DRAFT OF THE REGULATIONS FOR COLLECTIVE INVESTMENT SCHEMES APPROVED BY THE SEBI BOARD

  Press Release

 

  DRAFT OF THE REGULATIONS FOR COLLECTIVE INVESTMENT SCHEMES APPROVED BY THE SEBI BOARD

Pursuant to the Central Government's decision to treat schemes, through which instruments like agro bonds, plantation bonds etc. are issued, as Collective Investment Schemes (CIS), coming under the provision of SEBI Act, 1992, SEBI had constituted a Committee under the Chairmanship of Dr. S.A. Dave to examine and formulate the Regulations for this purpose. A sub-committee of eminent Chartered Accountant was also constituted to suggest the accounting / valuation norms for CIS. After due deliberations, the Committee submitted its interim report and the draft Regulations along with the recommendations of the Accounting sub-committee, to SEBI on December 31, 1998 and the same were made available for public discussion and suggestions were invited from investors and entities operating CIS. Thereafter the Committee submitted its final report to SEBI on April 5, 1999. 

The SEBI Board today approved the draft Regulations for Collective Investment Schemes. The salient features of the draft Regulations are as under;
 

1. "Collective Investment Scheme" has been defined to include any scheme or arrangement:-

1. with respect to property of any description, the purpose of which is to enable the investors to participate in the scheme or arrangements by way of subscriptions and to receive profits or income or produce arising from the management of such property or investments made thereof; and 
2. the subscriptions of the investors, by whatever name called, are pooled, and are utilised for the purposes of the scheme or the arrangement; and 
3. the property or such subscriptions are managed on behalf of the investors, who do not have day to day control over the management or operation of the scheme, whether or not such properties or subscriptions and the investments made thereof are evidenced by identifiable properties or otherwise. 

1. Acceptance of deposits by companies, schemes of Mutual Funds, chit funds, nidhis etc. would not be covered under these Regulations. Further, schemes structured for the purpose of investment in shares, bonds and other marketable securities would not be treated as CIS. 

 
2. CIS can be floated only by public companies registered under the provisions of the Companies Act, 1956. The company floating CIS shall have to seek registration with SEBI as Collective Investment Management Company (CIMC).

 
3. CIS shall be constituted as a two tiered structure comprising of a trust and a CIMC.

 
4. At the time of application for Registration as CIMC, these entities should have a minimum networth of Rs. 3 crores which shall have to be increased to Rs. 5 crores. 
5. Compulsory Filing of Offer Documents: Every Scheme shall have to file offer documents with SEBI containing adequate disclosures to enable the investors to take informed investment decisions.

 
6. Mandatory Rating Requirement: Each scheme shall have to obtain a rating from a recognised credit rating agencies. The projects being undertaken must also be appraised by an empanelled appraising agency.

 
7. No Assured Return: The schemes are prohibited from guaranteeing assured returns. Indicative returns, if any, provided by the scheme shall be based on the projections in the appraisal report.

 
8. Advertisement Code: Advertisements in respect of every scheme shall have to conform to the SEBI’s advertisement code. 

 
9. Subscription Period : No scheme shall be kept open for subscription for a period of more than 90 days. The schemes shall be close ended in nature. The schemes must indicate the minimum and maximum amount proposed to be raised over this period. 

 
10. Duration of Schemes: The duration of the schemes shall be for a minimum period of 3 years.

 
11. Insurance: Compulsory Insurance cover for the assets of the scheme and personal indemnity cover for the CIMC shall be obtained.

 
12. Listing: Units issued under the Collective Investment Schemes are to be compulsorily listed on recognised stock exchanges.

 
13. Accounting/Valuation norms: Accounting/valuation norms as stipulated shall have to be followed by Collective Investment Schemes. 

 
14. Initial Issue Expenses : The initial issue expenses for schemes of duration of upto 8 years shall not exceed 7% of the corpus mobilised and for schemes of duration exceeding 8 years shall not exceed 9% of the corpus mobilised. 

 
15. Management Fees : The Management Fees payable to CIMC shall consist of Basic Fee and Incentive Fee. The 'basic fee' shall not exceed:

 

 

i. 1.00% each year of the funds raised under the scheme for the first five years of the operation of the scheme.

ii. 1.25% each year of the funds raised under the scheme for the next five years of the operation of the scheme.

iii. 1.50% each year of the funds raised under the scheme for the subsequent period thereof till the termination of the scheme.

