Presentation on Collective Investment Schemes

Collective Investment

Schemes – An

Overview

Vinod KothariVinod Kothari & Company

1012 Krishna224 AJC Bose RoadKolkata – 700017Phone 033-22811276/ 22813742/ 22817715

601C, Neelkanth, 98, Marine Drive, Mumbai-400002Phone: 022-22817427

www.vinodkothari.comEmail: [email protected]

Copyright and Disclaimer

• The contents of the presentation are intended solely for the use of the client to whom the same is marked by us.

• No circulation, publication, or unauthorised use of the presentation in any form is allowed, except with our prior written permission

• No part of this presentation is intended to be professional advice, or solicitation of professional assignment.

2

About Us• Vinod Kothari & Company,

Company Secretaries in Practice

▫ Based out of Kolkata, Mumbai

• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.

3

Our Organization’s Credo:

Focus on capabilities; opportunities follow

Related Articles• Articles on AIFs: http://india-

financing.com/alternative-investment-funds.html• Articles on Venture capital and PE: http://india-

financing.com/staff-publications-venture-capital.html

• Article on CIS: http://india-financing.com/collective-investment-schemes.html

• Articles on bonds and debentures at other articles on bonds and debentures at http://india-financing.com/staff-publications.html/capital-markets.html

• Articles on NBFCs at http://india-financing.com/staff-publications-nbfc.html

4

Various small savings schemes

Household savings in India

6

Household savings in India

(As per cent of GDP at current market prices)

2011-12 2012-13

1 Currency 1.6 1.6

2 Bank deposits 8.6 8.8

3 Non- banking deposits 0.1 0.1

4 Life insurance fund 2.9 2.9

5 Provident and pension fund 1.7 1.7

6 Claims on Government 0.8 0.8

7 Shares & debentures 1.2 1.3

8 Gross Financial Assets (1 to 7) 16.8 17.1

9 Gross Financial Liabilities 5.1 5.2

10 Net Financial Savings (8 – 9) 11.7 11.9

11 Physical Savings 11.5 11.7

12 Household total Savings (10+11) 23.2 23.6

Source: http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=662#4

Government savings schemesName of The

Scheme

Limits of Investment Amount

Outstanding at

end-Mar.2011 P

(Rs. Billion)

Since Sep.2,

1993

Post Office

Savings Bank

Accounts

Minimum Rs.50 and Maximum Rs. 1,00, 000 for an

Individual Account (Rs. 2 lakh jointly)

301.01 #

Public Provident

Fund 1968

Minimum Rs 500 and Maximum Rs. 70,000 in a Fiscal

Year

315.83 15

Post Office Time

Deposit Account

Minimum Rs 200 and no Maximum Limit 284.45 1,2,3 and 5

Post Office

Recurring Deposit

Account

Minimum Rs 10 per month or Any Amount in Multiples

of Rs. 5 and No Maximum Limit

612.5 5

National Savings

Scheme 1992

Minimum Rs.100 and No Maximum Limit 4.78 4

Post Office

Monthly Income

Scheme

Minimum Rs 1500 and Maximum Rs 4.5 Lakh in Single

Account and Rs. 9 Lakh in Joint Account

2186.74 6

NSC VIII issue Minimum Rs. 100 and No Maximum Limit 546.42 6

Indira Vikas Patra No Limit 10.2 5 1/2

Kisan Vikas Patra Minimum Rs.100 no Maximum Limit 1585.84 5 1/2

Senior Citizens

Saving Scheme

Minimum Rs 1.000 and Maximum Rs.15 Lakh 309.13 -

7

Various collective investment devices

8

Collective investment

devices

Corporate form

Issue of securities

Deposits

Non corporate

form

public

Collective investment

schemes

Mutual funds

Private

Portfolio management

Alternative investment

funds

Mutual saving

schemes

Chit funds

Nidhi‟s

Barred devices

State-wise investments in small

savings in Government Securities*State 2007-08 2008-09 2009-10

Andhra Pradesh 387 323 1531

Arunachal

Pradesh27 24 54

Assam 72 115 163

Bihar 847 793 1852

Chhattisgarh 81 68 253

Goa 114 49 175

Gujarat 915 671 3829

Haryana 172 107 806

Himachal Pradesh 158 103 468

Jammu and

Kashmir62 43 127

Jharkhand 169 178 863

Karnataka 388 114 661

Kerala 180 13 72

9

* Source: http://finmin.nic.in

State-wise investments in small savings in

Government Securities contd..

