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Table of Contents

Introduction:...............................................................................................................................................3

Collective Investment Schemes Definition..................................................................................................5

SEBI Guidelines............................................................................................................................................6

Features of Collective Investment Scheme:.............................................................................................6

Followings are the features should not be in Collective Investment Scheme:.........................................7

Collective Investment Management Company:.......................................................................................7

Registration of Collective Investment Management Company:..............................................................7

Limitation on business activities for Collective Investment Management Company:..............................8

Responsibility of Collective Investment Management Company (CIMC):................................................9

Submission of Information and documents by CIMC:..............................................................................9

CIMC offer document of scheme:..........................................................................................................10

The Securities Contracts (Regulation) Act, 1956........................................................................................10

Section 27A. Right to receive income from collective investment scheme...........................................10

Section 15 D. Penalty for certain defaults in case of mutual funds.......................................................12

How do CIS work:......................................................................................................................................13

Plantation and agro bonds:...................................................................................................................13

Case study: Anubhav Plantation Scam...................................................................................................15

Real EstateBond:.......................................................................................................................................18

How it works:.........................................................................................................................................18

Case Study: Sahara scam.......................................................................................................................19

Art Fund:....................................................................................................................................................22

Background:...........................................................................................................................................22

How it works:.........................................................................................................................................24

Casestudy: Osian’s-Connoisseurs of Art Private Ltd Vs SEBI..................................................................24

Time sharing scheme:................................................................................................................................27

How it works:.........................................................................................................................................27

Casestudy: Suman Motels Vs SEBI.........................................................................................................28

SHG & GRAMEEN BANK(JOINT LIABILITY MODEL).....................................................................................30

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Joint Liability Groups (JLG).........................................................................................................................36

CASE STUDY : LIJJAT PAPAD..................................................................................................................37

MUTUAL FUNDS........................................................................................................................................40

Concept.................................................................................................................................................40

Organization of a Mutual Fund..............................................................................................................40

Organization of a Mutual Fund..............................................................................................................40

Fund Sponsor.........................................................................................................................................41

Trustee..................................................................................................................................................41

Rights of trustee....................................................................................................................................41

Obligations of Trustee...........................................................................................................................41

Asset Management Company....................................................................................................................42

Custodian..................................................................................................................................................42

Association of Mutual Funds in India.........................................................................................................43

Objectives..............................................................................................................................................43

SEBI GUIDELINES........................................................................................................................................44

RIGHTS OF UNIT HOLDER...........................................................................................................................44

Advantages of Mutual Fund......................................................................................................................44

Classification of Mutual Funds...................................................................................................................45

Types of Mutual Funds..............................................................................................................................46

Franklin Templeton Blue Chip Fund...........................................................................................................50

Conclusion.................................................................................................................................................55

Bibliography...............................................................................................................................................69

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Introduction:

A collective investment scheme is a trust based scheme that comprises a pool of assets that is

managed by a collective investment scheme manager and is regulated by the Collective

Investment Scheme regulations. Collective Investment Schemes (CIS) are a popular form of

investment, and they are accessible to all. Each investor has a proportional stake in the

Collective Investment Scheme portfolio based on how much money he or she contributed. The

word “unit” refers to the portion or part of the Collective Investment Scheme portfolio that is

owned by the investor. The “trust” is the financial instrument that is created in order to

manage the investment. The trust enables financial experts to invest the money on behalf of

the Collective Investment Scheme investor. Collective Investment Schemes provide a relatively

secure means of investing on the Stock Exchange, and other financial instruments. With a

Collective Investment Scheme, the money or funds from a group of investors are pooled or

collected together to form a Collective Investment Scheme portfolio.

There are many different types of collective investment schemes but most will have a fund

manager. This fund manager is responsible for making the investment decisions and keeping

members informed of what is going on, there is also usually a board of trustees to ensure that

everything runs smoothly. The two main types of collective investment schemes are those that

are official (usually recognized by official bodies) and those that are unofficial (for example, a

group of people just joining forces to invest their money as a group). A collective investment

scheme can have a limited number of shares (called a closed end fund) or one where new

shares can be created if more money is invested (called an open end fund).

CISs can be said as private financial arrangements. They pool resources of many small savers,

generating a large pool. The resources are then invested in various assets like

1. Plantation and agro bonds

2. Real estate bonds

3. art funds

4. time-sharing schemes

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with the sole purpose of generating high returns while minimizing risk through diversification of

investments. Collective Investment Schemes (CISs) provide a means for mobilisation of savings

and enable small investors to participate in capital markets. Collective Investment Schemes

widen the choice of investment vehicles, involve the public in the process of investing in

securities through pooling resources together, which are then invested by professional

managers.

The Securities and Exchange Board of India (SEBI) is a regulatory body established by an Act of

Parliament to protect the interests of investors in securities, to promote the development of, to

regulate the securities market and for matters connected therewith or incidental thereto. As

collective investment schemes are included in securities, hence SEBI automatically becomes the

regulatory body who will regulate these collective investment schemes.

Under the SEBI (Collective Investment Schemes) Regulations, 1999 (SEBI CIS Regulations), only a Collective Investment Management Company (CIMC) which is a company incorporated under the Companies Act, 1956, and is registered with SEBI for this purpose, is permitted to launch or operate/manage a collective investment scheme.

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Collective Investment Schemes Definition

Definition:

Collective Investment Schemes: According to sub section 2 of section 11AA of SEBI Act,

Collective Investment Scheme means “Any scheme or arrangement made or offered by any

company under which the contributions, or payments made by the investors, are pooled and

utilized with a view to receive profits, income, produce or property, and is managed on behalf

of the investors is a CIS. Investors do not have day to day control over the management and

operation of such scheme or arrangement”.

The key words in the definition are "pooling of investors' money" and distancing of ownership

and management of the funds. In other words, if the money raised from investors for sharing of

profits or returns is commingled, it is a CIS. The investors are passive investors; they are not

managing their own money. Further the investments are for certain pre-specified purposes.

Mostly CIS confines its investments to plantations and agriculture industry, real estate, art

funds, time-sharing schemes and multi-level marketing (MLM) schemes, among others. Any

entity proposing to operate as a Collective Investment Management Company (CIMC) has to

apply for registration with SEBI.

SEBI Guidelines

At the time of commencement of CIS Regulations i.e. (October 15, 1999), entities operating a

collective investment scheme are deemed to be an existing collective investment scheme.

SEBI does not ensure the refund of money invested in defaulting entities registered before

October 15, 1999.

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Features of Collective Investment Scheme:

In collective investment scheme, the contribution made by the investors are pooled and

used in different schemes

The purpose of contribution by the investors is earn some profit, income, property i.e.

movable or immovable from such scheme

Funds are managed by CIS instead of investor

Investors have no control on the management of funds

So, the three critical features of a CIS are:

(a) Pooling of money

(b) Entrustment of money to someone such that the investors are not the ones who are

managing their own money

(c) Sharing of returns from a specified investment.

Followings are the features should not be in Collective Investment Scheme:

Funds shouldn’t invested in co – operative society

Not deposited in non – banking financial institution

Not be an insurance

Not invested in Chit fund

Not to contribute in mutual funds, etc.

Collective Investment Management Company: means a company incorporated under

Companies act, 1956 whose objective is to organize, operate and manage the collective

investment scheme.

Registration of Collective Investment Management Company: 

An applicant has to pay non – refundable application fee for registration

If the application is incomplete or there is any error, it can be rejected by SEBI but

before rejecting the applicant will get one month time rectify the error.

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Applicant and its company should meet all the eligibility criteria for registration. The

followings are the eligibility criteria :

o Company should be registered under Companies act,1956

o Applicant should have Memorandum of Association

o The company at the time of registration as CIMC should have a minimum net

worth of Rs.5 crore (provided that at the time of making the application, the

applicant should have a minimum net worth of Rs.3 crore, which should be

increased to Rs.5 crore within 3 years from the date of grant of registration).

o Applicant should be a fit and proper person for the grant of such certificate

o Applicant should have adequate infrastructure to enable the scheme

o The directors or key personnel of the applicant shall consist of persons of

honesty and integrity having adequate professional experience in related field

and have not been convicted for an offence involving moral turpitude or for any

economic offence or for the violation of any securities laws

o No person, directly and indirectly connected with the applicant who has been

refuse registration by SEBI under the act.

Explanation : For the purposes of this clause, the Board shall take into account

whether the previous application for a certificate of any person, directly or

indirectly, connected with the applicant has been rejected by the Board or any

disciplinary action has been taken against such person under the Act or any of

the rules or any of the regulations made under the Act

o At least one of the directors, on the Board of the CIMC, who is not subject to

retirement, is a representative of the trustee;

o CIMC cannot become the trustee of the schemes

o In case the applicant is an existing collective investment scheme, it complies with

the provisions of Chapter IX of these regulations.

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Limitation on business activities for Collective Investment Management Company:

The collective investment management company should not undertake any activity

other than managing of the scheme

Should not act as a trustee of any scheme

Should not launch any scheme for the purpose of investing in securities

Should not invest in any schemes floated by it

Responsibility of Collective Investment Management Company (CIMC):

1. Be responsible: CIMC should be responsible to manage the funds or the property of the

scheme in the behalf of the unit holders and should also responsible to manage the

scheme according to the regulations and offer documents.

2. Exercise diligence: CIMC has to be very carefully manage the assets and funds of the

scheme. Also responsible for the accountability of the employees and the persons to

whom the services are availed.

3. Remain accountable: CIMC should be accountable to all the unit holders and there

transaction and any contract or agreement with them.

4. Appoint registrar: CIMC must appoint a registrar and share transfer agents.

5. Issue receipts:CIMC, every month send a report of receipts and payments to SEBI

6. Hold regular meetings: CIMC holds meetings of the Board of Directors at least twice in 3

months. CIMC ensures that the employee or officers do not make improper use of their

position to gain directly or indirectly.

7. Obtain insurance: CIMC obtain the insurance against the property of the scheme and

follow all the guidelines, directives, instruction and circulars issued by SEBI from time to

time.

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Submission of Information and documents by CIMC:

CIMC should prepare quarterly reports on its activities and the position according to the

regulations and submit the report to trustees within the one month expiry of the

quarter.

CIMC should report to trustee and SEBI when a new director joins within 15 days.

