It has been provided that the controlling interest in the CIMC cannot be changed without taking approval of 50 per cent of the unit holders Firstly, one must note that controlling interest has been defined as 10 per cent or more. Further, it is not clear as to how the approval of the unit-holders has to be taken. Is it sufficient that a meeting is called where half of the unit-holders present vote in favour of the change? Or, is it necessary that the approval of half of the total unit-holders has to be obtained in writing? A strict reading seems to imply that the second method seems to be intended.

The CIMC is barred from entering any contract with or through its associates relating to the scheme. The term associate has been very widely defined and this provision is intended to take care that funds are not siphoned off through contracts with sister concerns. However, in some cases, this may operate to be a barrier in smooth conduct of the business which is expected to be highly specialised and technical. The CIS will have to be appraised every year by an appraising agency empanelled with Sebi. Further, the CIS will also have to be rated by a rating agency registered with Sebi.

The regulations do not permit open ended schemes - ie, schemes where there is possibility of repurchase before maturity. The scheme further has to have a maturity period of at least three years Further, the maximum offer period can be of 90 days.

An interesting question is what would happen to existing schemes and this is an area where Sebi appears to have taken a very firm stand to simply wipe out those schemes who do not or are unable to conform to the high standards laid down in the regulations. While existing schemes had been given a transition period - years actually - to continue their schemes, these regulations seek to bring them under strict control within months. Else, they will simply have to wind up and repay money to investors without any other recourse. Existing schemes have been given a time of two months to apply for registration. If they do not apply for registration or their application is rejected, they simply have to wind up. There is a provision regarding taking of positive approval from investors to continue the scheme but the wording seems to be ambiguous as to whether unregistered schemes can continue if more than 25 per cent investors agree. Peculiarly, the winding up process has to wait till the CIS receives an intimation fromSebi. Does this mean that a CIS of which Sebi is not aware at all or to whom Sebi does not send an intimation does not have to be wound up.

Even if existing CIS apply for registration, they will have to comply with the stringent regulations - immediately in some respect of some provisions and gradually in respect of some others What is also important is that existing CIS cannot launch any new scheme or even raise further money from existing schemes till a certificate of registration is granted. Existing schemes will also have to pay Rs 10 lakh registration fees though in two installments.

All in all, the above process is intended to simply exterminate a large number of existing schemes who do not comply with the regulations. Whether investors actually receive their money in whole or in part will have to be seen. Stringent accounting norms are now specifically provided for. Sebi has freely adopted from International Accounting Standards and Indian Accounting Standards and where the issue has not been specifically covered by these standards, Sebi has come out with its own accounting requirements. An important malpractice whereby subscription was recognised as income has now been specifically prohibited and all sums received from subscribers by whatever names called would be part of capital. Prudent requirements for writing off capital costs are also made which was another grey area.

Finally, an interesting issue will be about tax treatment of the CIS and its investors. As stated earlier, the model suggested is that of the mutual funds and thus there will be a management company and a trust which will own the properties of the schemes on behalf of the investors. While this closely resembles mutual funds, mutual funds have liberal tax exemptions. At the fund level, they are eligible to exemption from tax. On distributions, there is a fairly low rate of tax in most cases but the unit-holders thereafter face no tax. However, no such provisions exist for CIS. Will therefore the CIS have to bear the highest rate of tax? What about the unit-holders - when and how much tax will they face? While the answer may depend on the facts of each case, it will be certainly an area of difficulty and specific provisions will need to be made in the Income-tax Act.

To conclude, we have finally a set of fairly comprehensive set of regulations which, while perhaps a little too strict, will help control the indiscriminate launching of new schemes while quickly eliminating the errant existing ones.

The author is a Mumbai-based chartered accountant