective Investment Management Company is Rs. 10 Lakh. Apart from this, the filing fees for the offer document is Rs. 25,000/-.

• Mode of Payment of the Fee

  The fee must be paid as a Bank Draft in favors of 'The Securities and Exchange Board of India' Mumbai or any of the regional offices where the application is submitted.

• Confirmation

  The application for registering under Collective Investment Schemes must confirm with the requirements of the board. If there are any forms of discrepancies with the application, then the application would be rejected.

• Appeal

  If the application is rejected, then the applicant has to provide reasonable cause as to why the application should be accepted. This must be carried out within a period of 30 days from the date of rejection of the application. The board may ask the applicant to provide other documents.

• Certificate

  If the application confirms with the requirement, then the board would ask the applicant to pay the registration fee for the certificate. Once the registration fee is remitted to the board, they would provide a certificate in 'Form B'.

• Terms and Conditions

  There are several terms and conditions which have to be followed by the company. This would be placed by the board for the applicant to follow.

Restriction on Activities of the CIS Company under Collective Investment Schemes

• This form of company cannot take part in any other activity other than managing the scheme.
• This company must not act as a trustee for any other collective investment scheme.
• This company cannot launch any form of scheme for active investing. However, the company can carry out any form of investment in its own scheme.

Documents required

The following documents are required for a collective investment scheme company:

• Information related to the directors of the company
• Certificate of Incorporation of the Company
• KYC details of the directors
• Form A- To be duly filled by the applicant
• Information on Net Worth- Annual Financial Statements
• Information on the property- whether leased or own
• Memorandum of Association (Objects)
• Articles of Association of the Company.

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