A copy of balance sheet, profit and loss account and a copy of appraisal to the unit

holders within two months from the closure of the financial year.

All the details related to scheme should inform to SEBI and trustee.

CIMC offer document of scheme:

Before launching any scheme CIMC should file an offer document of the scheme with SEBI and

pay the filing fees as specified in the Second Schedule.

Content of the offer document:

True and fair view of the scheme to enable for investor to make an informed decision

SEBI can do the modification in the scheme within 21 days of filing of the scheme

Every scheme is advertised with a advertisement code with the disclosure of investment

objectives, methods and the periodicity of the scheme. If the advertisement is incorrect

or fake, then the director of the CIMC is liable for the punishment.

CIMC should mention the minimum and the maximum amount of subscription

If the scheme is unable to get the minimum amount of the scheme then the funds will

be refunded in six weeks from the date of closure of the scheme with the rate of

interest of 15 % p.a.

CIMC should issue the unit certificates to the unit holders. This unit certificate can be

easily transferable and CIMC will issue the transfer certificate within 30 days

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The Securities Contracts (Regulation) Act, 1956

Section 27A. Right to receive income from collective investment scheme

It shall be lawful for the holder of any securities, being units or other instruments issued by the

collective investment scheme, whose name appears on the books of the collective investment

scheme issuing the said security to receive and retain any income in respect of units or other

instruments issued by the collective investment scheme declared by the collective investment

scheme in respect thereof for any year, notwithstanding that the said security, being units or

other instruments issued by the collective investment scheme, has already been transferred by

him for consideration, unless the transferee who claims the income in respect of units or other

instruments issued by the collective investment scheme from the transfer or has lodged the

security and all other documents relating to the transfer which may be required by the

collective investment scheme with the collective investment scheme for being registered in his

name within fifteen days of the date on which the income in respect of units or other is

instruments issued by the collective investment scheme became due.

Explanation: The period specified in this section shall be extended—

(i) In case of death of the transferee, by the actual period taken by his legal representative to

establish his claim to the income in respect of units or other instrument issued by the collective

investment scheme;

(ii) In case of loss of the transfer deed by theft or any other cause beyond the control of the

transferee, by the actual period taken for the replacement thereof; and

(iii) In case of delay in the lodging of any security, being units or other instruments issued by the

collective investment scheme, and other e documents relating to the transfer due to causes

connected with the post, e by the actual period of the delay.

(2) Nothing contained in sub-section (1) shall affect—

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(a) The right of a collective investment scheme to pay any income from units or other

instruments issued by the collective investment scheme which has become due to any person

whose name is for the time being registered in the books of the collective investment scheme

as the holder of the security being units or other instruments issued by the collective

investment scheme in respect of which the income in respect of units or other instruments

issued by the collective scheme has become due; or

(b) The right of transferee of any security, being units or other instruments issued by the

collective investment scheme, to enforce against the transferor or any other person his rights, if

any, in relation to the transfer in any case where the company has refused to register the

transfer of the security being units or other instruments issued by the collective investment

scheme in the name of the transferee.

Section 15 D. Penalty for certain defaults in case of mutual funds 

If any person, who is—

(a) Required under this Act or any rules or regulations made there under to obtain a certificate

of registration from the Board for sponsoring or carrying on any collective investment scheme,

including mutual funds, sponsors or carries on any collective investment scheme including

mutual funds, without obtaining such certificate of registration, he shall be liable to a [a penalty

of one lakh rupees for each day during which he sponsors or carries on any such collective

investment scheme including mutual funds, or one crore rupees, whichever is less];

(b) Registered with the Board as a collective investment scheme, including mutual funds, for

sponsoring or carrying on any investment scheme, fails to comply with the terms and

conditions of certificate of registration, he shall be liable to [a penalty of one lakh rupees for

each day during which such failure continues or one crore rupees, whichever is less;]

(c) Registered with the Board as a collective investment scheme, including mutual funds, fails to

make an application for listing of its schemes as provided for in the regulations governing such

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listing, he shall be liable to [a penalty of one lakh rupees for each day during which such failure

continues or one crore rupees, whichever is less];

(d) Registered as a collective investment scheme, including mutual funds, fails to despatch unit

certificates of any scheme in the manner provided in the regulation governing such despatch,

he shall be liable to [a penalty of one lakh rupees for each day during which such failure

continues or one crore rupees, whichever is less];

(e) Registered as a collective investment scheme, including mutual funds, fails to refund the

application monies paid by the investors within the period specified in the regulations, he shall

be liable to [a penalty of one lakh rupees for each day during which such failure continues or

one crore rupees, whichever is less];

(f) Registered as a collective investment scheme, including mutual funds, fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less].

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How do CIS work:

Plantation and agro bonds:

Background:

The investment vehicles were a craze in the early 80s, when about 2,000 companies sprang out

of thin air, promising fantastic returns to prospective investors. Back then, Sebi had not been

formed and the plantation companies had a free run, collecting about Rs 3,500 crore from

gullible investors.

Industry sources say that money may now have swelled to several times the initial collection,

some say it could even be as high as Rs 3 lakh crore. As per SEBI data, 664 CIS entities had

raised Rs3,518 crore in 1998-99. Out of these 664 CIS entities, 54 CIS entities wound up their

schemes and refunded investors' money. And more than 4500 plantation companies had raised

over Rs 25,000 crore from the public during the 1990s. The laxity of the concerned regulatory

authorities was a major factor behind these scams.

This was just another scam being cooked with agro-bonds and plantation bonds being the

staple offerings. Thanks to hazy disclosure norms, a number of fly-by-night operators jumped

into the fray to make a quick buck. There was a pressing need to regulate plantation and agro

companies with increasing number of reports from numerous investors of various frauds

committed by unscrupulous promoters.

Considering the high element of risk associated with such schemes, the central government felt

that it was necessary to set up a regulatory framework to regulate such entities. The

government decided that schemes through which instruments such as agro bonds, plantation

bonds etc. are issued by the entities would be treated as Collective Investment Schemes under

the Sebi Act. And Sebi issued a public notice on October, 01, 2002 that entities which issue

instruments such as Agro Bonds, Plantation Bonds, etc. and the schemes through which such

instruments are issued would be treated as Collective Investment Schemes (CIS) coming under

the provisions of the SEBI Act, 1992.

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How they work:

In this case the CIS issues agro-bonds, which are basically forward contracts in nature. Under

such a scheme, investors enter into a buying agreement of teak saplings or agri business now to

take delivery of the full-grown tree 20 years later and the plantation companies act as

promoters-cum-managers of this transaction-plantation-transaction cycle. The agri plantation

companies are engaged in diverse types of business which range from growing teak trees and

tulips to raising goats or specialized crops. At the end of 20 years from the date of investment,

the fully grown trees are auctioned with the plantation company in question as the auctioneer

and an investor was supposed to get the auctioned value of trees under his hold. Agro-bond

units have twin benefits—the benefit of a fixed deposit in which investors get back double the

deposited amount in less than five years and a future benefit in the form of precious teak trees

which, after five years, are virtually free of cost. The agro-bond units, thus, stand to provide the

investors with short-term as well as long-term capital gains and hence appear a very lucrative

investment opportunity.

Case study: Anubhav Plantation Scam

The Background:A commerce graduate from Chennai's Vivekananda College and a chartered accountancy course dropout, C. Natesan was a man who dreamt big. His lifestyle was lavish with plush office and imported cars. He was in the news for his lavish lifestyle. Natesan started his career in 1983 by launching a consultancy firm, 'Yours Faithfully Consultancy.' In 1984, he entered the construction business with three partners. Three years later, he closed this venture and set up the Anubhav Foundation. In 1992, Anubhav Plantations Ltd. (Anubhav) was floated as a public limited company.

The basic idea was to collect deposits from the public and invest in the farm lands. Anubhav Plantations Ltd. will register a piece of land in the name of the depositor and will grow teak trees.

Slowly they expanded with many subsidiaries such as Anubhav Homes ltd., Anubhav Resorts Ltd., Anubhav Finance & Investments, Anubhav Communications & Advertising (Pvt.) Ltd., Anubhav Royal Orchards & Exports, Anubhav Hire Purchase Ltd., Anubhav Green Farms &

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Resorts (Pvt.) Ltd., Anubhav Agro, Anubhav Security Bureau, Anubhav Interiors and Anubhav Health Club. By 1998, Anubhav had become a Rs 250 crore group which, apart from its teak-plantation schemes, was involved in the timeshare, finance, and real estate businesses.

Anubhav Foundations Ltd. was having branches all over India with 91 offices and over 1,800 employees.

Natesan had plans to forward-integrate from teak into furniture and to get imported machinery to make it. However, his growth strategy was focused mainly on mobilizing funds from investors. The group had already raised vast sums of money from the public in the form of fixed deposits, teak units, and a combination of fixed deposits and teak units. Natesan was extremely secretive about the financial performance of his group. In the plantations business, Anubhav was the market leader. It operated through four companies: Anubhav Agrotech, Anubhav Green Farms & Resorts, Anubhav Plantations, and Anubhav Royal.

The SchemeAnubhav Teak Farm Scheme:

Option A assures the investor a return that is 77 times the original investment while Option B promises a 66-fold one. The minimum deposit that an investor must make is Rs 6,000, and the maximum he can is Rs 60,000.

Under Option A, an investor who makes a deposit of Rs 6,000 gets a piece of land, measuring 300 square feet, with 3 teak saplings on it. This scheme had a tenure of 20 years, during which Anubhav is the self-appointed caretaker of the land and the trees. The investor gets back Rs 1,000 every year for the first 6 years; an additional Rs 6,000 at the end of the 6th year; and another Rs 12,000 after the 12th year. Finally, at the end of the 20th year, the investor gets Rs 3 lakh or 40 cubic feet of teak, whichever he prefers.

Option B offers similar, though not identical, returns. While the annual returns in the first 6 years are replaced by a payback of Rs 15,000 at the end of the 6th year, the rest of the payments remain the same.

Good Earth Unit scheme:

A similar investment of Rs 6,000 brought an investor not an outright ownership of the land, but a 5-year lease of 100 square feet. He, in turn, sublets the land to the company, with the returns amounting to bi-annual payments of Rs 500, and Rs 5,000 at the end of the 5th year. And a bonus of 1.13 cubic metres of teak-valued at Rs1 lakh at the end of the 20th year.

