SEBI Strengthens Regulatory Framework For Collective Investment Scheme

To strengthen the regulatory framework for collective investment schemes, markets regulator SEBI has enhanced the net worth criteria and track record requirements for entities managing such schemes.

Also, the regulator has mandated a minimum of 20 investors and a subscription amount of at least Rs 20 crore for each Collective Investment Scheme (CIS), according to a notification on Tuesday.

Currently, CIS rules do not mandate minimum number of investors, maximum holding of a single investor or minimum subscription amount.

In addition, the regulator has put a cap on cross-shareholding in Collective Investment Management Company (CIMC) to 10 per cent to avoid conflict of interest .

To give this effect, the Securities and Exchange Board of India (SEBI) has amended CIS regulations. The rules, first notified in 1999, have not been reviewed since then.

The move comes after the board of SEBI approved a proposal in this regard in its board meeting in March.

The new rule is aimed at strengthening the regulatory framework for collective investment schemes as well as empower the CIMCs to effectively discharge their responsibilities towards the investors.

CIS is a pooled investment vehicle in closed-ended investment space and the units of the schemes are listed on an exchange.

The structure of CIS is a two-tier one as there are two entities involved in the process -- the CIMC and trustees. CIMC is created to float and manage a CIS and the trustee is appointed as guardian of the funds and assets.

With regard to eligibility criteria, SEBI said applicant or its promoters should have a sound track record and general reputation of fairness and integrity in all their business transactions.

The applicant should have been carrying out business in the relevant field in which CIS schemes are proposed to be launched, for a period of at least five years; net worth should be positive in all the immediately preceding five years and should have profits in three out of the five years.

CIMCs are required to have a minimum net worth of Rs 50 crore as compared to the present requirement of Rs 5 crore.

"The applicant has a net worth of not less than Rs 50 crore on a continuous basis: Provided that the applicant shall have a net worth not less than Rs 100 crore till it has profits for five consecutive years", in case the requirements related to profit is not fulfilled, SEBI said.

At present, there is no such requirement for relevant business, net worth or profitability. With no limit on minimum investment by an investor, retail investors are the primary target base for CIS.

Under the new framework, each CIS will have a minimum subscription amount of Rs 20 crore and each CIS needs to have a minimum of 20 investors and no single investor will hold more than 25 per cent of the assets under management of such schemes.

To avoid the conflict of interest, the regulator has restricted a CIMC and its group/ associates/shareholders' shareholding in a scheme at 10 per cent or representation on the board of rival CIMC.

Besides, the mandatory investment of CIMC and its designated employees in the CIS has to align their interests with that of the CIS.

Also, SEBI said CIS will not be open for subscription for more than 15 days.

However, the scheme may be kept open for subscription for a maximum of another 15 days subject to issuance of a public notice by the CIMC before the expiry of initial 15 days.

At present, the limit is for 90 days.

Further, the regulator has rationalised fees and expenses to be charged for the scheme. Also, unit certificates against acceptance of application will be allotted as soon as possible but not later than five working days from the date of closure of the initial subscription list.