There was a crying need for a stringent law protecting the interests of thepublic. After much ado, including disputes as to who was entitled orresponsible for this area, finally, Sebi has formulated the regulations. Letus see some important features of these regulations to get a glimpse as tohow these schemes are expected to be set up and work.

Before that, let us quickly review the nature of these schemes particularlythose covered by the new regulations. One would recollect that issue ofshares is broadly governed by Sebi while acceptance of deposits is governedby the RBI and department of company affairs for finance and non-financecompanies respectively. Collective Investment Schemes, or CIS, however, werea breed apart - as one would say, neither fish nor fowl. These were issuedin a manner whereby the subscriber became direct owners of the assets. Forexample, in cases of teak plantation schemes, the idea was that thesubscriber because the owner of the teak plants so that when they are soldon their maturity, the subscriber was entitled to the sale proceeds. Theso-called issuers were then merely the managers of the assets. In thissense, these schemes resembled mutual funds where the unit-holders wereeffective owners of the investments in securities by the mutual funds. Infact, Sebi has broadly taken the model of mutual funds for providing aregulatory framework for CIS and the manner of setting up of the managementcompany and schemes.

Under CIS, the unit-holders directly own a proportionate part of the assetssuch as teak plantations, goats, etc. Their value of the units increases ordecreases directly as per the appreciation of such assets and income andreturns from them. Viewed in this sense, there are no guaranteed returns.

As pointed out earlier, the regulations have taken a cue from the frameworkfor mutual funds and hence an issuer need to form an collective investmentmanagement company (CIMC), a scheme in the form of a trust and to appointtrustees to manage and administer the CIS. Thus, there is a dual control.

The CIMC will actually manage the operating part of the scheme while thetrustees will oversee the operations mainly from the point of view ofprotecting the interests of the unit-holders. The scheme will be in the formof a trust which will hold the operating assets on behalf of theunit-holders. Sebi has ensured that practically every person who is involvedin the CIS is cleared by it. The CIMC will have to first get itselfregistered with Sebi. The Trustees also have to be registered with Sebi.

Similarly, the appraising agency and the credit rating agency will have tobe registered or empanelled with Sebi. What is curious is that even theauditors will have to be from a Sebi approved panel. As far as other personssuch as directors of the CIMC, there is a negative approval process, that isthey should not have been debarred or convicted under by Sebi.

Thus, first the CIMC will have to be formed as a company. Thereafter, thetrust will be formed and trustees appointed. The Scheme will be launched byan offer document, much like the prospectus, and the moneys collected andunits issued and then listed. Thereafter, under the close supervision of thetrustees, the CIMC will manage the CIS.

The CIMC needs to have a minimum net owned fund of Rs 5 crore, and at thetime of application, it has already to be Rs 3 crore with some time givenfor increasing it to Rs 5 crore. This requirement or entry barrier can becompared with the Rs 3 crore for finance companies though one may note thatfinance companies also have to limit their deposit acceptance as apercentage of their net owned funds. This is a limitation not faced by CIMCand theoretically speaking, with a net owned fund of Rs 3 crore, the CIMCcould raise Rs 300 crore or even Rs 3,000 crore. It is likely that somefinance companies may consider splitting their businesses whereby someportion of their business could be hived off to a CIS since that does notface any limitation over maximum amount of funds. Not that this would be amisuse since the regulations also provide a strict set of provisions.

At the same time, one must note that the NOF of Rs 5 crore is not expectedto be utilised in the operating part of the business but for setting up theinfrastructure for mere administration of the schemes. In this sense, theamount of Rs 5 crore could represent a significant barrier particularlyviewed in the light of the fact that there were a large number of relativelysmaller companies which may not find it possible to raise such funds.

In respect of existing CIS are required, their CIMC have been given a timeof five years to get their NOF to Rs 5 crore where in each year they willhave to build up an additional NOF of Rs 1 crore.

(To be concluded)

-- The author is a Mumbai-based chartered accountant