Dangling these carrots, Anubhav claims to have mobilised Rs 121 crore, using some of it to, it claims, plant 1.70 million trees on 1,063 acres at Bodi, Palani, and Tirunelveli in Tamil Nadu.

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The ScamThe deposits from the customers are collected by Anubhav Plantations Ltd. And a small piece of land is registered in the name of the customer. The customer in turn gives power to Anubhav Plantations Ltd. to grow teak and other vegetables, Anubhav Plantations Ltd. Will make mass cultivation and every year it is paid to the customer as agricultural income and this agricultural income is exempted from Section (10) IT Act

for example: Rs. 1 lakh is deposited by customer in Anubhav Plantations Ltd. and the company will pay a total interest of Rs.10,000/- per annum for 5 years. In the 5th year the deposited (Principal) money is returned to the customer, here that every year interest of Rs.10,000/- is considered as an agricultural income and was considered as a non-taxable element but the authorities of the income tax department held that the customers' land is leased to Anubhav Plantations Ltd.

Based on the power given by the customers, Anubhav Plantations made mass cultivation and returned the income out of such cultivation to the customer is not an agricultural income but a “lease rent”. Hence the income received by the customer cannot be treated as an agricultural income, but as a lease rent and chargeable to tax as income tax.

This quoted case was a great set back to Anubhav Plantations Ltd. and created confusion in the company which was subsequently audited by SEBI which had ranked APL 4th on a scale of 5.

Anubhav’s shaky financial condition could easily be seen in its books. In 1996-97, plantation income amounted to Rs. 35.32 crores and net profit was Rs. 38.69 lakhs. The low profitability was attributed to the group’s high, non-productive, expenses. In March 1997, Anubhav’s current liabilities exceeded its current assets by Rs.6.40 crores. The company’s paid-up equity capital was just Rs. 36 lakhs while its borrowings, both secured and unsecured, amounted to Rs. 2.64 crores. Loans and advances amounted to Rs 25.95 crores, of which Rs10.75 crores had been lent to Anubhav Foundations, Anubhav Green Farms & Resorts, Anubhav Foundations, Anubhav Green Farms & Resorts, Anubhav Resorts and Anubhav Communications.

In the schedule explaining the loan provisions, it was mentioned that the funds had been used for the purchase of residential apartments (Anubhav Foundations) and farmland (Anubhav Green Farms), and to meet the expenses incurred on advertising and marketing (Anubhav Communications).

Most of the plantation firms had a skewed capital structure. According to CRISIL’s findings, on an average, while Rs.35 lakhs was contributed from the promoter’s side, the public funds raised were usually above Rs. 300 crores.

Most of these companies did not even have sufficient crop insurance. Also, the offer documents of these companies did not highlight the risks involved. The lack of industry regulation made it virtually

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impossible for the average investor to distinguish between a fly-by-night operator and a genuine player. Most of these companies were reluctant to provide information about themselves.

The APL were not able to procure lands for all the customers spread out to the length and breadth of the country, at the same time the capital collected from the customer has to be paid in the 5th year which has created a huge bottleneck in the company which lead to shortage of Working Capital and this has paved the way for the downfall, the improper handling of huge deposits has brought down the shutters of APL.

Almost all the cheques at the end of 5th year bounced and APL was just a foot to the grave. This was a loss of Rs.400 crore to the entire nation and a major fraud committed by the group because of their incompetent workforce and defective financial planning.

Financial Fraud

APL collected deposits from public and transferred the funds to Anubhav Foundations (firm) for building apartments. The Companies Act states that in a Public Limited company, funds should not be transferred to a firm without a proper resolution and proper disclosure in annual accounts.

The funds were transferred to the firm, finally the funds were blocked in Anubhav foundation firm and APL was unable to recoup the funds back, but the adjustments were suitably made in APL accounts as if the funds were utilized only for the purchase of land and for agricultural cultivation. Most of the adjustments were made in purchasing land and cash withdrawals; in fact only notional entry was passed. Due to this APL was having shortage of working capital and the company finds it difficult to overcome this, as a result it ended with the closure.

AftermathThe government took over all the assets with an intention of paying the depositors but were not successful in their deed due to heavy and long process formalities from the government side and almost all the depositors lost their funds.

ConclusionIn the early 1990s, setting up a finance company was very simple as there was no supervisory authority for sole trading or partnership firms, nor did they fall under any regulatory framework. Though there was a limit on the number of depositors these sole trading or partnership companies were allowed to have, there was no ceiling on the amount of deposits they could collect. As per the Partnership Act, a partner in one company could be a partner in a number of other firms.

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Real EstateBond:

How it works:

A real estate company or a property developer will invite people to invest money in

land/plots/flats or simple 'to-be-constructed' properties. Sometimes, the land/plots/flats are

for real; sometimes, they are not.

Assuming they are for real, an 'investor' is allotted the plot or land, with an agreement to

execute conveyance—whereby at some time in the future, the plot or the property will be

transferred to the investor. Actually, however, the investor never intends to buy the plot or

property in question, he simply intends to invest money.

So, after a fixed term, say a year, the investor surrenders his right to get the property, and gets

back money with a promised rate of return.

Case Study: Sahara scam

Facts Two unlisted companies of Sahara India Group viz. Sahara India Real Estate and Sahara Housing Investment raised funds through unsecured Optionally Fully Convertible Debenture (OFCDs), with annual interest of 15%, in 2008 and 2009 respectively, without any intention of listing the proposed issue in any stock exchange for the purposes of financing acquisition of lands, development of townships etc. under the shadow of some Collective Investment Schemes. In return, these CIS entities are offering post-dated cheques and thus giving an impression to the investors that their money or return is assured, which may not be the case always. Annual accounts filed with the Registrar of Companies revealed that Sahara India Real Estate had already raised Rs 4,843.37 crore from investors as on June 30, 2009. The two Sahara companies were raising the deposits sometimes as "Housing Bonds" or "Abode

Bonds" or "Nirmaan Bonds". A Red Herring Prospectus was filed with the RoC wherein it was mentioned that the companies do not intend the proposed issue to be listed in any stock exchange. Subsequently an information memorandum was filed for private placement to the friends, associates, group companies, workers/employees and other individuals connected with the Sahara Group.

SEBI observed that SIRECL and SHICL were raising sizable amounts of money, running into thousands of crores, from the public without conforming to the ‘prudent disclosure’ and other

19

investor protection norms which govern public issues. Moreover, according to SEBI, the details of such mobilization were also not made available in the public domain.

Sebi had found that OFCDs raised by the two firms are “in effect no different from deposits from the public, except that they come with an ‘option to convert’ appended to it…it seems that under the guise of OFCDs, the two companies are extensively taking up parabanking activities and running deposit schemes”.

Key Issues

(1) OFCDs are ‘Securities’

It was argued that the OFCDs are not securities for the purposes of the SEBI Act and hence, SEBI does not have the jurisdiction to regulate them. SAT conclusively ruled that the SEBI Act is a complete code in itself pertaining to securities and securities market and the reference to the definition of securities under the Companies Act cannot be used to determine the scope of securities under SEBI Act. It was held that OFCDs are commonly understood as debentures in the securities market or by those connected therewith and are ‘securities’ for the purposes of the SEBI Act. Furthermore, SAT held that OFCDs being a combination of debt instrument and equity instrument and, therefore, a hybrid security would also qualify as ‘securities’ under SEBI Act.

(2) OFCDs are ‘Marketable Securities’

It was contended that OFCDs was not ‘a marketable security’ and hence not securities under SEBI Act as the transfer of OFCDs was made subject to the approval of the company. Rejecting this contention the SAT held in the first instance that such a restriction is not permissible in the light of Sections 111A (2) read with Sections 9 and 82 of the Companies Act (‘CA’).2 In addition, it was also held that ‘marketable’ would only imply that a product is capable of being bought and sold and there is no need for an actual sale. The OFCDs in the case was found to be eligible to be transferred to third parties and hence was held as a marketable security.

(3) Power of SEBI to regulate unlisted companies / unlisted securities It was held by SAT that SEBI has been empowered under Sections 11, 11A and 11B of the SEBI Act to take necessary steps to safeguard the interest of the investors in securities and regulate the securities market and widest interpretation needs to be given. Therefore, it was held that the SEBI has the power to regulate listed and unlisted companies and securities and that the SEBI Act does not distinguish between the two. Furthermore, it held that as the company has issued OFCDs it was a ‘person associated with the securities market’ and therefore amenable to the regulatory jurisdiction of SEBI.

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(4) Mandatory public listing of OFCDs (or other ‘securities’) by unlisted company It was contended that the OFCDs were only issued to friends, associaties, group companies, workers / employees and other individuals associated with Sahara India Group and was, therefore, a private placement and not a public issue. Rejecting this contention, the SAT held that the companies always knew that they were going to offer it to more than 50 persons. The SAT held interpreting the Proviso to Section 67 (3) of CA, that offering securities to more than 50 persons would automatically make it a public issue. In the instant case it was found that more than 2 crore investors had subscribed to the OFCDs. In addition SAT held that the fact that the Company had issued an information memorandum is indicative of the fact that the securities were offered for public as it was trying to assess the demand for the securities. After holding that the issue of OFCDs was a public issue, the SAT by interpreting Section 73 of CA held that a plain reading of Section 73 required every company intending to offer shares or debentures to the public to do so by issuing a prospectus and in turn applying to a recognised stock exchange for permission for listing of the securities. Furthermore, it was reiterated that when shares are offered to the public, the requirements of Section 73 are to be complied.

Sahara, in its earlier explanations to Sebi, had referred the Companies Act and stated that the two firms are not obliged to take Sebi’s approval for raising capital from the public as they were not listed and the issue was meant for a select group of subscribers associated with the group.

(5) Regulating unlisted companies It was contended that by virtue of Section 55A(c) of the Companies Act, SEBI could not regulate an unlisted company. Rejecting this contention, it was held that the powers under Sections 11, 11A, 11B of SEBI Act cannot be whittled down or in any way affected by Section 55A of CA and that the powers under Section 55A was exclusive of the provisions of SEBI Act. Furthermore, SAT held that the powers under Section 55A have been exercised by SEBI even before the introduction of the said provision. Therefore, under the SEBI Act, SEBI can deal with both listed and unlisted companies.

