Have you heard of Pancard Clubs, Pearl Agrotech or Alchemist Infra Realty? These aren’t names of multi-bagger stocks, but of unlisted companies which have mopped up thousands of crores from retail investors through illegal Collective Investment Schemes. Until March 2017, SEBI had launched cases against 196 such schemes. But after starting out as teak, orchard and plantation schemes, illegal money-pooling schemes have since morphed into many new shapes and forms. It is often difficult for an ordinary investor to identify one.

It was in the nineties, after the mushrooming of teak, orchard and plantation schemes that SEBI was first given sweeping powers to regulate such schemes through the Collective Investment Scheme Regulations of 1999. But these money-pooling schemes have since taken on new forms.

Shape-shifting schemes In the last five years, SEBI has unearthed ponzi schemes that promise fabulous returns from goat-rearing, cattle-rearing and the production of cow ghee. Some of the largest illegal CIS in operation, however, take the guise of deposits, chits, time-shares or real estate investments.

Over the period of a decade, Pancard Clubs mopped up over ₹7,000 crore, from its popular ‘holiday package’ schemes where, for an upfront payment, an investor could either pre-book a stay at its properties, acquire club memberships or surrender the time-shares for a repayment with hefty interest. The last option was the most popular with Pancard’s investors, until complaints about delayed payments began to surface.

In 2014, SEBI probed the business and held it to be an illegal Collective Investment Scheme. After fruitless efforts to get the firm’s promoters to refund the money, SEBI is now looking to auction off the firm’s properties to recover whatever it can.

PACL (formerly Pearl Agrotech) collected a cool ₹49,100 crore from over 5 crore investors over many years starting 1996. The group took advances from investors in Rajasthan and Uttar Pradesh, ostensibly towards purchase and development of agricultural land down South. It promised (and for some time paid) high returns to investors from the land, until the music stopped. A SEBI investigation in 2014 revealed big shortfalls between the sums pooled and the land owned and held PACL to be an illegal CIS. But attempts to get it to refund the money have been hanging fire and SEBI is now in the process of attaching and auctioning the firm’s properties. The story of Alchemist Infra Realty, another CIS that offered investors astronomical returns from real estate, follows an identical scipt.

But in many cases, despite SEBI taking the CIS to Court and attaching assets of the promoters, it appears quite unlikely that the original investors will be able to recover anything close to what they put in. Even in cases where a money pooling scheme isn’t a Ponzi scheme, it can attract legal action if it isn’t registered with SEBI. This just goes to show that when it comes to CIS, staying clear is better than seeking remedies later. So how can an investor identify an illegal CIS?

But first, what’s a CIS? Unlike shares, bonds or deposits, CIS can offer a variety of instruments to investors. Therefore can only be identified by the manner in which they are run. The Securities Laws Amendment Act of 2014 defined CIS as “any pooling of funds under any scheme or arrangement involving a corpus amount of ₹100 crore or more”.

While this definition sweeps all possible investment schemes collecting over ₹100 crore into the CIS net, a few regulated vehicles are specifically excluded — schemes from co-operative societies, deposits from NBFCs, insurance contracts, regulated pension schemes, corporate deposits under Companies Act, deposits with a Nidhi, mutual benefit society or registered chit fund, and units in mutual funds.

So, any entity that pools money from investors of over ₹100 crore and doesn’t fall into the exempted categories must register with SEBI as a CIS. If it doesn’t, it is illegal.

Legal tests Courts have applied four key tests to gauge if a money-making scheme is indeed a CIS. The scheme must pool money from investors. The investors should have contributed, expecting to receive profits, income, produce or property from the scheme. Once investors hand over the money, the scheme should be managed by the company/entity. And finally investors should have no role or say in the day-to-day operations of the scheme.

If you are contributing to any such scheme, the probability is very high that it is illegal. Though investigations are said to be on for hundreds of such schemes in the market, only one CIS (GIFT Collective Investment Management Company) has so far found it necessary to register with SEBI!

If in doubt, you can scan this list of CIS against which SEBI has already launched regulatory actions until December 2016, available on its website. https://www.sebi.gov.in/otherentry/dec-2016/database-of-prosecution-cases-launched-against-cis-entities-across-the-country-as-on-december-15-2016-_21761.html

If stuck…

Okay, you didn’t receive the above warnings in time and are already caught in the tangled web of an illegal CIS. What should you do? The most important thing to do now is to hold on tight to your original documents or certificate that shows proof of your investment in the CIS and to not part with it, under any circumstances, before the liquidation of assets of the CIS is through.

In many cases, after receiving SEBI orders to refund the money, dubious operators of such schemes have reached out to their investors to switch schemes or accept settlement in kind. It is best to resist such offers and wait for resolution from SEBI and the Courts.

When SEBI wins Court approval to attach assets and refund dues to investors in a CIS, it usually puts up a public notice/advertisement in a newspaper and on its website informing the public of its proceedings. In some cases such as PACL, the disposal of assets is being overseen by a Court-appointed committee. Investors will be asked to provide the original documents and apply for refunds with the regulator or committee, only after the disposal of assets is completed to a significant extent. Until then, it is best to keep a hawk’s eye on the SEBI website, and keep hope alive.