Sebi likely to overhaul CIS regulations at board meeting next week

The Securities and Exchange Board of India (Sebi) is likely to overhaul regulations governing collective investment schemes (CIS) at its board meeting that will be held on Tuesday. Just like mutual funds (MFs), CIS are pooled investment vehicles that offer retail investors exposure to a wide variety of underlying assets.

Sources said the new CIS regulations will be aligned with the rules governing MFs, which were first notified in 1996 but have undergone several changes.

The move will remove any regulatory arbitrage among the two investment-pooling vehicles. It could also open a new avenue to channel household savings to economy-boosting activities with proper safeguards.

This will be the first major review of CIS regulations since their notification in 1999.

There are several companies that have raised capital through money-pooling schemes linked to gold, plantations, goats, cows and emus disguised as CIS without proper authorisation. Often such schemes end up duping investors as they are structured in such a way that they escape regulatory scrutiny.

The new CIS regulations would require those setting up such schemes (sponsors) to have a track record of carrying out business in the relevant field for at least five years. Also, the sponsors would be required to have a minimum net worth of Rs 50 crore and profitability track record of five years.

Further, the sponsors and employees of the CIS would be required to maintain skin in the game. The new rules would mandate the sponsor to invest 2.5 per cent of the corpus or Rs 5 crore, whichever is lower, in the scheme. Also, just like MFs, key CIS employees will get a fifth of their compensation in the form of scheme units.

The regulator also plans to streamline the fee structure for CIS schemes. The initial expense of the scheme cannot exceed 2 per cent of the fund raised and the expense and fee charged to the scheme will also be capped at 2 per cent. Current rules allow initial issue expenses to be as high as 9 per cent.

CIS schemes may also be required to have a minimum of 20 investors with a single investor exposure capped at 25 per cent of the scheme assets under management (AUM).

A new CIS scheme will be allowed to be kept open for subscription for 15 days as against 90 days at present. Also, the cross shareholding norms applicable for MFs will be incorporated in the CIS regulations.

Under this, a shareholder cannot hold more than 10 per cent in more than one collective investment management company.

The Sebi board is also likely to approve the regulator’s annual accounts for financial year 2021-22.