3 Section 55A of CA provides that in respect of various provisions of the CA in so far as they relate to issue and transfer of securities and non-payment of dividend in the case of listed public companies and public companies intending to get their securities listed would be administered by SEBI and in all other cases by the Central Government.

In addition, it was also held that having gone to the public by circulating an information memorandum by virtue of Section 73 the law mandates the securities to be listed and therefore in law it will be assumed that the company intended the securities to be listed and would fall under Section 55A(b) of CA and amenable to the jurisdiction of SEBI. The SAT went even further and elaborated that although the explanation to Section 55A declared that all other matters for the purposes of Section 55A (c) including prospectus etc would be exercised by the Central

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Government or RoC, it was found that on a harmonious construction, the matters relating to issue and transfer of security and non-payment of divided in a prospectus etc would still be regulated by SEBI.

(6) Convertible bonds and OFCDs It was sought to be argued that by virtue of Section 28 (1) (b) the provisions of Securities Contract (Regulation) Act (‘SCRA’) the provisions relating to listing etc under the SCRA Act will not apply. It was held that convertible bond is not the same as convertible debenture and the exemption under Section 28 is only applicable to convertible bonds and not convertible debenture as in the instant case.

4 Under Section 28 (1) (b) the provisions of the SCRA will not apply to any convertible bond which is issued at a price agreed upon at the time of issue.

ConclusionThe Supreme Court asked Sebi, the market regulator who had ordered the two companies to return all the money they had raised from the public through a preferential allotment, to provide it a list of other unlisted firms which may have done the same thing as Sahara.

SEBI had ordered to return the money, along with 15 per cent interest, collected from investors through its Optionally Fully Convertible Debentures (OFCD) scheme.

Besides, the regulator has also restrained the entities from accessing the securities market for raising funds, till the time payments are made to the satisfaction of the SEBI.

The Sebi order also restrained Roy and the directors of the two firms—Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary—from associating “with any listed public company and any public company which intends to raise money from the public” till the repayments are completed.

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Art Fund:

Background:

Before February, 2008 Art funds were not included in CIS. But it came to the knowledge of SEBI

that most of the entities are operating the art-fund without having been registered with the

SEBI. There was one such Osian Art fund, which announced the launch of a private fund called

Osian’s Art Fund, worth over Rs 100 crore in June, 2006. Osian Art Fund, which pooled

investors’ money to invest in art, was supposed to be regulated by SEBI. However, the Osian

Art Fund was not regulated by or registered with any regulatory body. So SEBI issued a show-

cause notice in November 2007 to Osian’s–Connoisseurs of Art Private Limited, the asset

management company of the fund, seeking an explanation as to why the Art Fund should not

be regulated in terms of the SEBI (Collective Investment Schemes) Regulations, 1999. Hence in

this regard SEBI had a press release on February 13, 2008 in its official website stated that “Art

Funds” are “Collective Investment Schemes” as defined under the SEBI Act. In that press release

it further stated that “launching or floating of “Art Funds” or Schemes without obtaining

registration from SEBI amounts to violation of the SEBI Act and Regulations.

Fearing flow of illicit wealth into these funds and also a high level of risk posed by them to the general investors, Sebi is now considering framing a specific set of regulations for these funds, a senior official said.

Globally, art funds are very famous as an alternative class of investments for rich investors and have started gaining some ground in India over the past few years.

However, there are no specific regulations in India for art and other such funds, which collect money from numerous investors, most of whom are high net worth individuals to invest them into art works, antique pieces as also old and rare coins and stamps.

Sebi will soon begin a consultation process with various stakeholders, including the central government and RBI, with an aim to frame the specific regulations for these alternative investment vehicles this fiscal, the official added.

Earlier in 2008, a time when the art funds first became visible in India, the regulator had issued a public notice to warn the investors against putting their money into art funds or schemes of entities not registered with Sebi.

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At that time, Sebi had said that its analysis of various art funds has found them to be ‘collective investment schemes’ and were being launched by various entities without registering with it in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999.

As per the existing regulations, only an entity registered with Sebi as a Collective Investment Management Company is allowed to offer any collective investment fund or scheme, including those focussed on art works.

However, there are no specific regulations for art funds and the need has been felt now to have a distinct set of rules for such investment vehicles, the official added.

Globally, alternative investment avenues are quite in vogue among rich investors, who are estimated to allocate 5—10 per cent of their investment portfolio into these products.

How it works:

Money is pooled to buy art. Art funds are generally privately offered investment funds dedicated to the

generation of returns through the acquisition and disposition of works of art. They are managed by a

professional art investment management or advisory firm who receives a management fee and a

portion of any returns delivered by the fund.

The underlying characteristics of art investment funds are diverse and vary from fund to fund. While all

art funds utilize some form and degree of a traditional “buy and hold” strategy, art funds differ in their

aggregate size, duration, investment focus, investment strategies and portfolio restrictions.

The unifying factor of all art investment vehicles is their focus on the art market, which is characterized

by a lack of regulatory authority, deficient price discovery mechanisms, the non- transparency of the

market and the subjective value and illiquid nature of fine art. Proponents of art investment funds argue

that it is these very characteristics that generate the significant arbitrage opportunities within the

market that seasoned art professionals can exploit for the benefit of the fund’s investors. Likewise,

critics of art investment funds in turn point to such characteristics as denoting art as the riskiest asset

class, thereby creating the potential for substantial investment losses among the fund’s investors.

Casestudy: Osian’s-Connoisseurs of Art Private Ltd Vs SEBI

Osian Art fund, which announced the launch of a private fund called Osian’s Art Fund, worth

over Rs 100 crore on 1st June, 2006. The objective of the fund is to generate significant medium

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and long-term income and capital growth from a cohesive, historically driven portfolio of

investment and management in contemporary fine arts from the Indian sub-continent. This was

the first fund winch was floating at that time. The Art Fund was a three-year closed-ended fund.

Osian Art Fund, which pooled investors’ money to invest in art, was supposed to be regulated

by SEBI. However, the Osian Art Fund was not regulated by—or registered with—any regulatory

body. So SEBI issued a show-cause notice in November 2007 to Osian’s–Connoisseurs of Art

Private Limited, the asset management company of the fund, seeking an explanation as to why

the Art Fund should not be regulated in terms of the SEBI (Collective Investment Schemes)

Regulations, 1999.

Excerpts from the 5th six-monthly disclosure report prepared by the Fund, reveal the entire

story. Osian Art Fund was launched in 2006 and was served a show-cause notice by SEBI in

November 2007 asking as to why the Fund should not be regulated. Osian had a hearing with

SEBI later in 2008. However, in both instances, SEBI did not revert with any further

communication. This shows a shocking dereliction of the implementation of SEBI’s regulatory

process.

Osian claims to have submitted a detailed response in December 2007 to the show-cause

notice. However, after this response, the Osian report claims, there was no further

communication from SEBI. “As the duly appointed trustee of the Art Fund, Oseta Investment

Trustee Co. Pvt Limited (“Oseta”) submitted a detailed response to the Notice on 21 December

2007. SEBI has not reverted to Oseta with any further queries, concerns or directions on this

issue as of date,” the report further stated. This report was released in February 2009.

Later, in a press release dated 13 February 2008, posted on SEBI’s official website, SEBI advised

investors with regard to their investments in art funds. The press release stated that “SEBI has

advised investors with regard to their investments in “Art Funds” that “Art Funds” are

“Collective Investment Schemes” as defined under the SEBI Act. However, no entity has

registered with SEBI, under the SEBI (Collective Investment Schemes) Regulations.” The press

release further stated that “launching or floating of “Art Funds” or Schemes without obtaining

registration from SEBI amounts to violation of the SEBI Act and Regulations. Appropriate

actions, civil and criminal, under the SEBI Act may be taken by SEBI against such

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funds/companies.”

Followed by this new advisory, Osian was granted an opportunity for a hearing before the

whole-time director of SEBI on 5 September 2008. Again, there was no further communication

from SEBI after the hearing.

“Osian presented the case to SEBI through its legal galaxy, explained their viewpoint at length

on legal as well as industry-specific issues and made submissions; since then, there has been no

further communication from SEBI. No directions for registration under the CIS Regulations have

been issued to the Art Fund or Oseta Investment Trustee Co. Pvt. Ltd. as of date,” stated Osian’s

six-monthly report released in February 2009.

Conclusion:Along with that SEBI in its press release on February 13, 2008 in its official website stated that

“Art Funds” are “Collective Investment Schemes” as defined under the SEBI Act. In that press

release it further stated that “launching or floating of “Art Funds” or Schemes without obtaining

registration from SEBI amounts to violation of the SEBI Act and Regulations. Appropriate

actions, civil and criminal, under the SEBI Act may be taken by SEBI against such

funds/companies.” In response to that press release SEBI had given another opportunity to

Osian on September 5, 2008, to appear before it. However, there was no follow-up action by

SEBI, since Osian was wound up on 10 July 2009. According to the Mr Tuli, many buyers, “who

had promised to buy art at present prices in 2007-08 (upon which the ongoing NAV was based)

refused to pay those prices in 2009 when redemption demanded it, as by then the prices had

fallen by more than 50%-60% of the agreed value, but more importantly confidence was at an

all-time low and liquidity at an exceptional premium.”

He explained that the assumption that art would be sold at a discount of 20%-30%, compared

to earlier sales, proved wrong. “…as the art would not sell at any price, given a relatively large

amount of absolute value was required to be sold. The cash liquidity just did not exist even at a

junk value discount.”

The fund, instead of writing down the NAV to 54.65, decided that Osian’s – Connoisseurs of Art,

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who is the asset manager, could cover defaults to protect the unit- holders’ capital. The NAV of

54.65, according to the fund, “could have been the value if the defaults had been accepted and

sales made at whatever prices.”

Accordingly, various banks were approached to lend to the fund, so that the unit-holders would

be paid in three to four years. Few banks, agreed to lend and on that promise, in December

2009, the NAV was kept at 111.72. 85% of the capital was to be paid to all unit-holders.

However, three months later the banks refused to lend.

Till date many of the investors have not been repaid and have demanded that the forthcoming

auction, where investors are allowed to participate on their choice, be blocked unless they

are paid in full.

Meanwhile Osianama—a grand museum of art, culture, cinema and architecture, and Mr Tuli’s

dream project—will be completed in 2012. Mr Tuli had bought the plot where Mumbai

famous Minerva Theatre used to stand for Osianama, but the deal got delayed when Osian’s

ran into trouble with the civic authorities.