State 2007-08 2008-09 2009-10

Madhya Pradesh 246 71 810

Maharashtra 2188 1538 4314

Manipur 203 203 2

Meghalaya 12 11 69

Mizoram 0 0 12

Nagaland 1 2 6

Orissa 169 161 756

Punjab 729 190 1576

Rajasthan 105 63 144

Sikkim 0 0 0

Tamil Nadu 534 62 695

Tripura 16 3 64

Uttar Pradesh 1956 1213 4985

Uttaranchal 230 189 777

West Bengal 1470 1654 7992

Delhi 746 429 1769

Pondicherry 16 22 38

10

Small Savings in West Bengal

11

-2000

0

2000

4000

6000

8000

10000

1200019

92

…

199

3…

199

4…

199

5…

199

6…

199

7…

199

8…

199

9…

20

0…

20

01…

20

0…

20

0…

20

0…

20

05

…

20

0…

20

07

…

20

0…

20

0…

20

10…

20

11…

Net collections of small savings in West Bengal (Rs

*Source: West Bengal Economic Survey 2012-13

CISs: Actions againts defaulting

companies*• As on December, 2012, there were 171 CIS companies against

which court proceedings have been initiated▫ Penalty imposed in such from 30,000/- t0 10,00,000/-

(depending upon the money mobilized in contravention of the CIS Regulations)

▫ Rigorous imprisonment up to 6 months• Recently, in March, 2013, proceeding against a company

named Maitreya Services Pvt Ltd and all its directors have been barred▫ Charges like offences of fraud, cheating, criminal breach of trust

and misappropriation of public funds have been filed• As per SEBI‟s latest data, around 664 entities collected Rs

3,518 crore in 1998-99▫ Among these 75 wound up their schemes and returned money to

investors▫ Prosecution action has been launched against remaining 589

entities

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*Source: www.sebi.gov.in

An Overview

13

Overview of regulatory framework

Pooling of Money by way

of:

DepositsDeposit Rules,

NBFC Guidelines

Issue of securities

Refer next slide

CIS

Publicly offered

SEBI CIS Regs

Privately offered

SEBI AIF Regs

Mutual Funds MF Regs

Money circulation

schemes

Prize Chit and Money Circulation Schemes

(Banning) Act

Chit funds Chit Fund Act

Non Corporate

BodiesProhibited

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Issue of Securities

• To 49 or less:▫ Privately placed issue

• To 49 or more [proviso to section 67 (3)]: ▫ Deemed public issue▫ Issue of prospectus and other public issue formalities to apply

• Whether deemed public offer rule apply to NBFCs?▫ As per general definition of a public offer, offer resulting into

securities being available to a person other than the one to whom the offer was made is regarded as public offer, applies to all companies. Hence, in our view, rule applies to NBFCs also

▫ However, taking benefit of the proviso, many chit funds use NBFC to raise money generally through debentures which are neither covered by

Deposit Rules nor comes into public offer due to proviso to sec 67(3)

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Issue of Debentures (depending on nature of

the issuing company)Debenture

issue

By Public Cos

NBFC

Issue to 50 or more

sec 67 does not apply

But issue will be

public issue

Issue up to 49

Pvt offer

NBNC

Issue to 50 or more

Deemed public offer

Issue up to 49

Pvt offer

By Private Cos

cannot issue to public

16

Issue of Debentures (by NBNCs) – When

Deposit?Debentures

Secured by

Mortgage of immovable

property

Issue on or before March

20, 2013 -Exempted

Mortgage of fixed assets*

Having MV more or equal

to issue size

Exempted

Any other case

Deposit Rules apply

Any other case

Deposit Rules apply

Unsecured

Convertible

Exempted

Non Convertible

Deposit Rules apply

17

*As per MCA Notification dated March 21, 2013

18

Issue of Debentures by NBFCs- When Public

Deposit?Debentures

Secured by

Mortgage of immovable

property

Having MV more or

equal to issue size

Exempted

Any other asset

Having MV more or

equal to issue size

Exempted

Any other case

Directions apply

Unsecured

Convertible

Exempted

Non Convertible

Directions apply

Meaning of Deposit

• Simple meaning: money given/taken in advance to execute a monetary transaction

• Sec 45I(bb) of RBI Act provides inclusive definition as to include any receipt of money by way of deposit or loan or in any other form but excludes:▫ amounts raised by way of share capital; ▫ amounts contributed as capital by partners of a firm; ▫ amounts received from banks and financial

institutions▫ amounts received by way of security deposit or

advance against orders▫ any amount received from a registered money lender ▫ any amount received by way of subscriptions in

respect of a chit.

