What are collective investment schemes and the laws governing them?
An investment scheme where multiple people combine their money to invest in a specific asset is known as Collective Investment Scheme (CIS). The profit is shared among the investors as per the agreement before the pooling of funds.
In other words, any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised to receive profits, income, produce or property. The scheme/arrangement is managed on behalf of the investors is a CIS. In this case, the investors do not have a day to day control over the management and operation of such scheme or arrangement.
The Companies Act, 2013 (2013 Act) defines Collective Investment Management company (CIMC) for organizing, operating, and managing CIS. This company is registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999. According to SEBI Act 1992, CIS or arrangement is specified in section 11 AA that provide that scheme or arrangement which satisfied the condition referred to in section 2 or sub-section 2 A.
Osians Connoisseurs of Art (P) Limited v. Securities and Exchange Board of India (SEBI) [2020]
In this judgment, the Supreme Court noted that a CIS operated by a private trust is illegal and the same can be only floated by a collective investment management company and in no other form.
The case concerns two trust funds established respectively under the Indian Trusts Act, 1882. When SEBI asked the trustees to apply for certificates of registration as the investment comes under CIS, the trustees denied the same on the basis that the fund does not classify as CIS. The main argument was that since they conducted business by a trust, the restrictions of the SEBI Act under Section 12[1B] would not apply to them. The reason is, Section 11AA refers to the word company and not person.
Responding to this argument, the court observed that Section 12(1B) and the CIS Regulations particularly Regulation 2(h) defining Collective Investment Management Company (CIMC) states that “a company formed under the Companies Act of 1956 and registered with the Board under these regulations with the purpose of organizing, operating, and managing a collective investment scheme”. Further, Regulation 3 of the CIS Regulations states that CIS can only be carried out, sponsored, or launched by a CIMC that has received a certificate.
The court further noted that the statutory scheme of CIS is that it can only be floated by a person in the form of CIMC and not in any other form. Hence, it can be said that the term company is used in 11AA unlike 12(B) because the former was introduced five years after the latter and the CIS regulations came into force in 1999.
Lastly, the court noted that it is clear from the statutory scheme that the collective investment scheme of appellants which was carried out through a private Trust, would violate the said Statute and the CIS Regulations making it illegal.