But in November 9, 2009 the art fund was redeemed as per the redemption guidelines as

shared with the unit holders in June 2009. The company further stated that it may refund the

money back to its unit’s holders before December 2009.

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Time sharing scheme:

How it works:

A timeshare is a form of ownership or right to the use of a property, or the term used to describe such properties. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each sharer is allotted a period of time (typically one week, and almost always the same time every year) in which they may use the property. Units may be on a part-ownership or lease/"right to use" basis, in which the sharer holds no claim to ownership of the property.

Timeshare also known as Holiday Ownership is the same thing just a change of name in the way it is being promoted. It is the art of sharing your ownership in your resort with other people, and having the ability to SWAP or EXCHANGE that time to another resort anywhere in the world depending on availability.

It is normally sold in 1 week blocks, however in years gone by this was also sold in 2 week and also 4 week blocks to one owner. This was a great system and allows you to swap (exchange) your week or weeks at your resort for weeks at over 3700 resorts worldwide. The swap or exchange system allows you to exchange your timeshare to one of like value in other words if you own a 1 bedroom unit you can exchange to a 1 bedroom unit, if you own a 2 bedroom unit you can exchange to a 2 or a 1 bedroom unit, the system does not allow for you to exchange to a larger unit, for example if you own a 1 bedroom unit you cant exchange up to a 2 bedroom unit.

Timeshares are almost exclusively used in the tourism market. Investors pool in their money,

and in return get a plot of land which they can reside for a certain number of days or a resort

where they can book a room for a certain number of days. Timesharing is the art of combining

the benefits of Holiday Home Ownership and Luxury rented accommodation for a small

initial capital investment.

Casestudy: Suman Motels Vs SEBI

Suman Motels was incorporated in the year 1984 as a private limited company. In 1989 it was

converted into a public limited company. It is involved in resort and tourism activities. It is also

involved in plantation activities. It had floated several Collective Investment Schemes. 2

directors Javed Akhtar and Vijay Kumar, of Suman Motels, a chain of holiday resorts facing a

number of cheating cases filed by investors across the country. Suman Motels duped investors

of more than Rs 300 crore overall. Over 60,000 small investors have complained of cheating by

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Suman Motels and the total amount the resort chain is said to have wrongfully deprived them

of is pegged at over Rs 300 crore. Suman Motels had launched 12 schemes. These included

holiday time sharing, plantation, agricultural land and bungalow investment schemes, among

others.

Investors were also promised a week's stay for 15 years in any resort of a chain spread across

the country. The company had announced that those investing in these schemes would get high

returns, free holidays and lifetime club memberships.

The Company was not registrated under SEBI (Collective Investment Schemes) Regulations,

1999.

SEBI vide a letter dated December 29, 1999 and also by way of a public notice dated December

10, 1999, had given intimation to the Company in terms of Regulation 73 (2) which cast an

obligation on it to send an Information Memorandum to all the investors detailing the state of

affairs of the scheme(s), the amount repayable to each investor and the manner in which such

amount is determined and register with SEBI. Accordingly, the Company was required to send

the Information Memorandum to the investors latest by February 28, 2000. The Company in its

reply dated May 16, 2000 informed SEBI that Information Memorandum has been circulated to

its members on February 28, 2000 and it has taken further steps for realizing the assets and for

making payments to the investors. But as a matter of fact, the Company, neither applied for

registration under the said Regulations nor has taken any steps for winding up of the scheme(s)

and making payment to the investors.

Hence SEBI has directed the Company to refund the money collected under its Collective

Investment Scheme (s) with returns which is due to the investors as per the terms of the offer

within a period of one month from the date of the Order failing which the following actions

would follow:

1. Initiation of prosecution under section 24 of SEBI Act, 1992.

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2. The Company and its concerned officials would be debarred from operating in the

capital market and from accessing the capital market for a period of 5 years.

3. Reference to the state governments / local police to register civil /criminal cases against

the Company/its concerned officials for the offences of fraud, cheating, criminal breach

of trust, dishonest misappropriation of public funds.

4. Reference to the Department of Company affairs to initiate the process of winding up of

the Company.

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SHG & GRAMEEN BANK(JOINT LIABILITY MODEL)

The two broad microfinance approaches in India are the government run SHG Bank Linkage

Programme pioneered by NABARD and the MFI model which is privately managed by

independent civil society institutions with some of them regulated by the RBI.

MFI’s use two basic methods in delivering financial services to their clients.

These are:

(1) Group Method

(2) Individual method- focuses on providing microcredit to one client and does not require

other people to provide collateral or guarantee a loan.

Group Method

This is one of the most common methodologies for providing micro-finance. Group method

primarily involves a group of individuals, which becomes the basic unit of operation for the

MFIs. It is also known as solidarity group lending or village banking, is a mechanism that allows

a number of individuals to gain access to microcredit by providing collateral or guaranteeing a

loan through a group repayment pledge. As MFIs have to provide collateral free loans, group

methodologies help in creating social collateral (peer pressure) that can effectively substitute

physical collateral. The incentive to repay is based upon peer pressure; if one person in the

group defaults, the other group members make up the payment amount.

Advantages:

• Groups are trained to own joint responsibility for loans that are taken by individuals in the

group.

• Groups ensure repayments from all individuals in that group and incase of a default

• Groups functions as the forum where the credit discipline and other related issues are

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discussed.

• Group may have to jointly own the responsibility of defaults and pay on behalf of defaulting

client.

• Group also help credit appraisal and provide opinion on creditworthiness of each individual in

the group.

• Groups methodology also helps in controlling cost

This ensures that even without taking any physical collateral, the MFI is able to manage its

credit risk (loan related risk).

MFIs actually deliver the financial service at the client’s location which could be a village in rural

areas or a colony/slum in urban area. Having a group helps the MFIs in getting all clients at one

spot rather than visiting each individual’s house. This helps the MFI in increasing the efficiency

of staff and controlling the cost. Group methodology creates a forum where individuals come

and discuss, can provide opinion, and exert social pressure.

The advantage of Group methodology can easily be appreciated by the fact if a MFI employee

has to visit each individual house in isolation, it would be very difficult. Also in the absence of a

group, if a client refuses to pay there is no forum where such a case can be discussed or there is

no method through which the MFI can exert pressure on the client.

Group methodology is also important because in case of larger loan defaults a financial

institutions can take recourse o legal action but in small loans legal recourse is not an

economically sound option. An MFI who may have an outstanding or Rs 3,000 at default cannot

apply legal pressure as the cost of recovery through that method can be higher than the

amount to be recovered itself.

Moreover, the clients that the MFIs are dealing with are generally poor and may face genuine

problems at times. Rather than taking an aggressive/legal approach, which such vulnerable

clients it is always better to have more constructive and collective approach, which is provided

by the Groups.

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Due to the various advantages, as indicated above provided by groups, this methodology is

widely accepted and used in micro-finance across the world.

Self-help Group and Joint Liability Groups (Grameen model and its variants) are two common 

credit delivery models in India.

Self –Help Groups (SHGs)

Self-help Group concept has its origin in India. SHGs are now considered to be very important

bodies in rural development and are therefore found in almost all parts of the country and their

number is still rapidly growing. SHGs are formed by NGOs as well as Government agencies and

are used as channels for various development programmes.

A Self-Help Group is an association of generally up to 20 members (not exceeding 20 members),

preferably from the same socio-economic background. SHGs are facilitated by Government

agencies or NGOs for members to come together for discussing and solving their common

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problems either financial or social through mutual help. An SHG can be all-women group, all-

men group, or even a mixed Group. However, it has been the experience that women’s groups

perform better in all the important activities of SHGs. Mixed group is not preferred in many of

the places, due to the presence of conflicting interests.

Some of the distinct features of SHGs are;

(i) Recognized by government: SHGs are well recognized and accepted by government, SHGs

can open bank accounts in the name of SHG. They can also receive government grants and

funds for development activities.

(ii) SHGs are social intermediaries: SHGs do not restrict their functions only to financial

transactions. SHGs are often involved in many social activities. There are example where SHGs

have taken up social issues and fought against social evils like alcoholism, violence, against

women, dowry, getting into village politics and being elected as Sarpanch.

(iii) Books of accounts: SHGs maintain their own books of accounts. These are simple books to

keep records of their savings, loans income and expenditures. Strong SHGs also make their

Balance sheets and Income statements.

(iv) Have office bearers: SHGs gave a structure where there is a Group President, Secretary and

Treasure. They are elected by the group.

(v) SHGs are more autonomous as they decide their own rules and regulations.

(vi) SHGs mobilize thrift and rotate it internally.

(vii) SHGs can hold bank account and can also borrow from banks and other financial

institutions.

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As more SHGs are formed they have started federating themselves into clusters and clusters in

turn as SHG Federations. The Federations are able to channelise funds to the SHGs and also

help in improving the managing and financial skills of SHGs.

The SHG – Bank Linkage Programme was initially promoted by MYRADA (in Karnataka) and

PRADAN (in Tamil Nadu and in Bihar) and formally launched in 1992 by NABARD began to

scale-up in the mid-1990s. Under this programme, NABARD refinances bank loans to SHGs

through commercial banks but the credit risk is carried by the banks. This has stimulated the

growth of SHGs nationwide making SHGs a dominant model in the delivery of microfinance in

India.

Joint Liability Group – Grameen Model

Grameen model is based on the concept of joint liability. It is the brainchild of Prof. Muhammad

Yunus, founder of Grameen Bank in Bangladesh. Grameen model is the most accepted and

prevalent micro-finance delivery model in the world today. Many MFIs have accepted the

model as it has high focus on standardization and discipline

Grameen model, as mentioned, is a joint liability group model. Here five-member groups are

formed and eight such groups form a Center. Hence, in a full-capacity Center there are 40

members (8 x 5). However, over the years people have experimented with Centers of different

sizes and now there are variations of 5-8 groups within a Center. Center is the operational unit

for the MFI, which means that MFI deals with a Center as a whole.

