Collective schemes under lens

Last Updated: Tue, Jan 10, 2012 19:20 hrs

Regulator seeks overhauling of section 11AA of Sebi Act to include NBFCs, chit funds and cooperatives.

Collective investment schemes (CIS), which are largely unregulated because of dispute in jurisdiction, could soon come under one principal regulator, if market regulator Securities and Exchange Board of India’s proposals are implemented. In addition, several entities like cooperatives, NBFC deposits and collection under Chit Fund Act could also come under Section 11 (AA) of the Sebi Act, which defines CIS.

Several of these entities have used these loopholes to mop up funds from gullible individuals. There are over one lakh complaints with Sebi pertaining to non-payment of dues by CIS. The regulator has also received many complaints against multi-level marketing (MLM) companies, art funds and time sharing schemes that are not under the regulatory authority.

“There are several informal MLMs operating freely, and which are collecting deposits without regulations. It is necessary that they come under some regulatory ambit,” said Ashvin Parekh, national head, financial services, Ernst & Young.

Against this backdrop, Sebi, at its board meeting held earlier this month, made several proposals. “While there has been a change in market dynamics of investment management activities over a period of time, the regulations have remained constant,” Sebi said in the note in which it proposed amendment of guidelines to include new genre of firms. The CIS regulations put in place in 1998-99 primarily aimed at plantation and agro companies. Before the guidelines, 664 entities had collected Rs 3,518 crore from the public. None of the entities, who applied for registration, were found eligible after the regulations were introduced. About 75 of these entities wound up and returned the money, while Sebi prosecuted more than 550 entities. In some recent crackdowns, companies, including Rose Valley Real Estate, Sun-Plant Agro and Pearl Green Forest, have been barred from raising public money.

As per the regulations, no entity is allowed to run a CIS scheme without obtaining the Certificate of Registration from the market regulator. However, so far only one — GIFT Collective Investment Management — has registered with Sebi, but it has not launched any scheme till date.

Although no official figures are available, industry players say money raised by unregulated CIS could run into a few lakh crore. In case of art funds, in FY11, investments in the schemes increased 10.5 per cent to Rs 264 crore, according to a Karvy private wealth report.

“Despite so many measures, companies continue to dupe investors and raise money without being regulated. If Sebi takes additional measures there is no harm in that,” said Mehul Modi, senior director at Deloitte India.

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