Investment is one of the major political planks of the present political regime
which help them to retain the throne. The government is also taking investment
friendly steps to meet their promises. It also raises potential regulatory
challenges which may arise in near future. Already country has witnessed many
big scams like Harshad Mehta vs CBI which led to the formation of regulatory
bodies like Securities and exchange Board of India (SEBI) in 1992. After SEBI
proper registration method is followed aimed at curbing such scams in future.
SEBI has been successful in achieving its objective until now.
In the late 90s many entities were floating many schemes which pooled money from
the general public for exorbitant returns. But many schemes failed in giving
returns which made huge loss to the people who invested enormous amount of money
with the hope to get something better return. SEBI was appointed as an official
regulator of the collective investment schemes. These fraudulent money pooling
activities are causing huge loss to the innocent investors and these results in
huge loss to the economy of the nation.
Adequate finance is integral to growth of the economy. The growth of the economy
is dependent on the production and distribution of goods and services, which in
turn is correlated to availability of capital. For this purpose, company
collects huge amount of money from the investors. Collective Investment Schemes
is an arrangement wherein any pooled money by the investors is utilized only for
the purpose of the scheme.
The contributions made by the investors are made with
the object of earning profit, income or produce. Collective Investment Schemes
falls under the purview of the SEBI. SEBI regulates it through the SEBI Act,
1992 and CIS Regulation, 1999. There are four main participants in the scheme-
Collective Investment Management Company, Trustee, Shareholder and Fund Manager.
Collective Investment Schemes though regulated by these two frameworks have not
been effective in curbing the scams.
These fraudulent pooling activities are
launched in abundance. These fraudulent pooling activities are causing huge loss
to the innocent investors and are also eroding the confidence of public in
investing their savings in the productive areas. This ultimately results in loss
the economy of the nation.
The term Collective Investment Scheme has been defined under Sec 11AA of the
SEBI Act, 1992. These are regulated by the SEBI Act, 1992 and CIS
regulations,1999. It is a trust-based scheme comprising of pools of assets which
is managed by the scheme manager. CIS portfolio is the contribution of group of
small investors. The stake of each investor in the total portfolio is
represented by the units of scheme held by the investors. These units are
securities in terms of Sec 2(h) of the Securities Contract Regulation Act,
The definition of Collective Investment Scheme is as follows:
Section 2(ba): collective investment scheme? means any scheme or arrangement
which satisfies the conditions specified in section 11AA.
- Any scheme or arrangement which satisfies the conditions referred to in
sub-section (2) [or sub-section (2A)] shall be a collective investment
scheme: 30[Provided that any pooling of funds under any scheme or
arrangement, which is not registered with the Board or is not covered under
sub-section (3), involving a corpus amount of one hundred crore rupees or more
shall be deemed to be a collective investment scheme.]
- Any scheme or arrangement made or offered by any [person] under which:
- the contributions, or payments made by the investors, by whatever name
called, are pooled and utilized for the purposes of the scheme or
- the contributions or payments are made to such scheme or arrangement by
the investors with a view to receive profits, income, produce or property,
whether movable or immovable, from such scheme or arrangement;
- the property, contribution or investment forming part of scheme or
arrangement, whether identifiable or not, is managed on behalf of the
- the investors do not have day-to-day control over the management and
operation of the scheme or arrangement.
2[(2A)] Any scheme or arrangement made or offered by any person satisfying the
conditions as may be specified in accordance with the regulations made under
- Notwithstanding anything contained in sub-section (2) [or sub-section
(2A)], any scheme or arrangement:
- made or offered by a co-operative society registered under the
Co-operative Societies Act, 1912 (2 of 1912) or a society being a society
registered or deemed to be registered under any law relating to co-operative
societies for the time being in force in any State;
- under which deposits are accepted by non-banking financial companies as
defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934
(2 of 1934);
- being a contract of insurance to which the Insurance Act, 1938 (4 of
- providing for any Scheme, Pension Scheme or the Insurance Scheme framed
under the Employees Provident Fund and Miscellaneous Provisions Act, 1952
(19 of 1952);
- under which deposits are accepted under section 58A of the Companies
Act, 1956 (1 of 1956);
- 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 (1 of
- falling within the meaning of Chit business as defined in clause (d) of
section 2 of the Chit Fund Act, 1982 (40 of 1982);
- under which contributions made are in the nature of subscription to a
- such other scheme or arrangement which the Central Government may, in
consultation with the Board, notify,] shall not be a collective investment
This section provides for pre-conditions necessary for any scheme to be
constituted as collective investment scheme.