The incentive fee shall not exceed 25% of the excess return realised over and above the indicative return as shown in the offer document (excluding the unit capital) at the time of the termination of the scheme. In case, the return at the time of termination of the scheme is less than or equal to the indicative return as shown in the offer document, then no incentive fee shall be paid.
 

16. Existing Schemes: Entities which are operating a collective investment scheme(s) as on the date of notification of the SEBI regulations would be treated as existing CIS and would need to seek registration from SEBI within a period of 2 months from the date of notification. They would be considered for grant of a provisional registration and given some time to comply with the provisions of the regulations. The existing CIS would also have to abide by the directions of the Honourable Courts in various matters in this regard. 

While taking these decisions the views of the Association of Agri Plantation Companies of India were also taken into consideration.

Recommendations of the P. K. KAUL COMMITTEE

Trustees are first line regulators for mutual funds operations. SEBI had constituted a Committee under the Chairmanship of Shri P.K. Kaul, ex-Cabinet Secretary to the Government of India, to recommend the manner of discharging responsibilities by the trustees as envisaged in the Regulations. The Committee submitted its report, which was made public. The view of the Association of Mutual Fund (AMFI) was also called for. A meeting of some of the trustees of mutual funds was also called by SEBI to ascertain their views. SEBI Board considered all the views and decisions taken in this regard are given below:

1] Each trustee shall file the details of his transactions of buy or sell of securities with the trust on a quarterly basis. 

2] All information and documents relating to the compliance process shall be authenticated / adopted by the Board of Directors of the AMC who are entrusted with the primary responsibility in this regard. In like manner, the Board of Directors of the Trustee Company would review all information and documents to be received from the AMC as required under the compliance process.

3] The manner in which due diligence shall be carried out by the Trustees in fulfillment of the various obligations as required under the Regulations, has been specified.

4] Uniform Management Information System shall be adopted and the compliance certificate to be submitted by the AMC to the trustees on periodical basis would contain specific comments. Further, the Board of Trustees or the Trustee Company, as the case may be, shall be sending reports to SEBI in the prescribed format.

5] The independent directors of the trustees / AMC shall pay specific attention to certain aspects, eg. Compensation paid under Investment Management Agreement, Service Contracts with affiliates, Selection of the company’s independent directors, etc.

6] With regard to the frequency of the meetings of the trustees / board of directors of the trustee company, there would be requirement of at least one meeting every three months and four such meetings to be held in a year. The Trust Deed shall also specify the quorum for such meetings provided that the quorum shall also specify the presence of at least one independent trustee / director.

7] The minimum number of trustees shall be four and it would be upto the mutual fund to decide the maximum number of trustees.

8] It shall be left to the discretion of mutual fund whether to appoint independent auditors or to have separate full fledged administrative set up to give support to the trustees in discharging their duties in accordance with SEBI Regulations.

9] The trustees shall not be held liable for acts done in good faith and if they have exercised adequate due diligence honestly.

Amendments to SEBI (Depositories and Participants) Regulations, 1996

The SEBI Board approved the amendments of SEBI (Depositories andParticipants) Regulations, 1996 to allow registrar to an issue and share transfer agents to act as depository participants even for securities of companies for which they are acting as a registrar to an issue and share transfer agent.

Relaxation of Broad Based Criteria

The SEBI Board approved amendment of SEBI (Foreign Institutional Investors) Regulations 1995, so as to relax the broad based criteria for registration of sub accounts from an existing level of 50 investors to 20 investors and the maximum holding of a single investor to 10% from the existing level of 5%. 

Relaxation from offering 25% of the issued securities to the public for the purpose of listing:

The Board has decided to relax the requirement of offering 25% of the securities for the purpose of listing under Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 for companies in the Information Technology sector subject to the following:

1. at least 10% of securities issued by the company are offered to the public, and

 
2. at least twenty lakh securities are offered to the public (excluding reservation, firm allotment and promoters’ contribution); and

 
3. the size of the net offer to the public (i.e. the offer price multiplied by the number of securities offered to the public which exclude reservation, firm allotment and promoters’ contribution) is at least Rs. Fifty Crores. 

Rationalisation of fee structure relating to primary market intermediaries

With a view to bring uniformity in the fees structure of the various intermediaries the Board has decided to rationalise the fee structure of the intermediaries associated with the primary market . The revised fee structure would be notified in due course.