Meetings also take place only at the Central level and individual groups do not meet. Group

meetings take place only in front of the Field staff of the MFI. A Grameen model is focused on

financial transactions and other social issues are generally not discussed. The Group and Center

are Joint liability Groups, which means that all members are jointly responsible (‘liable’) for the

repayment. MFI recovers full money from Center, if any member has defaulted: the group

members have to pool in money to repay to the MFI. If Group members are unable to do it,

Center as whole has to contribute and share the responsibility.

35

Some other features of Grammen Model are:

(i) The group meeting take place every week

(ii) Interest rate are charged on flat basis

(iii) MFI staff conducts the meeting

(iv) All transactions take place only in Center meetings

Grameen model is focused on providing financial services to the clients and hence there is an

emphasis on standardization and discipline. The model suggests weekly meeting for frequent

interaction with the clients to reduce credit risk. The meetings are conducted for carrying out

the financial transactions only. The meetings are conducted systematically in a short-time and

other social issues are not discussed. Flat interest is charged again for making the system

standardized. In flat rate system installment size of repayment remains small for all weeks and

hence is convenient and easier to explain. Also, it is easy to break the loan installment into the

principal and interest component.

We see that the SHG and Grameen model have originated with two different approaches. SHG

model has been developed with holistic view of development and empowerment of society

where financial transactions are only one part of it. While Grameen model is specifically

focused on providing financial services to the low-income clients. A broad comparison of the

two models is presented in the Table 1.

Joint Liability Groups (JLG)

Grameen model is a particular form of joint liability Group but in India there are other forms of

Joint liability Groups as well. MFIs, particularly in urban areas, form JLGs of five-members.

These are group of individuals coming together to borrow from the financial institution. They

share responsibility (“liability”) and stand as guarantee for each other. There is a Group Leader

in such JLGs, many MFIs prefer such group in urban business areas. Such JLGs do not hold

periodic meetings.

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Typically members are shopkeepers from same locality. These forms of JLGs are somewhere

between Group and Individual lending methods. While lending in such JLGs is to individual

members small JLGs still provide some sort of comfort to the MFIs. Also collection can be done

from a single point, generally from the Group leader rather than going to each individual. As in

urban areas shopkeepers do not have time to hold meeting, these JLGs do not meet.

CASE STUDY :  LIJJAT PAPAD

THE STRUCTURE :

Shri Mahila Griha Udyog, the makers of the famous Lijjat Papad, is an organisation which

symbolises the strength of a woman. All the women members are jointly the owners of the

organisation and are fondly referred to as ‘sisters’. The seven women were Jaswantiben

JamnadasPopat, Parvatiben RamdasThodani, Ujamben NarandasKundalia, Banuben. N. Tanna,

Laguben Amritlar Gokani, Jayaben V. Vithalani, and one more lady whose name is not known.

There is a central managing committee of 21 members to manage the affairs of the

organisation.

The organisation is wide-spread, with it’s Central Office at Mumbai and it’s 60 centers and 40

divisions in different states all over India. The organisation started of with a paltry sum of Rs.80

and has achieved sales of over Rs.300 crores with exports exceeding Rs. 10 crs.

Membership has also expanded from an initial number of 7 sisters from one building to over

40,000 sisters throughout India. The organisation functions on the basis of consensus.

AN OVERVIEW OF THE HISTORY :

It all began on 15th march. 1959 which was a warm summer day with the sun shining brightly in

the cloudless sky. A majority of the women inhabitants of an old residential building in Girgaum

(a thickly populated area of South Bombay), were busy attending their usual domestic chores.

A few of them, seven to be exact, gathered on the terrace of the building and started a small

inconspicuous function. The function ended shortly, the result – production of 4 packets of

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Papads and a firm resolve to continue production. This pioneer batch of 7 ladies had set the ball

rolling.

As the days went by, the additions to this initial group of 7 was ever-increasing. The institution

began to grow.

The early days were not easy. The institution has its trials and tribulation. The faith and

patience of the members were put to test on several occasion – they had no money and started

on a borrowed sum of Rs. 80/-.

Self-reliance was the policy and no monetary help was to be sought (not even voluntarily

offered donations). So work started on commercial footing.

The success of the organization stems from the efforts of it’s member sisters who have

withstood several hardships with unshakable belief in ‘the strength of a woman’. The

organization functions on the basis of consensus.

With quality consciousness as the principle that guided production, Lijjat grew to be the

flourishing and successful organization that it is today.

CORE VALUES :

ShriMahilaGrihaUdyogLijjatPapad is synthesis of three different concepts, namely

(1) The concept of Business

(2) The concept of family

(3) The concept of Devotion

All these concept are completely and uniformly followed in this institution. As a result of this

synthesis, a peculiar Lijjat way of thinking has developed therein.

The institution has adopted the concept of business from the very beginning. All its dealings are

carried out on a sound, pragmatic and commercial footing – Production of quality goods and at

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reasonable prices. It has never and nor will it in the future, accept any charity, donation, gift or

grant from any quarter. On the contrary, the member sisters donate collectively for good

causes from time to time according to their capacity.

Besides the concept of business, the institution along with all it’s member sisters have adopted

the concept of mutual family affection, concern and trust. All affairs of the institution are dealt

in a manner similar to that of a family carrying out its own daily household chores.

But the most important concept adopted by the institution is the concept of devotion. For the

member sisters, employees and well wishers, the institution is never merely a place to earn

one’s livelihood – It is a place of worship to devote one’s energy not for his or her own benefits

but for the benefit of all. In this institution work is worship. The institution is open for

everybody who has faith in its basis concepts.

Lijjat received the "Best Village Industries Institution" award from KVIC for the period 1998-99

to 2000-01. In 2002, the "Businesswoman of the Year" award was given to "The Women

BehindLijjatPapad" at The Economic Times Awards for Corporate Excellence. At the awards

ceremony, the President of Lijjat urged the State Governments of Maharashtra and Punjab to

reconsider their decision of withdrawing the tax exemption on Lijjat'sSasa Detergent.

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MUTUAL FUNDS

Concept

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

Organization of a Mutual Fund

There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

Organization of a Mutual Fund

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Fund SponsorAny person or corporate body that establishes the fund and gets it registered with SEBI

Form a trust and appoint a board of trustees

Appoints Custodian and Asset Management Company either directly or through trust, in accordance with SEBI regulations

SEBI regulations also define that a sponsor must contribute 40% to the net worth of the AMC

TrusteeCreated through a document called the Trust Deed that is executed by the Fund Sponsor and registered with SEBI

The trust i.e. Mutual Fund may be managed by a Board of Trustees – a body of individuals or a Trust Company – a corporate body

Protector of unit holders interests

2/3rd of the trustees shall be independent persons and shall not be associated with the sponsors

Ensure that systems, process, personnel are in place

Rights of trusteeApprove each of the schemes floated by AMC

The right to request any necessary information from AMC

May take corrective action if they believe that the conduct of the fund’s business is not in accordance with SEBI regulations

Have the right to dismiss the AMC

Ensure that any shortfall in AMC net worth is made up

Obligations of TrusteeEnter into an investment management agreement with the AMC

Ensure that the funds transactions are in accordance with the Trust Deed

Furnish to SEBI on half yearly basis, a report on the funds activities

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Ensure that no change in the fundamental attributes of any scheme or the trust or any other change which would affect the interest of unit holders is happens without informing the unit holders

Review the investor complaints received and the redressal of the same by the AMC

Asset Management CompanyActs as an investment manager of the Trust under the Board Supervision and direction of the Trustees

Has to be approved and registered with SEBI

Will float and manage the different investment schemes in the name of Trust and in accordance with SEBI regulations

Acts in interest of the unit-holders and reports to the trustees

At least 50% of directors on the board are independent of the sponsor or the trustees

Obligations of AMCFloat investment schemes only after receiving prior approval from the trustees and SEBI

Send quarterly reports to Trustees

Make required disclosures to the investors I areas such as calculation of NAV and repurchase price

Must maintain a net worth of at least 10 Crores at all times

AMC cannot act as trustee of any other mutual fund

Do not undertake any other conflicting with managing the fund

CustodianFloat investment schemes only after receiving prior approval from the trustees and SEBI

Send quarterly reports to Trustees

Make required disclosures to the investors I areas such as calculation of NAV and repurchase price

Must maintain a net worth of at least 10 Crores at all times

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AMC cannot act as trustee of any other mutual fund

Do not undertake any other conflicting with managing the fund

Responsibility of CustodianReceipt and delivery of securities

Holding of securities.

Collecting income

Holding and processing cost

Corporate actions etc

Association of Mutual Funds in IndiaIncorporated on 22nd August 1995

Apex body of all AMC’s which have been registered with SEBI

Maintains ethical lines enhancing and maintaining standards

Follows the principle of protecting and promoting interests of mutual funds as well as the unit holders

ObjectivesTo define and maintain high professional and ethical standards

To recommend and promote best business practices and code of conduct

To interact with the SEBI

To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry

To develop a cadre of well trained Agent distributors and to implement a programme of training and certification

To undertake nationwide investor awareness programme

To disseminate information on Mutual Fund Industry

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SEBI GUIDELINESMFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs)

MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors

The net worth of the AMCs should be at least Rs.10 croreAMCs and Trustees of a MF should be two separate and distinct legal entities

The AMC or any of its companies cannot act as managers for any other fund

AMCs have to get the approval of SEBI for its Articles and Memorandum of Association

All MF schemes should be registered with SEBI

MFs should distribute minimum of 90% of their profits among the investors

There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds

RIGHTS OF UNIT HOLDER Receive unit certificates or statements of accounts Receive information Receive dividend Vote in accordance with the Regulations to:- change the Asset Management Company; - wind up the schemes Receive communication from the Trustees Inspect the documents of the Mutual Funds

Advantages of Mutual FundInvesting in a mutual fund offers you a gamut of benefits

Some of them are as below:

Small   investments: With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.

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Professionally  managed: The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favorable investment opportunities.

Spreading risk: A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds.

Transparency and interactivity: Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided.

Liquidity: Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.

Choice: A wide variety of schemes allow investors to pick up those which suit their risk / return profile.

Regulations: All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor

Classification of Mutual FundsEvery investor has a different investment objective. Some go for stability and opt for safer securities such as bonds or government securities.

Those who have a higher risk appetite and yearn for higher returns may want to choose risk-bearing securities such as equities. Hence, mutual funds come with different schemes, each with a different investment objective.

There are hundreds of mutual fund schemes to choose from. Hence, they have been categorized as mentioned below.