It provides for four conditions; it
is as follows:
This section also provides for certain exceptions:
- The contributions of the small investors must be pooled and deployed for
the purpose of scheme only.
- Investors have contributed in the scheme with the aim to gain:
- Profits, or
- Income, or
- Produce, or
- Property � Movable or Immovable
- These contributions are managed on behalf of investors.
- Investors do not have day-to-day control on the contributions or scheme.
- Scheme offered by a co-operative society registered under the
Co-Operatives Act, 1912 or any state law for registration of the
co-operative society. Co-operative societies fall under the purview of the
State Government, if its object confine to a single state else Central
- Schemes will allow acceptance of deposits by NBFCs. Non -Banking
Financial Institution are regulated by RBI. RBI has issued NBFCs Acceptance of
Public deposits (Reserve Bank) Directions,1998 to regulate the NBFCs.
- Contract of Insurance, which is regulated by the Insurance Development
and Regulatory Authority of India or pension scheme or provident scheme
under the Employees Provident Fund Act.
- Schemes offered as chit funds. Chit funds are regulated by the State
- Schemes in the form of mutual fund which are regulated by the SEBI Mutual
Fund Regulation of 1996.
- Deposits accepted by the Companies under Section 74 of the Companies Act
and also deposits accepted by the Nidhi Companies under Section 406 of the
- Any other scheme notified by the Central Government in consultation with
Any scheme with a corpus of more than Rs. 100 crore which is not regulated by
any other authority and does not fall to any of the exceptions to the Collective
Investment Scheme would be CIS. This amendment was brought to the definition to
regulate the innovative schemes designed in a way that they fall out of the
purview of any regulator and thus remains unregulated.
In 1990s many plantations and agro based companies pooled money from the
investors for the purpose of investing. Such schemes lured small investors by
promising them very high returns. However, they failed to return even the
principal amount depriving the small investors of their hard-earned money and
bringing misfortune to them.
In the case of PGF Ltd, the Supreme Court of India has discussed the scope of
Section 11AA of the SEBI Act, 1992. It stated that the applications of the
provisions of this section are not limited to the agriculture or plantation
activities or for that matter any specific type of activity. Instead, any
activity which satisfies all the condition specified under Section 11AA and is
not regulated by any authority/regulator will fall under the category of the
collective investment schemes. It is observed that this provision was introduced
to protect the interest of the investors thus to give effect to its object it is
necessary to give wide connotation to it while any interpretation.
Participants Of The Collective Investment Schemes
Collective Investment Management Company: The Collective Investment Management Company is characterized as an
organization that is incorporated under the arrangements of the Companies
Act,2013 and which is additionally enlisted with SEBI under the SEBI (Collective Investment Scheme) Regulations,
1999 which works with the main goal compose, work and deal with a CIS.
Fund Manager: A Fund Manager or an investment manager a certified and a qualified person
who deals with the CIS management choices and decisions. This individual
likewise offers to trade reconciliation, valuation, and unit evaluating of
the plan or the course of action or the scheme.
Trustee: An individual who holds the property of the CIS in trust the support the unitholders is known as trustee. Trustee works as per the applicable
guidelines ad shields the benefits just as the guarantees the consistency with
the principles and guidelines. It is basic that a CIS is established as the
Trust according to the CIS Regulation 1999. A organization or company may choose
a trustee who could hold the advantages of the CIS to serve its financial
Shareholder: The unit holder or normally known as shareholder, are the
people who contribute assets in the CIS. These shareholders need to the rights
to the advantages engaged with the plans and to the related salary or income
produced by the plan or scheme.
