SLATE. Collective investment schemes: All you wanted to know about...

Have you ever been tempted by easy instalment schemes to buy plots of land? Or by the prospect of high returns from growing teak, tending to apple orchards or rearing goats and emus? If you have, you should be warned that such schemes are illegal unless they have registered as collective investment schemes (CIS) with market regulator SEBI. Only last week, SEBI slapped a mammoth fine of ₹7,269 crore on PACL (formerly Pearl Agrotech) and its directors for running an illegal CIS which promised high returns from redeveloping barren plots into agricultural land.

According to the Securities Laws (Amendment) Act 2014, a CIS is any scheme or arrangement which pools funds from investors and involves a corpus amount of ₹100 crore or more. Every CIS has to compulsorily register itself with SEBI, file offer documents for its schemes and obtain a credit rating from a recognised rating agency, before it can knock at your doors for funds.

If the definition of CIS seems rather open ended, it is because the intention of this law is to sweep into its ambit all kinds of unregulated entities which collect money from investors. Regulated entities such as mutual funds, insurers, pension funds, registered chit funds, co-operative societies and nidhis are specifically exempted from the CIS regulations even if they manage ₹ 100 crore or more.

Until a few years ago, everybody felt that every entity that could possibly raise money from retail investors was covered by the elaborate regulatory framework of one of the financial market regulators — SEBI, RBI, IRDA or PFRDA. But in recent years, it has become clear that dozens of such schemes have been flourishing outside the ambit of regulators. And though they all claim to be legitimate, hardly any of them has sought registration with SEBI as CIS, despite it being a legal necessity.

The sums they’ve been raising are not to be scoffed at either. PACL’s scheme for investing in plots of land, for example, collected ₹49,100 crore from 5.85 crore investors over two decades. The strategy used by such unregistered collective investment schemes is simple. They operate mainly in the rural hinterland where the reach of formal financial products is minimal. They market their products and collect money through highly paid agents with good local standing. None of the transactions is on paper. All these schemes promise high ‘assured’ returns, impossible from regulated products.

Whether you live in a city or a town, you are bound to come across instalment schemes for buying land, livestock, farms, which solicit investments.

If you have been approached by such a scheme, the first thing you must do is to check if it registered with SEBI as a CIS. If it isn’t, and manages more than ₹100 crore, it is illegal and you should stay away.

In addition, last year, SEBI has won unambiguous powers to not just regulate CIS schemes, but also to issue orders stopping them from collecting money or to disgorge funds already collected from investors, in violation of its rules. So, if you have already invested in a CIS without being aware of it, or have been defrauded by one, you can complain to SEBI which can attach the assets of the promoter and liquidate them to refund investors.

Money doesn’t grow on trees. If someone tells you it does, he’s running a CIS.

A weekly column that puts the fun into learning

COMMENT NOW