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Meaning of Public Deposit

• Paragraph 2(i)(xii) of NBFC Directions defines „public deposit‟ as a „deposit‟ as defined by RBI Act but further excludes:▫ Amount received from Public financial institutions▫ Amount received from any other company▫ Share/debenture application money▫ Amount received from directors, or shareholders in case of a private

company▫ Amount received by issue of secured mortgage bonds, or convertible

bonds▫ Promoters‟ loans brought according to loan agreement with term lending

institutions▫ Amount received from mutual funds▫ Hybrid debt or subordinated debt, maturity not less than 60 months▫ Amount received on issue of commercial papers▫ Any amount received by SI-NBFC-ND by issuance of 'perpetual debt

instruments' in accordance with the rules framed by the RBI from time to time.

20

In-substance Deposit

• Money to money transactions to be treated as in-substance deposit

• Generally, where there exists debtor-creditor relation

• Some examples are:

▫ Share application money lying un-allotted for long time

▫ Advances received without any purpose

▫ Subscription money received for issue of preference shares

21

Deposits: Rules applicable

• RBI Act, 1934• Companies (Acceptance of Deposits) Rules, 1975

▫ Under these, companies can accept deposits upto 10% of capital and free reserves

▫ Minimum NOF of 1 crores required▫ A maximum of 12.5% interest can be charged

• NBFC Acceptance of Public Deposit (Reserve Bank) Directions, 1998 ▫ NBFC-D can accept upto 10 times of its NOF▫ Minimum credit rating: investment grade▫ Capital Adequacy: 15%▫ Rate of interest – max. 12.5% or as specified from time

to time

22

Collective Investment Schemes

(CIS): Meaning

• Scheme or arrangement made or offered by any company

▫ under which the contributions, or payments made by the investors are pooled and utilised with a view to receive profits, income, produce or property

▫ is managed on behalf of the investors.

• Investors do not have day to day control over the management and operation of such scheme or arrangement.

23

Schemes not treated as CIS• scheme or arrangement made or offered by a co-operative society;• scheme or arrangement under which deposits are accepted by

NBFCs;• scheme or arrangement being a contract of insurance to which the

Insurance Act, applies;• scheme or arrangement providing for any Scheme, Pension Scheme

or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952

• scheme or arrangement under which deposits are accepted under section 58A of the Companies Act, 1956;

• scheme or arrangement under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956;

• scheme or arrangement falling within the meaning of Chit business as defined in section 2(d)of the Chit Fund Act, 1982;

• scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund;

24

SEBI (Collective Investment Schemes)

Regulations, 1999

25

Eligibility Conditions

• applicant is set up and registered as a company under the Companies Act, 1956

• applicant has a net worth of not less than Rs. 5 crores

• managing of collective investment scheme as one of its main objects is states in its MoA

• Atleast 50% directors shall be independent

• CIS company is not the trustee of any CIS

SEBI CIS Regulations contd..

26

Obligations before the launch of any scheme

• Scheme to be approved by trustee• Registered as debenture trustee are

eligible to be appointed as trustees • Appraisal by an appraisal agency and

credit rating by any such agency.• Duration of schemes shall not be less than

3 days• No scheme shall provide guaranteed or

assured returns• Scheme to be open for not more than 90

days• All unit certificates to be freely transferable• Listing of schemes allowed, if mentioned in

the offer document

Disclosures

• An annual report and annual statement of accounts to be prepared in respect of each financial year

• within two months from the date of closure of each financial year forward to SEBIa copy of the Annual Report

• Publish unaudited results within 1 month of end of each quarter in newspapers

SEBI CIS Regulations contd..27

Terms and conditions after issue

of certificate

inform SEBI of any

material change

director to be appointed

with prior approval of the trustee

no change in the controlling

interest without prior approval of

SEBI , trustee and 50% unit

holders

grievances redressal

within 1month

SEBI CIS Regulations

Restrictions on business activities

• undertake any activity other than that of managing the scheme

• act as a trustee of any scheme

• launch any scheme for the purpose of investing in securities

• invest in any schemes floated by it

Obligations of CIS company

• be incompetent to enter into any transaction with or through its associates or relatives relating to the scheme

• give receipts for all monies received by it and give a report to SEBI every month, particularly of receipts and payments