Central Government has given powers to the SEBI to regulate CIS. According to
Sec 12(1)(b) of the SEBI Act, 1992 no entity is eligible to launch CIS before
registering it with SEBI as collective investment management company. But the
constitutional validity of Sec 11AA and Sec 12(1)(b) has been challenged on the
grounds of the excessive delegation and violation of Art. 14 of the Constitution
The Apex Court was of the view that the provisions which were
challenged were introduced to protect the interest of the investors and adequate
safeguards have been introduced on SEBI and refrain it from abusing its power.
Such provision is not arbitrary. In the case of M/s PGF ltd. Vs Union of
India, the court applying the doctrine of pith and substance stated that the
Parliament introduced such provision to protect the interest of the investors
which is the prime object of the SEBI.
Procedure Followed By Sebi
If the SEBI Board has prima facie case that there is case of default then it may
appoint an officer as designated authority. The officer so appointed shall not
below the rank of division chief. The appointed officer may appoint more 3
members if he desires not below the rank of division chief in case, he feels
there�s a need. The designated authority or the bench as the case may be would
issue show cause notice to concerned person to state reasons as to why any
action must not be initiated against him and the company. The show cause notice
must contain proper details about alleged contravention along with the
The notice shall be given an opportunity to represent himself along with
documentary evidence within the period specified in the notice. Such period
should not be more than 21 days from the date on which the notice has been
served. The designated authority may also extend the time for representation if
satisfactory reasons if exist for non-compliance within the time period. In case
the notice does not respond to the show cause notice then the designated
authority may proceed against the notice ex-parte. It has to record the reasons
for the same in writing.
The designated authority shall prepare a report after taking note of all facts,
evidence, provisions of law, etc. The report may also contain recommendations on
the appropriate action to be taken such as cancellation of certificate,
prohibiting notice to launch further schemes, winding up of existing schemes.
The report has to be submitted to the Board. On receiving the report, the Board
shall also issue the show cause notice to the concerned person.
The report of
the designated authority must also be attached with the show cause notice. The
notice has to state reasons as to why any action by the Board must not be taken.
The notice must specify the time period for written representation by the notice
and in no case such period shall be more than 21 days. After the written reply
from the notice, the Board provides him with an opportunity of being heard.
After hearing all the concerned person�s, the Board shall pass appropriate
orders. Endeavour shall be made to wind up the case within 120 days of receiving
the reply on notice.
Powers Of Sebi
Powers Under Cis Regulations,1999
In accordance with the power conferred by the CIS Regulations, Board can pass
the following order against the concerned persons, in case of default.
Action Against Concerned Person Of Company
- To stop collecting any further money from the investors and prohibition
on launching any further schemes.
- Forbid te concerned persons from disposing of the assets connected with
- Direct the concerned persons from disposing of the assets associated
with the scheme in prescribed manner.
- Refund the invested amount with the specified interest to the investors.
- Forbid access to capital market for certain period.
Action Against Intermediary: The Board has power to suspend as well as
cancel the registration of any intermediary who did not perform proper due
diligence or contravened any of the mandatory duties specified in the
regulations. While taking action against intermediary the Board has to follow
procedure mentioned in the SEBI (Intermediaries) Regulations, 2008.
The powers prescribed in the CIS Regulations are in addition to the powers of
the Board under the SEBI Act,1992.
Powers Of The Board Under The Sebi Act, 1992.
Powers To Issue Directions: After the completion of the inquiry, the Board, if satisfied that the
interest of investors is at stake then it may issue directions to the
company or intermediary associated with the whole process of default to
safeguard their interest. This provision provides huge power to SEBI
to issue any direction to protect the investors and regulate the intermediaries.
However, such direction must be preventive and remedial in nature.
