Over 500 CIS entities at work; just one registered

Under CIS, contributions by investors are pooled, utilised with a view to receive profits, income, produce or property

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More than 500 entities and their promoters are feared to be running thousands of illicit Collective Investment Schemes across the country, although just one is registered with the market regulator Sebi for this kind of business and that is also yet to launch a scheme.

Under a Collective Investment Scheme (CIS), which is regulated by Sebi, the contributions made by the investors are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors by its operator.

Since investors do not have day to day control over the management and operation of such schemes, Sebi follows a strict set of rules to regulate them and to grant registration for such businesses.

However, an ongoing probe into such schemes, which was triggered by Saradha scam in West Bengal, has come across thousands of such businesses being operated across the country without any approval from Sebi, sources said.

The regulators have zeroed in on about 500 entities and their promoters and directors, who might be running numerous CIS operations under different names. More than one lakh complaints are said to be pending against these entities, they added.

The operators of such schemes typically set up a new CIS business under a new name after fleecing the investors under the earlier scheme.

Most of them are doing businesses that are in the nature of ponzi schemes, where unusually high returns are promised and the old investors are paid from the money collected from new investors. However, once the new investors stop coming in, the schemes goes bust and the operators run away to start some new scheme, sources said.

These schemes are being run in the names of businesses linked to sectors like real estate, hospitality, art, agriculture and even education, sources said, while pointing out at West Bengal and other states in the Eastern and North-Eastern region as among the most fertile grounds for such schemes.

While Sebi has been mandated to regulate the CIS operations, it has been complaining about lack of powers to handle this menace and has sought greater authority to address the gaps.

The government is said to be seriously considering amendments to the Sebi Act and other regulations to allow Sebi greater powers to tackle all kinds of money collection schemes as there are many exceptions in the existing CIS regulations.

Sebi has said that only one entity, Gujarat-based Gift Collective Investment Management Company, is registered with it for CIS operations, and that too has not yet launched any scheme.

The government has also set up an inter-ministerial group to consider ways to tackle the ponzi schemes, while the Ministry of Corporate Affairs has ordered an SFIO probe into the affairs of companies belonging to Saradha group and three others in West Bengal.

As per Sebi's estimates, more than 500 entities in the country have undertaken CIS activities without complying with the required regulations and necessary action have been initiated against many of them.

Among steps being proposed to tackle the issue, the names of all these entities could be publicised widely to make the gullible investors aware about their modus operandi.

The government had first decided to frame CIS regulations and named Sebi as a regulator in 1997, after a number of agro-based and plantation companies in 1990s started raising money from public through agro and plantation bonds.

Thereafter, it was made mandatory for all such companies to register with Sebi. The existing entities were also asked to get registered with Sebi, and those not being able to get a go-ahead were asked to wind up their operations.

As per Sebi data, 664 CIS entities had raised Rs 3,518 crore in 1998-99. Out of these 664 CIS entities, 54 CIS entities wound up their schemes and refunded investors' money.

None of the companies that applied for registration at the time was found to be eligible for final registration as a Collective Investment Management Company under the Sebi (CIS) Regulations.