Understanding India's Collective Investment Schemes: A Guide

A Collective Investment Scheme (CIS) is a form of investment where individuals pool their money together to invest in different assets. The primary objective of a CIS is to maximise profits and diversify the portfolio of investments. In India, CISs are regulated by the Securities and Exchange Board of India (SEBI) and are not considered to be mutual funds or unit trusts. The main participants in a CIS include the sponsor, asset management company (AMC), trustees, custodian, investors, registrar and transfer agent, and distributors/intermediaries. To be eligible for a CIS, applicants must meet specific criteria, including a minimum net worth, integrity requirements, and compliance with SEBI regulations.

What is a Collective Investment Scheme (CIS)

A Collective Investment Scheme (CIS) is an investment scheme in which payments made by investors are pooled and used to generate profits, managed on behalf of the investors. The primary purpose of a CIS is to provide individuals with access to a diversified portfolio of investments that may be challenging or costly to achieve alone. This scheme is managed by professional fund managers who make investment decisions on behalf of the investors. Each investor owns units or shares in the scheme, proportionate to their investment amount.

CISs include mutual funds, exchange-traded funds (ETFs), hedge funds, and private equity funds. They offer investors the potential for capital appreciation and income generation, depending on the fund's investment objectives. The key features of a CIS include pooling of funds, professional management, diversification, ownership through units or shares, transparent reporting, regulatory oversight, investment objectives and strategies, and accessibility and affordability.

In India, CISs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Collective Investment Schemes) Regulations, 1999, and subsequent amendments. These regulations define the roles and responsibilities of the participants, which include the sponsor, asset management company (AMC), trustees, custodian (optional), investors, registrar and transfer agent (RTA), and distributors/intermediaries.

The benefits of investing in a CIS include access to a wide range of portfolios, maximisation of profits through diversification, and high liquidity and marketability of the schemes. However, it is important to note that CISs do not include certain types of schemes, such as insurance contracts, deposits accepted by Non-Banking Financial Companies (NBFCs), or schemes developed by cooperative societies.

Benefits of a CIS

A Collective Investment Scheme (CIS) is an investment scheme that pools payments from investors to generate profits and income, which is then managed on their behalf. Here are some advantages of investing in a CIS:

Portfolio of Securities:

Investors in a CIS have access to a wide range of investment portfolios to choose from, allowing them to select the most suitable options according to their requirements and financial goals.

Maximisation of Profits:

By investing in various CIS schemes, investors can maximise their profits. The diverse investment options available through CIS help spread risk and increase the potential for higher returns.

Diversification:

One of the primary goals of CIS is to provide investors with a diversified portfolio of assets, sectors, or geographic regions. This diversification helps mitigate the impact of poor performance in any single investment on the overall portfolio, thus reducing risk and enhancing potential returns.

Liquidity and Marketability:

CIS schemes are highly liquid, providing investors with the flexibility to buy or sell units or shares with ease. This liquidity, along with the diversified portfolio, helps maximise the income of the investor.

Professional Management:

CIS schemes are managed by professional fund managers who analyse market trends, conduct research, and make informed investment decisions on behalf of the investors. These professionals ensure that the investments are aligned with the scheme's objectives, thus providing expert guidance to investors.

Accessibility and Affordability:

CIS offers access to investment opportunities that may otherwise be challenging for individual investors to access or afford. By pooling funds, investors can benefit from economies of scale, reduced transaction costs, and the expertise of professional fund managers.

Regulatory Oversight and Transparency:

In India, CIS schemes are regulated by the Securities and Exchange Board of India (SEBI), which provides rules and regulations to protect investors' interests, ensure transparency, and promote fair practices in the operation and management of these schemes. CIS investors also receive regular financial reports, performance updates, and disclosures, enabling them to monitor their investments and make informed decisions.

Overall, CIS in India offers a range of benefits, including diversification, professional management, and regulatory oversight, making it an attractive option for investors seeking to maximise their profits while minimising risks.