Power To Order Investigation And Impose Penalty On The Non-Cooperation With The Investigating Authority The Board can also appoint an Investigating
Authority to investigate into the alleged matter and form a report regarding the
same. The investigating authority has power to ask for any books, record or
document required for investigation. It can also examine officers and other
employees of the company on oath. Also, if the authority has reasons to believe
that any relevant evidence might be hampered then it may also order seizure of
such evidence. The Directors and other employees of the company have to
compulsorily co-operate with the investigating authority and provide him with
all relevant information. In case of failure to do so the Board can impose
punishment for one year and fine upto Rs. 1 crore.
Power To Impose Penalty For Fraudulent And Unfair Trade Practise: Under
the Act, SEBI has power to impose penalty for illegal and fraudulent money
pooling upto Rs. 25 crores or three times the amount of profit made out of such
Power To Initiate Criminal Prosecution: It has power to initiate criminal
prosecution against the violators of the Act and Regulations made thereunder. It
can also impose fine to the tune of Rs. 25 crores and order civil imprisonment
upto 10 years. However, such a power has to be exercised with caution and in
rare cases as it has the effect of restraining the liberty of an individual.
Power To Initiate Recovery Proceedings:
In accordance to Section 28A of
the Act, SEBI has power to initiate recovery proceedings against every person
who has failed to refund the money of the investors as per an order of SEBI or
has not paid the penalty amount. This power is to be exercised by recovery
officer. The recovery officer firstly formulated a certificate regarding amount
to be recovered and only then recovery proceedings are initiated. The recovery
officer can use any of the following methods to recover the amount:
- Attach and sell the movable property
- Attach the Bank�s account
- Attach and sell immovable property
- Arrest the offender and detain him in prison
- Authorize a recover for managing the movable and immovable property of
An appeal to the Securities Appellate Tribunal (SAT) can be preferred against
any order or direction of the Board or the adjudicating officer, which is given
in accordance with the provisions of the SEBI Act or CIS Regulation. The
appeal must be filed within 45 days of the order and not an administrative
Supreme Court clearly clarified that any circular issued by SEBI would be
in administrative in nature and any order under sections 11(4), 11(d), 12(3) and
15 I of the Act would be as quasi-judicial in nature. Also, an adjudicatory
order under any regulation made under SEBI Act would also be by the SAT.
The second appeal can lie only on question of law. The Supreme Court if
satisfied can extend the period for filing the appeal. The jurisdiction of civil
courts has been barred. The matters regarding which the Board or SAT have
been empowered is out of the jurisdiction of civil courts. However, the writ
jurisdiction cannot be ousted. So, a writ petition can still be preferred.
Maitreya Services Pvt. LtdMaitreya services had floated various schemes wherein they were collecting money
from the public for development of land by promising exorbitant returns. Income
tax department referred the matter to SEBI alleging that the company seems to
have violated SEBI regulations. SEBI conducted enquiry and found that the
schemes offered satisfied all the ingredients of CIS and were yet not registered
with SEBI. The operations of Maitreya Services were in nature of CIS and not a
real estate business as it claimed to be.
The company had collected a huge
amount to the tune of Rs. 1332 crores as advances and had no adequate assets to
pay off the investor�s money also there was no work in progress. The
investigation also revealed that the company had Rs. 204 crores as the
outstanding liability in favour of investors and the assets of the company were
no enough to pay off the debts. The liabilities of the company were double its
movable and immovable assets.
This is evident of the fact that the company is
running the schemes in detriment of interest of the investors. SEBI ordered that
the company has contravened section 12(1)(B) of the SEBI Act,1992 and Regulation
3 of CIS Regulations by launching a CIS without obtaining registration from SEBI.
Thus it is directed to wind up the schemes and refund money to the investors. It
also referred the case to the local police department to initiate a criminal
proceeding for the offence of fraud, cheating and misappropriation of public
fund. Challenging the orders passed by SEBI, the company filed an appeal to SAT
under Section 15 T of the SEBI Act, 1992.
The appellate tribunal validated the
order of SEBI however it extended time for repayment of money by 6 months.