By structure: Closed-Ended, Open-Ended Funds, Interval funds.

By nature: Equity, Debt, Balance or Hybrid.

By investment objective: Growth Schemes, Income Schemes, Balanced Schemes, Index Funds.

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Types of Mutual FundsThere are hundreds of mutual fund schemes to choose from. Hence, they have been categorized by structure, nature and investment objective.

Types of mutual funds by structureClose ended fund/scheme: A close ended fund or scheme has a predetermined maturity period (eg. 5-7 years). The fund is open for subscription during the launch of the scheme for a specified period of time. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices or they are listed in secondary market.

Open ended fund/scheme: The most common type of mutual fund available for investment is an open-ended mutual fund. Investors can choose to invest or transact in these schemes as per their convenience. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).

Interval   schemes: Interval schemes combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. FMPs or Fixed maturity plans are examples of these types of schemes.

Types of mutual funds by nature Equity mutual funds: These funds invest maximum part of their corpus into equity holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks.

These are by far the most widely known category of funds though they account for broadly 40% of the industry’s assets, while the remaining 60% is contributed by debt oriented funds. Equity funds essentially invest the investor’s money in equity shares of companies. Fund managers try and identify companies with good future prospects and invest in the shares of such companies. They generally are considered as having the highest levels of risks (equity share prices can fluctuate a lot), and hence, they also offer the probability of maximum returns. However, High Risk, High Return should not be understood as “If I take high risk I will get high returns”. Nobody is guaranteeing higher returns if one takes high risk by investing in equity funds, hence it must be understood that “If I take high risk, I may get high returns or I may also incur losses”.

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This concept of Higher the Risk, Higher the Returns must be clearly understood before investing in Equity Funds, as it is one of the important characteristic s of Equity fund investing.

The Equity funds are sub-classified depending upon their investment objective, as follows:

Diversified equity funds

Mid-cap funds

Small cap funds

Sector specific funds

Tax savings funds (ELSS)

Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.

Debt mutual funds:  These funds invest in debt instruments to ensure low risk and provide a stable income to the investors. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers.

Debt funds are funds which invest money in debt instruments such as short and long term bonds, government securities, t-bills, corporate paper, commercial paper, call money etc. The fees in debt funds are lower, on average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund is usually preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration. Investments in the equity markets are considered to be fraught with uncertainties and volatility. These factors may have an impact on constant flow of returns. Which is why debt schemes, which are considered to be safer and less volatile have attracted investors. Debt markets in India are wholesale in nature and hence retail investors generally find it difficult to directly participate in the debt markets. Not many understand the relationship between interest rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt market investments is not common among investors. Investors can however participate in the debt markets through debt mutual funds.

One must understand the salient features of a debt paper to understand the debt market.

Debt paper is issued by Government, corporates and financial institutions to meet funding requirements. A debt paper is essentially a contract which says that the borrower is taking some money on loan and after sometime the lender will get the money back as well as some interest on the money lent.

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Debt funds can be further classified as:

Gilt funds

Income funds

MIPs

Short term plans

Liquid funds

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

Balanced funds: They invest in both equities and fixed income securities which are in line with pre-defined investment objective of the scheme. The equity portion provides growth while debt provides stability in returns. This way, investors get to taste the best of both worlds.

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Types of mutual funds by investment objective

Growth SchemesAlso known as equity schemes, these schemes aim at providing capital appreciation over medium to long term. These schemes normally invest a major portion of their fund in equities and are willing to withstand short-term decline in value for possible future appreciation.Income schemes

Also known as debt schemes, they generally invest in fixed income securities such as bonds and corporate debentures. These schemes aim at providing regular and steady income to investors. However, capital appreciation in such schemes may be limited

Index schemes

These schemes attempt to reproduce the performance of a particular index such as the BSE Sensex or the NSE 50. Their portfolios will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the index.

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Franklin Templeton Blue Chip Fund

KEY HIGHLIGHTS An open-end equity fund having clear focus on large-cap companies, strong financials,

quality management and market leadership Ensures that the downside risk of single sector or stock not doing well is minimized;

adequately diversified across sectors and across stocks within a sector Focus on company fundamentals and not on momentum Suitable for investors looking at a largecap oriented equity fund with an investment

horizon of at least 3 years

FEATURES

Load Structure:

Entry Load: Nil

Exit Load: 1% if redeemed

switched out within one year of allotment

Minimum Investment:Rs. 5,000 and in multiples of Re.1 thereafter

SIP - If you had invested Rs.5000 every month in FIBCF...

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Top 10 Holdings

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ULIP CONTROVERSY

Background

ULIP (i.e. Unit Linked Insurance Plan) is a Scheme combining benefits of Life Insurance as well as Investment in the stock market. In ULIP, part of the premium amount is paid towards Life Insurance while the rest (after Administrative Charges) is invested in the Stock Market. Therefore, ULIP provides the financial safety as well as opportunity for wealth creation.

After formation of Unit Trust of India in 1963, it started a Scheme US-64 to assimilate small savings and provide benefits of Stock market to the investors. ULIP was launched in 1971 for the first time to give such benefits to the investors. This is scheme is having 2 Plans with duration of 10 Years and 15 Years and premium is payable on half yearly and yearly basis in Jan and July every year. The payment in the Plan is eligible for tax benefit under section 80C of the Income Tax Act, 1961. When such scheme was launched. Life Insurance Corporation of India was carrying on life insurance business as a monopologist. There was neither SEBI (Securities & Exchange Board of India) nor IRDA (Insurance Regulatory and Development Authority). At that time, life insurance was undertaken as a means to provide financial coverage to life risk and to save income tax.

Development

With the passage of time, size of the stock market grew substantially and SEBI was created by an Act of Parliament to regulate the stock market in India. With the globalization and liberalization insurance business started in private sector and with a view to regulate and develop insurance business in India IRDA (Insurance Regulatory and Development Authority) was created. In this development process, Insurance Companies came out with number of products to meet the needs of each investor. In such sequence of development, for the investment element of ULIP, number of options is made to invest in high risk securities or risk securities or secured securities or highly secured securities. Such investment is managed like a Mutual Fund.

Controversy

SEBI manages all stock market related activities. They have power to manage mutual funds and other investment schemes that invest in stock markets.ULIPs are similar to mutual funds (investment in stock market) and some part of insurance added to it. As ULIP are doing investment in share market, SEBI should have a control over it and thats why SEBI is saying that insurers should seek its approval for ULIP products.

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IRDA is regulatory authority for insurance companies in India. As ULIP has more to do with Stock market investment and less with insurance part. Ideally SEBI should also have say in regulation of ULIPs. The same was requested to IRDA by SEBI, but they refused to give them control, So Sebi has asked them to stop selling Ulips, but IRDA has asked companies to continue selling the ULIPs.

SEBI has removed all entry loads on mutual fund investment, But insurance agents are making lot of money in first 3-5 years of ULIP charging high entry load on ULIP investment. Most of the ULIPs are mis-selled in India, saying that investment have to be done only for 3-5 years, which is incorrect as if policy holder does not continue this after that, he stands to loose.

This regulatory issue is turning into a battle of supremacy – an outcome wherein the consumer interest may be sidelined for the moment. IRDA seems particularly irritated as it may see this ban as an encroachment of its territory of rights – perhaps ignoring the public good.

It may be noted that Insurance Business in India has been lacking efficiency. The industry that was originally supposed to cover risks is selling investment instruments many a times dependent upon stock market – which bring in inherent risk – which is nearly opposite the whole philosophy of Insurance.

Barring the term plans which provides pure risk cover, rest of the insurance policies have steep overheads and charges. Many policies including ULIP deduct as much as 40% or more of the first year premium as charges.

India is a peculiar country which has a very poor ratio of premium to cover – which means that even though a lot of premium is being collected the cover provided is very less. The primary reason for that is that a huge portion of the premium is diverted to investments and corresponding charges and load. Only a small fraction of the premium goes into covering the actual risk.

These are major concerns that should ideally be addressed by IRDA, which has acted very little in consumer interest. Insurance still ranks to be the no. 1 product that is miss-sold making false claims and giving wrong product knowledge. In these circumstances, it is obvious for the market regulator SEBI to take a note. SEBI has made a great impact in the highly rigged mutual funds and stock markets, making it far more transparent over the years.

It is expected that with SEBI intervention, things would get better for the common man for whom Insurance is indispensable. It is high time that Insurance is being sold as Insurance and Investment is being sold as Investment and that too without leakage.

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The government may be compelled to step in to resolve the issues as some insurers are planning to approach the court.

Update

SEBI has lifted the ban on selling of Unit Linked Insurance Polices (ULIPs) by 14 insurance companies. This move came in after SEBI guys met IRDA and finance ministry people. But Finance Minister Pranab Mukherjee has said that final decision will be by court.

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ConclusionCollective Investment schemes as a whole have neither been very popular in India as an

investment vehicle nor have they been giving investors a very good experience when people did

decide to take a plunge in this sector. In fact the magazine moneylife claims that these schemes

are

There are quite a few reasons why this takes place:

Uninformed Investors-

Most people invest in Collective Investment Schemes based not on financial prudence but

rather on the charisma of the promoter, who promises very unrealistic returns or because they

are friends, family or acquaintances of someone working for the scheme.

In such situations, people tend to assume that the promoter or their friend or relative is not

only trustworthy but also helpful and they generally hold that person in high regard. People do

not ask questions particularly pointed ones about the financial viability of such schemes, the

track record of such schemes or the track record of these promoters.

In general fraudulent schemes tend to target those people who do not see through the smoke

and mirrors and despite the fact that ponzi schemes capture high profile names (eg- Bernard

Madoff’s clients), the vast majority of CIS Investors are uninformed and financially illiterate.

Moneylife.in has this to say about CIS Investors “The lure of easy money has always been strong

enough, and surprisingly, well-reasoned people are very easily taken in by promises of making a

decent return backed by secured investments. It is not that regulators have not warned

investors enough; and that investors have not suffered in the past. In fact, the operators of these

schemes know that these offerings are short-lived; investors also know that these are risky

investments—but somehow, interest has such an intoxicating impact on people that every now

and then, one such scheme succeeds in attracting investors.

And if a person succeeds, it is then the 'demonstration' effect—if the next-door neighbour

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has invested money and earned 18%, then why not take the plunge? Or, if Bobbyji has raised

crores of money—out of nothing-and is leading a lavish life, why wouldn't I do it?

