Sebi mulls measures to strengthen regulatory framework for CIS

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

Also, the regulator has suggested that a Collective Investment Management Company (CIMC) or its promoters should meet certain criteria with respect to track record and net-worth, according to a consultation paper.

In addition, the markets watchdog has proposed a cap on cross-shareholding in CIMCs to 10 per cent to avoid conflict of interest and recommended that CIS should not be open for subscription for more than 15 days.

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.

According to Sebi, with no limit on minimum investment by an investor, retail investors are the primary target base for CIS.

CIS Regulations, notified in 1999, have not been reviewed since then.

“With a view to removing any regulatory arbitrage among various pooled investment vehicle as available to the retail investors, it is important that the regulatory requirement for CIS as a pooled investment vehicle should be aligned or matched with those for Mutual Funds,” Sebi said.

The Securities and Exchange Board of India (Sebi) has sought public comments on the proposals till January 31.

In the consultation paper, Sebi has proposed that each CIS should have a minimum subscription amount of Rs 20 crore and each CIS should have a minimum of 20 investors and no single investor should hold more than 25 per cent of the assets under management (AUM) of such scheme.

“In order to avoid the potential risk of controlling the scheme by few individuals or investors, there is a need to maintain minimum number of investors in any CIS,” Sebi said.

Also, the regulator suggested that CIMC should have a minimum net-worth of Rs 50 crore as compared to the present requirement of Rs 5 crore.

It should be 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, it said.

At present, there is no such requirement for relevant business, net-worth or profitability.

To avoid conflict of interest, Sebi has proposed that a CIMC, its shareholders holding 10 per cent or more, its associate or group, individually or collectively, directly or indirectly, will be restricted from holding 10 per cent or more stake in a rival CIMC.

It further said such entities should be barred from having a representation on the board of another CIMC.

In order to align the interest of the CIMC and its key employees with the unitholders of the CIS, the regulator has suggested that the CIMC should have a continuing interest of not less than 2.5 per cent of the corpus or Rs 5 crore, whichever is lower, in the form of investment in CIS.

Further, a minimum of 20 per cent of the salary of the designated employees of the CIMC should be mandatorily invested in the units of CIS in which they have a role/ oversight.

In addition, the regulator has recommended that the CIS should not be open for subscription for more than 15 days. It is 90 days at present.

Further, unit certificates against acceptance of application shall be allotted as soon as possible but not later than five working days from the date of closure of the initial subscription list.

The proposals are aimed to strengthen the regulatory framework for collective investment schemes as well as empower the CIMCs to effectively discharge their responsibilities towards the investors.