Instead of making refund to the investors in compliance of SEBI�s orders the
directors of the company floated another company with the name of Maitreya
Realtors and Construction Ltd. And transferred all the investments to this new
In form both the companies were separate legal entities but behind the
veil they were operated by the same directors. The new company was also engaged
in floating illegal CIS. SEBI passes winding up orders against Maitreya Realtors
and auctioned 8 properties of Maitreya Services to return the money to the
investors. However due to the sale of property at a lower value, it was not able
to refund complete investment.
Rose Valley ScamBackground:
In the backdrop of Sharda Scam, the Supreme Court of India in 2014
ordered the investigating agencies to examine other companies which were
involved in raising of funds from the general public. The Rose Valley Scam was
exposed in this investigation. This group has solicited money from millions of
investors by launching illegal CIS. It is assumed that this scandal is one of
the biggest financial scams related to Ponzi schemes. This has shaken the very
foundation of almost sixty million houses in India. Reports say that the scam is
much more enormous than Sharda Scam.
Emergence Of Rose Valley Group: The Rose Valley Group was basically started by
its ex-Chairman Kajal Kundu in 1990s. he started with the incorporation of Rose
Valley hotels and entertainment ltd. Slowly and gradually he expanded the
business to real estate, media, entertainment and then in 2002 to agency of LIC.
It took almost 18 years� time span to build the empire of Rose Valley.
Modus Operandi: The Rose Valley group pooled money from the investors by
offering exorbitant rate of returns. It solicited money from thousands of
investors by luring them with high returns rates upto 21% of their investments.
These funds were collected as an instalment towards purchase of property or
holiday packages. Basically, two of the companies were majorly involved in
launching camouflaged CIS.
Firstly, Rose Valley real estate and construction
limited was raising funds from the general public by launching schemes for the
development of property and the investors were to be given a credit value which
could be used as a part payment for buying land or can also be returned at the
end with returns.
Secondly Rose valley hotels and entertainment ltd was raising
funds from investors by offering holiday membership schemes. Under these
schemes, investors had to pay monthly instalments which could be utilized at the
maturity either for booking a holiday package or the investors can also take
back the money with additional returns. These companies were not actually
investing any money in any business. They collected money from the new investors
and repaid the old investors with that amount. In this way they were just
rotating the amount among investors.
Sebi�s Intervention: SEBI received a letter from the Directorate of economic
offence investigation cell, West Bengal on 7 th December 2009 stating that the
company seems to be violating SEBI Regulations. It again received a complaint
from Directorate of Income Tax on 27th July, 2011 disclosing that the rose
valley real estate is raising funds from the public without authorized
permission of SEBI. It also received complaints from other regulatory bodies as
well as many investors regarding non-Payment of dues, after which it started
investigation into the matter.
On Jan 3rd, 2011 SEBI passed interim order
against rose valley real estate prohibiting it to collect any money under the
old as well as new schemes as the same is in violation of Regulation 3 of CIS
regulation 1999.Meanwhile it also received complaint from ADG of Police Assam
stating that Rose Valley real estate and rose valley hotels have together
solicited Rs 1006. Crores from the public until Feb, 2012.99 Rose Valley Real
Estate had been violating the interim order passed by SEBI
Also, the activities of Rose Valley real estate were in contravention of SEBI
Act as well as CIS Regulation. SEBI also started investigation against Rose
Valley Hotels. It observed that the schemes launched by Rose Valley group
satisfied all the ingredients of CIS. It stated that in both the scheme the
contributions made by the investor were pooled in as there was undivided
interest and was used for the purpose of scheme only. It concluded that both the
companies had launched Collective investment schemes in the garb of Real estate
and time share business. It passed final orders Rose Valley real estate on 18th
June 2014 and an exparte order was passed against rose Valley hotels on 10th
Method Adopted For Absconding Order: The Rose valley group in order to abscond
from SEBI orders adopted the very old strategy of fillings appeals and writs for
delaying the matter. It adopted all possible means to obfuscate the matter. SEBI
passed interim order against Rose Valley Real Estate and Construction limited on
3rd January, 2011 prohibiting the company from raising funds from public under
any existing or new schemes.102 Instead of filing a response to the order, the
company approached various courts challenging the order of SEBI. Firstly, it
filed a writ petition at High court of Calcutta.