Parties involved in a CIS

There are several parties involved in a Collective Investment Scheme (CIS) in India. These include:

• The Sponsor: The sponsor is responsible for proposing, initiating, and setting up the CIS. They fulfil regulatory requirements, appoint the Asset Management Company (AMC), and ensure compliance with regulations. Sponsors must meet eligibility criteria set by the Securities and Exchange Board of India (SEBI), including having a sound track record and financial standing.
• Asset Management Company (AMC): The AMC manages and operates the CIS, making investment decisions, managing the portfolio, and carrying out day-to-day activities. The AMC must be registered with SEBI.
• Trustees: Trustees act as custodians of the fund's assets, protecting investors' interests, and overseeing the AMC's activities. They ensure the scheme operates in accordance with regulations and the trust deed, and they must be independent of the sponsor and AMC. Trustees require SEBI approval for their appointment.
• Custodian (Optional): A custodian may be appointed to safeguard the scheme's securities and assets. They ensure proper segregation and safekeeping of assets and perform functions as per regulations and SEBI specifications.
• Investors: Investors are individuals, institutions, corporate entities, and other eligible participants who contribute funds to the CIS. They pool their money to invest in a diversified portfolio of securities or other assets. Investors can include retail investors, high-net-worth individuals, corporate bodies, trusts, and more.
• Registrar and Transfer Agent (RTA): The RTA maintains records of investors, transfer of units, and processes subscriptions and redemption requests. They help manage the administrative functions of the CIS and ensure efficient handling of investor transactions.
• Distributors/Intermediaries: Distributors or intermediaries market, sell, and distribute the CIS units to investors. They can be banks, financial institutions, brokers, agents, or other authorised entities. They assist investors with the investment process and provide information and guidance on the scheme.

These parties work together to ensure the smooth operation of a CIS, providing investors with access to a diversified portfolio of investments and professional management of their funds.

Eligibility criteria for registering under a CIS

The Securities and Exchange Board of India (SEBI) defines the eligibility criteria for a Collective Investment Scheme (CIS) in India. Here are the key requirements:

Sponsor Entity Type:

The sponsor, or entity responsible for proposing and setting up the CIS, should be a well-established corporate body. Specifically, the sponsor should be registered under the Companies Act, 2013, or be a Limited Liability Partnership (LLP) with the legal status to establish and manage the CIS.

Additionally, the sponsor must have a proven track record in the financial services business, with a minimum of 5 years of experience. This ensures expertise and competence in handling financial matters. The sponsor's financial stability is also assessed through a minimum net worth requirement of Rs. 5 crores.

Fit and Proper Criteria:

The fit and proper criteria are designed to ensure the integrity and competence of individuals managing the CIS. The sponsor, trustees, and directors of the Asset Management Company (AMC) should have a good reputation, sound mind, and no convictions for economic offences or regulatory violations.

Registration with SEBI:

Both the CIS and its Sponsor and AMC must obtain registration from SEBI by submitting the necessary application forms, documents, and fees.

Compliance with Regulations:

The CIS, its Sponsor, and AMC must adhere to various regulations, including investment limits, disclosure requirements, valuation norms, and reporting obligations. They must also comply with investor protection measures specified by SEBI.

Appointment of Trustees:

The CIS should appoint trustees who are independent of the sponsor and the AMC. These trustees must obtain prior approval from SEBI and possess the necessary qualifications and experience to fulfil their fiduciary duties effectively.

Valuation of Assets:

The assets of the CIS should be valued periodically and fairly, in accordance with the valuation norms prescribed by SEBI. This ensures an accurate calculation of the net asset value (NAV) of the scheme.

Procedure for registering as a Collective Investment Management Company (CIMC)

Any person who wishes to launch a Collective Investment Scheme (CIS) will be required to register as a Collective Investment Management Company (CIMC). The following is the procedure for registering as a CIMC:

• The applicant must be set up as a company under the Companies Act, 1956 or the Companies Act, 2013 and must have specified the management of a collective investment scheme as one of its main objectives in its Memorandum of Association.
• The applicant must have a net worth of at least 5 crore rupees, with a minimum of 3 crore rupees at the time of application, which should be increased to 5 crore rupees within 3 years from the date of registration approval.
• The applicant must have adequate infrastructure to carry out the operations of the collective investment scheme as per the applicable provisions.
• The applicant's directors or key personnel must be persons of integrity and honesty with adequate professional experience in related fields and must not have been convicted of any offence involving moral turpitude or any violation of securities laws.
• At least 50% of the directors in the CIMC should be independent and not directly or indirectly associated with the persons who have control over the company.
• No individual directly or indirectly connected with the applicant should have been refused registration by the Securities and Exchange Board of India (SEBI) in the past.
• The applicant must furnish an application for registration in Form A with the necessary documents and pay the prescribed fees.
• The application will be reviewed by the Board, and if it is complete in all respects and fulfils the eligibility criteria, the applicant will be intimated to pay the fees. Once the fees are duly paid, the Board will grant the Certificate of Registration.
• If the application does not meet the criteria, the Board may reject it but will provide an opportunity for the applicant to rectify any discrepancies within one month. Once the Board is satisfied that the application is complete, it will be considered for approval.

Frequently asked questions