• hold a meeting of its BoD at least twice in every three months

• obtain adequate insurance against the property of the scheme

28

Meaning of Alternate Investment

Funds (AIFs)

• A fund

▫ established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which:

is a privately pooled investment vehicle collecting funds from investors, Indian and foreigners, both

is not a MF or any other fund as regulated by SEBI

29

AIFs: Categories

Depending upon the activities in which investment can be made and on the basis of power to borrow, AIFs has been divided into:

• Category 1 AIF: investing in starting or early stage ventures• Eg. social venture funds, SME funds, and infrastructure

funds• Category 2 AIF: which cannot borrow except for day to

day operations • Eg.,PE funds

• Category 3 AIF: employing diverse or complex trading strategies• eg., hedge funds, real estate funds, venture capital funds

30

Features of an AIF

• An investment vehicle▫ Must be engaged in investment activities with an objective of

generating a rate of return, other than by carrying on a substantive activity

• Segregating ownership of money and management of money• Pooling of money not in form of ownership capital

▫ Vehicle pooling money from persons other than its own shareholders is an AIF

• Collective and Managed vehicle▫ A fund managed by managers and a commingled pool of money

that collectively makes investment• Private vehicle

▫ Raising and pooling money on private placement basis However, no. of investors may go up to 1000

▫ Therefore, pvt placement will mean that accepting of offer by person to whom offer was made

31

AIF and CIS

• AIFs:

▫ Almost same as a CIS

▫ But pooling money on private placement basis

• CIS:

▫ Engaged in pooling of money through public offers

32

AIFs and VCFs

• AIFs:

▫ Privately pooled investment vehicle

▫ AIF Regulations defines VCFs as an AIF investing in unlisted securities of emerging business models

• VCFs:

▫ VCF Regulations were loose regulations resulting in AIF regulations

▫ A VCF is a fund raising and investing money in terms of VCF Regulations

33

Who cannot be an AIF?

34

family trusts set up for the benefit of relatives

employee welfare trusts or gratuity trusts

Other SPVs not established by Fund managers, securitization trust

ESOP Trusts

holding companies as per Companies Act

Funds managed by securitisation company or reconstruction co.

Any such pool of funds which is directly regulated by any other regulator in India

AIFs: Registration procedure

35

Application

• Application in Form A• Accompanied by non-refundable application fee as specified

in Part A• In the manner as in Part B

Requirements

• Board to consider all the requirements laid down in AIFRegulations for the purpose of grant of certificate

Validity

• Certificate of registration to be valid till the AIF is wound up.

AIFs: General investment

conditions

36

Companies outside

India

• •AIFs may invest in securities of companies incorporated outside India subject to such conditions

Category I, II and

III

• Category I and II to not invest more than 25% of corpus in one investee company

• Category III to invest not more than 10% of corpus in one investee company

Un-invested portion?

• Un-invested portion of the corpus may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality till deployment of funds as per the investment objective.• Thus, AIFs can invest funds according to their investment objectives

states in IM. In case of the un-invested portion, may be invested in liquid assets

Mutual Funds: Meaning

A fund registered under MF

Regulations

• established in the form of a trust

• to raise monies through the sale of units to the public

• under its schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets

37

Mutual Fund Regulations, 1996Eligibility criteria

• sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions

• Sponsor contributes at least 40% to the net worth of the AMC

• appointment of trustees, AMC , custodian

Application for registration

• Ensure that main objects of company allow carrying on of mutual fund activities

• Submit the following along with Form A:

• complete list of group/associate companies registered with SEBIin any capacity

• Whether any of the sponsor or its group/associate companies is listed?

• Details of any disciplinary action taken by RBI against the sponsor or group/associate companies

38

Mutual Fund Regulations, 1996

contd..

39

• Mutual fund may invest only in:• securities;• money market instruments;• privately placed debentures;• securitised debt instruments, which are either

asset backed or mortgage backed securities;• gold or gold related instruments;• Real estate assets

Investment obligations

• Not to borrow except to meet temporary liquidity needs for the purpose of repurchase, redemption of units or payment of interest or dividend to the unitholders

• Not to advance loans for any purpose• Restrictions on gold exchange traded fund scheme

provided separately.

Restrictions

40

What are chit funds

• The recent happenings in West Bengal (Sharadhascam and political bickerings thereafter) have painted the chit fund industry shady.

▫ Periodically, the chit fund industry has faced similar episodes

• Chit funds are perfectly legal, regulated instrument

• Declining over the past few years, but prevalent mainly in Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. To some extent in Delhi

▫ Unregulated, informal chit funds are countless

41

Chit funds are mutual savings

associations• Chit funds are what is globally known as

Rotating Savings and Credit Associations.