The Honourable Court dismissed
the petition directing to exhaust the alternate remedy of appealing to SAT
first. However, for delaying the matter the company kept on challenging it in
various courts. It challenged the High Court�s order in Division Bench which
also dismissed the matter. It again challenged the constitutionality of CIS
Regulations in Calcutta High Court. The Court imposed injunction on SEBI�S
orders and directed it to not proceed further with investigation until the
matter is subjudice. During this time the company continued with acceptance of
funds from the public.
On July, 2013 the court dismissed the matter while
upholding the validity of the Act. Now the alleged Company filed an appeal
before SAT. The whole procedure delayed the matter to such an extent that it
took almost 4 years for SEBI to pass final orders against Rose Valley group on
18th June 2014.
Loss To Investors: The whole scandal led to a loss of almost 60,000 crores to
almost 60 million investors. They targeted people from low-income group who had
low financial literacy. The scam mostly effected the people from West Bengal,
Orissa and A.P. This scam brought misfortune to millions of households in India
by taking away their lifesavings. It has also shaken the confidence of people
Reports state that one out of every twenty persons has been
hit by such fraudulent investment schemes. These schemes mostly target those
people which do not have easy access to Banking system as they are easily lured
by offering high interest. The Direct impact of this is on the economic growth
of the country as the savings which could have been invested in the productive
arenas is lost to unscrupulous companies in fa�ade schemes.
Current Status: CBI
and the Enforcement Directorate are separately investigating the Rose valley
case. Gautam Kundu, the Director of Rose Valley Group and two of the Trinamool
congress leaders have been arrested for alleged connection with the Scandal.
Both CBI and ED have filed charge sheets for cheating, fraud and criminal
misappropriation of funds against the directors and other persons involved in
the case. The investigation is still going on.
While the intent and purport of CIS regulation world over is quite clear, but
the provisions have been described as �extraordinarily vague�. In the shared
economy, there are numerous examples of ownership of property being given up for
the right of enjoyment. As long as the intent is to enjoy the usufructs of a
real property, there is evidently a pooling of resources, but the pooling is not
to generate financial returns, but real returns. If the intent is not to create
a functional equivalent of an investment fund, normally lure of a financial rate
of return, the transaction should not be construed as a collective investment
CIS Regulations, if made effective by plugging in the loopholes, can
serve as an efficient instrument for financial inclusion. Collective investment
schemes could very effectively be used for channelling small savings of people
into the economy. The entry size of these schemes is usually very low. It can
promote participation of large number of people in the economic system. Thus, it
is necessary to bring changes in the regulation in order to build the confidence
of public in investments and enhancing economic growth of the nation.
- 1992 (24) DRJ 392
- Sec 2(h)- �securities� includes-
(ib) units or any other instrument issued by any collective investment
schemes to the investors in such scheme
- Inserted by the Securities Law (Amendment) Act, 1999, w.e.f. 22-2-2000.
- M/s P.G.F. Ltd. & ors vs Union of India & Anr [2013
- M/s Rose Valley Real Estate & Construction Ltd. Vs Union of India
-  Insc 312
- Chapter VII, CIS Regulation, 1999
- Regulation 65, CIS Regulation, 1999
- Sec 11B of the SEBI Act,1992
- Sec 11C of the SEBI Act,1192
- Sec 15HA of the SEBI Act, 1992
- Sec 24 of the SEBI Act, 1992
- Sec 15T of the SEBI Act, 1992
- NSDL vs SEBI  79 247 SC
- Sec 15Y of the SEBI
Award Winning Article Is Written By: Ms.Rasika Sanjay Ghate
Authentication No: JU115851306543-7-0621
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