Sebi overhauls collective investment scheme rules, brings on par with MFs

The Securities and Exchange Board of India (Sebi) on Tuesday overhauled regulations governing collective investment schemes (CIS), bringing them on a par with the mutual fund (MF) regulations. The market regulator said the move will “remove regulatory arbitrage” between the two pooled investment vehicles.

Sebi’s board also approved amendments  to the Sebi Custodian  Regulations, 1996 to  enable  registered custodians to  provide custodial services in respect of silver exchange traded funds (ETFs) launched by domestic MFs. The board also made amendments to the  Listing Obligations and Disclosure Requirements (LODR) Regulations to ease the securities transmission process for investors and ensure uniformity in the process. The board also approved budget estimates for the next financial year.

In a press release, Sebi said the key changes to the CIS Regulations include increasing the minimum networth requirement and introduction of a clause for having a track record in the relevant field for setting up a CIS. Also, introduction of cross shareholding norms whereby one entity cannot hold more than 10 per cent stake in more than one collective investment management company (CIMC).

This will be the first major review of CIS regulations since their notification in 1999. The changes follow a consultation paper floated by Sebi in January to review CIS norms.

At present, there are several companies who have been raising capital from investors through money-pooling schemes linked to gold, plantation, goats, cow and emu birds 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.

Industry players said the changes in regulations will encourage large institutions to set up CIS, which will help channelise household savings to economy-boosting activities with proper safeguards.

Sebi has also prescribed minimum number of investors, maximum holding of a single investor and minimum subscription amount at the CIS level.

The discussion paper had proposed to have a minimum of 20 investors with a single investor exposure capped at 25 per cent of the scheme assets under management (AUM). Further, the sponsors and the employees of the CIS would be required to maintain skin in the game. Further, it had mandated that the sponsor should 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. As per the discussion paper, the minimum networth for setting up of a CIMC was Rs 50 crore with a profitability track record of five years.