• These prevail in many countries.

▫ In Germany and Austria, Bausper-kassen is a well regulated model for mortgage financing

• In India, these are known by various names such as chit funds, kuries, Nidhis, mutual benefit companies, etc

42

Number of Chit Fund Companies*

• As on November 6, 2008, number of registered chit fund companies: 10269

• As on date, number has fallen down to 4256

*Source: www.mca.gov.in

43

Chit Funds

• The central act is The Chit Funds Act, 1982

▫ Having overriding effect on other acts and MOA/AOA of companies

• State wise laws prevalent

▫ Following states have their own laws:

Karnataka

Tamil Nadu

Delhi (U.T.)

44

Chit Funds: Meaning

• Meaning of “Chit”:

▫ a transaction by whatever name

▫ wherein a person enters into an agreement with a specified number of persons

▫ every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and

▫ that each such subscriber shall, in his turn, as determined by lot or by auction or in any other manner as in the chit agreement, be entitled to the prize amount.

45

Transactions not treated as “Chit”

• Transactions not to be treated as chit if in such transaction:

▫ some alone (not all) of the subscribers get the prize amount without any liability to pay future subscriptions, or

▫ all the subscribers get the chit amount by turns with a liability to pay future subscriptions

46

The Chit Funds Act, 1982

47A

pp

lic

ati

on

pr

oc

es

s 1. Application for the conduct of chit fund to be made to the State Government.

2. Certificate of commencement shall be provided after all the tickets specified in the chit agreement are fully subscribed and the Registrar is intimated of the same.

Fo

rm

at

of

Ch

it

Ag

re

em

en

t 1. Shall be in duplicate and signed by each of the subscribers‟ and the foreman.

2. Every chit agreement to be registered with the Registrar of Chit

Re

qu

ire

me

nts 1. Paid up capital of not

less than Rs. 1 lakh

2. Create and maintain a reserve and transfer a sum not less than 10% of such profit.

3. No foreman to continue chit business if the aggregate chit amount exceeds Rs. 25 lakhs

4. Minutes of proceeding of each draw to be filed with the Registrar within 21 days from the date of draw.

Chit Funds – registration in Delhi

Documents to be submitted

• Bank certificate for deposit of Rs. 1,00,000/- as paid-up capital• MOA, AOA, e-form 2, 18, 32• Resolution for appointment of foreman of the company• Net-worth certificate issued by CA of the company in respect of all the Directors• Balance sheet(s) of the company

Framing of bye laws

• Submit following particulars• name under which chit business is done• full details of the working of the chit• area of operation of the chit• mode of custody and investment of money.• rate of commission to which the foreman is entitled

Other obligations

• Change in registered office or director to be filed in e-form 18, 32 and submitted

• Chit can be pre-terminated if all the non-prized and unpaid subscribers consent in writing to the termination or foreman being an individual dies

48

Money Circulation Schemes:

Meaning

• Any scheme, by whatever name called,

▫ for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money

▫ on any event or contingency relative or applicable to the enrolment of members into the scheme,

▫ whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions

• Such schemes are BANNED

49

Prize Chit: Meaning

• Includes any transaction or arrangement by whatever name called ▫ under which a person collects through foreman, agent or in any other

capacity, ▫ Monies by way of : contributions or subscriptions or by sale of units, certificates or other instruments or as membership fees or admission fees or service charges

▫ in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement and

▫ utilises the monies so collected for following purposes: specified number of subscribers as determined by lot, draw or in any other

manner, prizes or gifts in cash or in kind not won any prize or gift, the monies collected, with or without any

bonus, premium, interest or other advantage, on the termination of the scheme

• Such chits are BANNED

50

Money Circulations Schemes:

Examples

• Multi level marketing or network marketing schemes▫ ways to sell the products directly to the consumers in which

the salesmen are compensated not only for the work done by them but also for the sales of people who have joined the company through them

• Pyramid Schemes▫ non-sustainable business which involves payments to

participants primarily to recruit other people into the scheme and there is no real investment or sale of products

• Ponzi Schemes▫ returns are paid to investors from their own money or

money of subsequent investors rather than actual profit earned.

51

Penalties provided in Regulations/Acts

52

Chit Funds: Penalty for violations

53

In Delhi

Starting any chit group without registration of Bye-laws by the R.C.F. Delhi

Imprisonment for a term which may extend to one year or with fine which may

extend to Rs.500/- or both.

