Way back in 1997, the Union Government decided to clamp down on collection of funds under collective investment schemes (CIS) and decided to appoint SEBI as a regulator.

The market watchdog brought requisite regulations in force in 1999 to ensure that investors are not lured by promises of super normal returns.

But more than a decade after, there is no dearth of investors' complaints of getting duped.

According to SEBI annual report of 2010-11, there has been a steady flow in the number of investor grievances against collective investment schemes (CIS) over the previous two years.

Strict Legislation

The number of complaints against non-receipt of investment and returns on such schemes has increased from 1,09,121 cases in 2008-09 to 1,09,897 cases during the 2010-11 fiscal.

According to SEBI, a CIS is defined as “any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of investors”.

The most common instruments for such schemes were bonds – for investments in real estate properties; plantations and agriculture and art objects.

According to the Collective Investment Schemes Regulations, 1999, existing entities were also asked to get registered (with SEBI).

Only one legal entity

According to SEBI, ever since the new regulations came into force, only one company — Ahmedabad-based Gift Collective Investment Management Company Ltd – has been allowed to raise funds under CIS.

Interestingly, though Gift Collective, a subsidiary of Gujarat International Finance Tec City, obtained registration in 2008-09, it is yet to raise funds through these routes.

According to the vice-president and company secretary, Mr Dipesh Shah, Gift Collective initially planned to launch CIS schemes to raise funds for developing real estate but reversed the decision as it felt that the peripheral conditions were not suitable. Even if the only authorised player stays away from the CIS market, there is no dearth of investor complaints even today. Logically, some of the complaints must have been against schemes that were floated before the 1999 regulation came into being.

Shut down notice

Having brought the regulations into force, SEBI started issuing wind-up notices to entities failing to comply with the norms.

However, the process of prosecution is slow as most of these companies approached different courts of law.

As on March 31, 2011, SEBI launched criminal prosecution cases against 552 companies collecting funds under such schemes. So far, court judgements have been obtained against 115 entities, indicating that most of the CIS related cases are currently sub judice .

Investors suffer

Whatever the reason may be, it is clear that the regulations were not enough to prevent entities from collecting investments under CIS schemes even after 1999 or that many such entities were raising finances even without SEBI approvals.

A classic example is that of Rose Valley Real Estate and Constructions, which was barred by SEBI from raising public money and launching any scheme in January 2011. The closure order dated January 3, 2011, states that Rose Valley raised approximately Rs. 1,272 crore (without any registration from SEBI) between 2003-04 and 2009-10 as earnest deposits for selling plots of land on a future date. Approximately Rs 566 crore was raised in 2008-09 alone.

shobha@thehindu.co.in

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