A system offered by a company under which the contributions made by the investors are pooled and used with the goal of receiving profits, income, produce or property is known as a Collective Investment Scheme (CIS). Under the Securities Laws (Amendment) Act 2014, when a corpus amount of Rs 100 crore or more is gathered from investors, it is referred to as a Collective Investment Scheme. The Collective Investment Scheme is an important topic for the UPSC IAS Exam.

What is a Collective Investment Scheme?

• A collective investment scheme is one in which a group of people pool their money and invest it in an asset.
• The asset's returns are then shared among the group based on their share of the total investment.
• According to Section 11AA of the SEBI Act, CIS is any scheme or arrangement that meets the following criteria:
  • the contributions or payments made by the investors, by whatever name called, are pooled and used solely for the purposes of the scheme or arrangement;
  • the contributions or payments are made to such scheme or arrangement by the investors with the intention of receiving profits, income, produce, or property, whether movable or immovable, from such scheme or arrangement;
  • the property, contribution, or investment that forms part of the scheme or arrangement is handled on behalf of the investors, whether identifiable or not.

Collective Investment Management Company

• A Collective Investment Management Company is a business entity formed under the Companies Act of 1956 and registered with SEBI under the SEBI (Collective Investment Schemes) Regulations of 1999 with the purpose of organizing, operating, and managing a Collective Investment Scheme.
• A registered Collective Investment Management Company can establish plans to gather funds from the general public.
• Credit ratings and appraisals from an appraising agency are required for such schemes.
• The schemes must also be certified by the Trustee and include disclosures that allow investors to make informed decisions, as required by the Regulations.
• A copy of the scheme's offer document must be filed with SEBI, and if no changes are proposed by SEBI within 21 days after filing, the Collective Investment Management Company may disseminate the offer document to the general public for the purpose of raising money.

Structure of a CIS

Trustee

• According to the Collective Investment Scheme Regulations of 1999, the CIS must be set up as a trust.
• The Trustee follows the established laws and regulations and works for the interest of the unitholders, safeguarding the assets and ensuring compliance.
• The Collective Investment Management Company appoints the Trustee who is in charge of the CIS's assets.

Fund Manager

• The fund manager, as the name implies, is in charge of the CIS's funds and oversees and controls all of the CIS's investment decisions.
• The fund manager is also responsible for the following tasks:
  • scheme unit pricing
  • valuing the scheme
  • managing the scheme's portfolio

Shareholder

• Individuals that combine their money into the plan are referred to as shareholders.
• As a result, individuals have a right to collect the investment returns as well as a right to the asset to the amount of their share and on the basis of the agreement signed when they joined the scheme.

Schemes that are not treated as CIS

The following do not qualify as a CIS:

• any scheme or arrangement developed or offered by a co-operative society;
• any scheme or arrangement under which non-banking financial companies accept deposits;
• any scheme or arrangement providing for any Scheme, Pension Scheme, or Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952;
• any scheme or arrangement in which deposits are accepted under section 58A of the Companies Act, 1956;
• any scheme or arrangement in which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956.
• any scheme or arrangement falling within the meaning of Chit business as defined in the Chit Fund Act, 1982.
• any scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund.

Benefits to the Investors

• Diversification of market techniques and investment types is aided by Collective Investment Schemes (CIS).
• Collective Investment Schemes (CIS) allows to receive the return money quickly and at market-related pricing.
• One will receive regular updates on the value of the investment and may be able to acquire information about the Collective Investment Scheme's specific investments.
• Within two months of the financial year's end, investors are entitled to a copy of the Balance Sheet, Profit and Loss Account, and a copy of the summary of the yearly appraisal report from CIMC.
• Moreover, the scheme-by-scheme annual report, or a shortened version of it, must be published in a national daily as soon as feasible but no later than two months after the accounts are finalized.

Problems of Collective Investment Scheme

• The management and functioning of such a scheme or arrangement are not within the control of investors on a day-to-day basis.
• More than 500 companies in the country are estimated to have engaged in CIS activities without complying with SEBI.
• In most cases, the operators of such schemes promise high profits, in the beginning, to entice unwary investors, only to vanish after a short period of time, leaving their victims in the dark.
• Then, before coming under the SEBI scanner, they relaunch similar firms under a different name and defraud even more investors.
• SEBI, as a regulatory authority, cannot guarantee or take responsibility for the repayment of funds to investors.

Conclusion

Though SEBI doesn’t take guarantee the repayment of funds of a CIS, if companies don't follow through on their promises or provide poor service, investors can contact CIS. Investors can also write to SEBI if they do not receive a satisfactory response. Going to district consumer redressal forums is another option.

FAQs

MCQs

1. What is a Collective Investment Scheme (CIS)?

A) A type of investment where funds are pooled together from individual investors and invested in stocks
B) A government-backed savings scheme
C) An insurance scheme
D) A form of direct foreign investment

2. Who regulates Collective Investment Schemes (CIS) in India?

A) RBI
B) SEBI
C) IRDA
D) Ministry of Finance

3. Which of the following is a major risk associated with investing in Collective Investment Schemes (CIS)?

A) Guaranteed returns
B) Market risk
C) No risk
D) Fixed interest rates

4. What is one of the main benefits of investing in a Collective Investment Scheme?

A) High risk
B) Diversification
C) Fixed returns
D) None of the above

5. Which of the following types of funds can be categorized under CIS in India?

A) Mutual funds
B) Fixed deposits
C) Government bonds
D) Term insurance plans

GS Mains Questions and Model Answers

Q1: Explain the role of Collective Investment Schemes (CIS) in the Indian financial system. How do they contribute to investor protection and financial inclusion?

Answer: Collective Investment Schemes (CIS) play a significant role in the Indian financial system by providing investors with an opportunity to invest in diversified portfolios managed by professionals. They contribute to investor protection by ensuring transparency, regulated governance, and adherence to SEBI guidelines. CIS also promote financial inclusion by offering small investors access to markets and asset classes that would otherwise be difficult for them to access independently, enhancing their participation in the broader economy.

Q2: Discuss the regulatory framework for Collective Investment Schemes (CIS) in India. What are the key provisions that ensure investor protection?

Answer: The regulatory framework for Collective Investment Schemes (CIS) in India is primarily governed by SEBI. SEBI mandates disclosures, compliance with risk management norms, and transparency in the operations of CIS. Key provisions include the requirement for periodic reports to investors, clear risk disclosures, and restrictions on the investment types to protect against market manipulation. Additionally, SEBI ensures that the funds are managed by professionals with adequate experience and credentials.

Previous Year Questions on Collective Investment Scheme

1. UPSC CSE Prelims 2022:

Question: Which of the following regulatory authorities oversees Collective Investment Schemes (CIS) in India?

A) Reserve Bank of India (RBI)
B) Securities and Exchange Board of India (SEBI)
C) Ministry of Finance
D) Insurance Regulatory and Development Authority (IRDA)

Answer: (B)

Explanation: SEBI is the regulatory body for Collective Investment Schemes (CIS) in India, ensuring that these schemes operate in a transparent and investor-friendly manner.

2. UPSC CSE Mains 2020 (GS Paper 2):

Question: Evaluate the role of Collective Investment Schemes in financial inclusion and investor protection in India. Discuss the regulatory framework governing CIS.

Answer: Collective Investment Schemes (CIS) are critical in fostering financial inclusion in India by offering small investors access to diversified portfolios and professional management. The regulatory framework, governed by SEBI, ensures that these schemes operate with transparency, adhere to disclosure norms, and are managed by qualified professionals. These regulations protect investors by enforcing clear risk management practices, promoting fair competition, and ensuring accountability.