Inviting the public to subscribe in a chit group, the Bye-laws of which are not registered with R.C.F. , making false statement

Not filing chit agreement Punishable with fine which may extend to one hundred rupees.

Not filing copy of the entry with the R.C.F.Delhi regarding substitution/removal of subscriber

For not furnishing proper security duly pledged with the RCF Delhi before the commencement of chit group

For not depositing the unpaid amount of subscription in the Statutory Deposit A/C. of an approved bank in respect of a non-prized subscriber.

MFs: Penalty for violations

54

Mutual Funds

Fails to furnish any information or furnishes wrong information relating to its activity as a mutual fund as required

Shall be dealt with in the manner provided under the Securities and

Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer

and Imposing Penalty)Regulations, 2002Fails to submit periodic returns

Fails to resolve complaints or give satisfactory reply

indulges in unfair trade practices in securities.

Violates the conditions of registration

CIS: Penalty for violations

55

Collective Investment Scheme

furnishes any information which is false or misleading or suppresses any material information

Shall be dealt with according to Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008

fails to make an application for listing or fails to list units of a Scheme in a recognized stock exchange

fails to resolve the complaints of the investors or fails to furnish to SEBI a satisfactory reply in this behalf

AIFs: Penalty for violations

Alternate Investment Funds

Contravenes the Regulations Punishable under Securities and Exchange Board of India (Intermediaries) Regulations, 2008

fails to furnish any information to SEBI

Furnishes false or misleading information

Does not submit returns to SEBI

fails to resolve the complaints of investors

56

Money Circulation Schemes-

Penalty

• Contraventions punishable with

▫ imprisonment up to three years, or

▫ fine up to five thousand rupees,

▫ or with both

57

58

Suman Motels Ltd. vs SEBI

• Suman Motels Ltd. vs SEBI (2003 42 SCL 433 SAT)

▫ SAT affirmed the SEBI order passed to refund the public money

▫ Appellant Company cannot claim that it is not required to comply with the requirements of the CIS Regulations

59

Paramount Bio-Tech Industries Ltd.

vs UOI

• M/S Paramount Bio-Tech Industries Ltd. vsUOI (Civil Misc Writ Petition No 51911 of 1999 decided on November 25, 2003)

▫ Sizeable portion of amount mobilized paid for commission expenses

▫ View framed by SEBI that company was deploying the funds received from the public for non banking financial companies, real estate

▫ Allahabad HC ruled that SEBI has the legislative competence to frame the Act and Regulations and CIS Regulations applies to this case.

60

P.G.F. Ltd. vs Union of India

• P.G.F. Ltd. vs Union of India (2005 124 CompCas 201 P H)

▫ It was held that transaction for purchase of agricultural land in the name of several investors is a money circulation scheme

▫ Reason being that it was not proved whether land was actually bought at all, or registered in the name of the so-called investors.

▫ Hence, the Scheme was treated as money circulation scheme and not CIS by the Punjab Haryana HC

61

Amway India Enterprises

• Amway India Enterprises• AP High court ruling at :

http://indiankanoon.org/docfragment/1369717/▫ Company argued that : its networking scheme did not infringe the Prize Chits &

Money Circulation Schemes (Banning) Act since “there is no quick money involved”

And that money received by the sponsor members was not dependent on any event or enrolment of new members

▫ However, Court held that: Company‟s marketing scheme is “money circulation

scheme” as it allegedly provided inducement since a sponsor member‟s income partly also came through the commission earned by those made members subsequently

62

Other rulings on collective

investment schemes

• Brijeshwar Jaiswal vs SEBI (27th March 2012)[http://indiankanoon.org/docfragment/17567204

8/]• Ankur Forest and Project (8th Feb 2011)[http://indiankanoon.org/docfragment/36651229

]• PACL India vs Axis Bank[http://indiankanoon.org/doc/1670110/]• Rose Valley [on the question of SEBI’s

jurisdiction][http://indiankanoon.org/doc/13648517/]

63

Muddle of Regulations

• It is not clear who will regulate the schemes which takes various forms

▫ For example, money is raised by strange instruments like preference shares or debentures – which, arguably, is not a deposit at all – hence, comes another regulator, MCA

Money is raised in disguise of such instruments, regulators keep waiting, investors suffer

• LLPs- not regulated by SEBI, RBI or Deposit Rules

▫ Only AIF Regulations cover LLPs

64