Unclear Regulations-

CIS regulations are a very grey area and SEBI has not handled these schemes in the same

manner it has handled the equity markets in general. SEBI Regulations in CIS have been reactive

in nature, when they made amendments only after something major happened. While this is

not completely SEBI’s fault, it is the legal equivalent of closing the stable doors after the horse

has bolted. The major chunk of CIS laws came into picture after a lot of people were duped by

fake plantation schemes.

Now the biggest issue for CIS laws are that most companies operating as CIS companies

maintain that their modus operandi is something completely different. Usually if there is an

asset underlying, they claim that their core business is in that underlying asset and that they do

not operate as CIS. Companies involved in such major scams like speakasia and sahara have

given similar reasoning for not registering with SEBI.

Now, the major problem comes with the jurisdiction of CIS. Explained in this Indian Express

Article.

“Market regulator Securities and Exchange Board of India (Sebi) has sought a total revamp of the current regulations for ‘collective investment schemes’, as it fears that loopholes in current rules allow for gullible investors being taken for a ride.

“Certain individuals / companies are able to raise money from gullible individuals by taking advantage of the loopholes in the legal provisions and also taking advantage of lack of clarity about roles of different agencies like MCA, Sebi, RBI, state governments, registered co-operative societies etc,” Sebi said in an internal note to its board.

The move follows numerous cases of investors being cheated in the name of investment schemes and in many cases the operators of these schemes — especially multi-level marketing (MLM) companies — disappear after some time and the investors are left in a lurch.

Sebi said, “the CIS Regulations were incorporated at a time when large scale funds were mopped up by plantation and agro companies and investors lost money. The spirit behind CIS regulations was primarily to put in place a regulatory mechanism to restrict such unabated mop

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up of funds. While there has been a change in market dynamics of investment management activities over a period of time, the regulations have remained constant.”

“Moreover, the definition of CIS is broad in nature leaving room for many activities to fall under the purview of CIS Regulations. Hence, re-examination of CIS regulations may be considered to clearly specify its scope,” Sebi said. “Sebi often receives complaints against certain activities such as multi-level marketing (MLM) companies, art funds, time sharing schemes or arrangement that claim that they do not come under the domain of any regulatory authority,” it said.

According to the regulator, there appears to be a need to bring the matter under one principal regulator to deal with all cases where pooling of money is taking place and investments are being made.

With this regulatory muddle taking place, most investment authorities raise their hands and

claim that this is not their jurisdiction, leaving investors in the lurch. With no clarity on who to

complain to when such schemes go sour, the investor goes to a police station where they are

just as confused. Given the insufficient clarity over rules, it is not surprising that few duped

investors ever recover their money.

Solutions-

Single One Stop Regulator especially for CIS- Removing all issues over jurisdiction, this

regulatory authority will handle all CIS related queries and problems. The government has been

thinking on these lines for some time now.

Market regulator Sebi has sought a complete overhaul of the current regulations for collective investment schemes, as it fears that loopholes in current rules allow for gullible investors being taken for a ride.

In a collective investment scheme (CIS), the payments are pooled in by the investors for certain pre-specified purposes and profits or income are later shared among them.

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However, there have been numerous cases of investors being cheated in the name of CISs and in many cases the operators of these schemes disappear after some time and the investors are left in a lurch.

A senior official at Sebi said that more than one lakh investor complaints are currently pending with it, and in most of the cases the matter is sub-judice since long.

While Securities and Exchange Board of India (Sebi) is the regulatory authority for such schemes, a number of other government agencies and departments also govern similar investment products and a lack of clarity in this regard comes in the way of bringing the guilty to book, the official added.

Some of the most famous CISs are related to investments for real estate properties, plantation and agriculture industry and art funds, among others.

In a board memorandum submitted during its last meeting on 3 January, Sebi said that “it is clear that certain individuals/companies are able to raise money from gullible individuals by taking advantage of the loopholes in the legal provisions and also taking advantage of lack of clarity about roles of different agencies like MCA (ministry of corporate affairs), Sebi, RBI (Reserve Bank of India), state governments, registered co-operative societies etc.”

Sebi further told its board, which includes nominees from the MCA, finance ministry and RBI, that certain exemptions in the current regulations also “leave scope for people to take a stand that their scheme is not a collective investment scheme and that they have got relevant licenses/approvals from the competent authorities.”

“There appears to be a need to bring this matter under one principal regulator to deal with all cases where pooling of money is taking place and investments are being made,” the Sebi said.

It further said that various exemptions also needed to be either completely removed or drastically pruned and “in case of pruning, there is need to provide criteria such as maximum number of investors or the minimum amount intended to be raised beyond which all have to get registered with the principal regulator.”

As per Sebi, there is only one entity registered with the market regulator as a Collective Investment Management Company, but it has not launched any scheme as yet.

On the other hand, as many as 32 cases are currently under examination for applicability of Sebi (CIS) regulations, while there are 1.09 lakh complaints pertaining to CIS.

“With regard to these complaints, it may be noted that since most of the CIS related cases are currently sub-judice, the redressal of such complaints depends on the outcome of these cases,” Sebi said.

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The government had first decide to frame CIS regulations and named Sebi as a regulator in 1997, after a number of agro-based and plantation companies in 1990s started raising money from public through agro and plantation bonds.

Thereafter, it was made mandatory for all such companies to register with Sebi. The existing entities were also asked to get registered with Sebi, and those not being able to get a go-ahead were asked to wind up their operations.

As per Sebi, 664 CIS entities had raised Rs3,518 crore in 1998-99. Out of these 664 CIS entities, 54 CIS entities winded up their schemes and refunded the money to the investors.

None of the companies that applied for registration at the time were found to be eligible for final registration as a Collective Investment Management Company under the Sebi (CIS) regulations.

The Sebi had issued directions to the remaining 610 entities directing them to refund the money collected under the schemes with returns due to investors as per the terms of the offer within a period of one month from the date of the order.

Subsequently, 21 CIS entities closed their schemes and repaid the investors. Hence a total of 75 CIS entities had closed their schemes and refunded the money to investors.

In 19 cases, courts had imposed stay orders / appointed official liquidators / administrators.

Against the remaining entities that failed to wind up their schemes and repay the investors, Sebi took actions such as prosecution, sough their winding up and initiation of criminal proceedings.

Some of the CIS cases listed out by Sebi include an entity that claimed to be involved in the sale of trees to investors whereas in reality it was having collective investment schemes in the guise of this business.

In another case an entity had invited contributions to invest in land and allotted land to investors.

Sebi said that the CIS regulations were incorporated at a time when large scale funds were mopped up by plantation and agro companies and investors lost money.

“While there has been a change in market dynamics of investment management activities over a period of time, the regulations have remained constant.

“Moreover, the definition of CIS is broad in nature leaving room for many activities to fall under the purview of CIS regulations. Hence, re-examination of CIS regulations may be considered to clearly specify its scope,” it noted.

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The regulator also said that it often receives complaints against certain activities such as multi level marketing (MLM) companies, art funds, time sharing schemes or arrangement that claim that they do not come under the domain of any regulatory authority.

Financial sector regulators are keen on having a single agency to regulator collective investment schemes. Last week, Sebi chief UK Sinha had said that the proposal has been under discussion in Financial Stability and Development Council or FSDC a forum of regulators monitoring financial stability and inter-regulatory co-ordination."That is under discussion in FSDC and in the government that there should be one agency for the entire thing. But it's a very complicated area because the state governments also come in the picture. It's not very easy to resolve. We are trying to do where we thing is our domain. We have highlighted that there are various agencies working in that area and there is a need to rationalise that," Sinha had said on the sidelines of the India Investment Conference.

The Sebi board had also discussed the proposal to have a principal regulator for tackling collective investment schemes which lure common investors by promising huge returns.Policy makers intend to plug the regulatory gap with regard to different types of entities and methods of raising money from investors.

The market regulator has proposed to have a threshold in terms of maximum number of investors or the minimum amount entities can raise, beyond which they will have to be registered with the principal regulator.

The regulator had also said some of the exemptions provided in the Sebi Act also leaves scope for people to take a stand that their scheme is not a collective investment scheme and that they have got relevant approvals from the competent authorities. Investment vehicles like agro bonds and plantation companies were a craze in the early 80s,when thousands of companies sprang out of thin air, promising huge returns to investors.

Investor Awareness- The government needs to take up investor awareness on the same lines

that the Bombay Stock exchange has taken up.

Salient features would include-

The regulating authority should prepare the list of registered CIS companies (or a giant

board containing the name of Gift Collective Investment Management Company Ltd)

The regulator should display on its website known unregistered companies operating as

a CIS.

The regulator should display the names of promoters of fraudulent schemes and display

them prominently on their websites.

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The regulator should mention prominent do’s and don’t’s for prospective CIS Investors.Survey for understanding investor awareness regarding CIS

Purpose: For the purposes of this project, we have carried out a survey to understand the

awareness about collective investment schemes in India and how people invest in these

schemes.

Demographics: The demographics of the survey respondents are educated, urban, Indians

between the ages of 20-35, either working as professionals or studying in post-graduate

courses.

Methodology- We have carried out this survey online through the website surveymonkey.com

and the respondents were selected from our peer network.

Questionaire- The questionnaire was designed to gauge the knowledge of Indians regarding CIS.

1. Are you aware of Collective investment schemes?

Are you aware of Collective investment schemes?  Yes

No2. Have you invested in a fund, which will be used for buying Art, painting, plantation, real estate etc?

Yes

No3. Before investing in any scheme which of these factors do you consider in order of priority

Return

Risk

Promoter

Experience of other investors

Track record

Credit Rating

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4. Would you invest in a scheme based on anyone's recommendation?

Yes

No5. Do you know anyone who has invested in above schemes?

Yes

No6. Do you check whether the scheme you are investing in is registered with SEBI

 Yes

No7. Do you check where your funds are invested in? (excluding MFs)

Yes

No8. Are you aware of any of these scams? Anubhav Plantation,Sahara

Yes

No9. How much % of you saving do you invest in MFs?

5-10%

10-15%

15-20%

20 and more10. Do you prefer MFs and CIS over Equity?

Yes

No

We had 164 respondents to the survey, due to anonymity issues, we do not have the breakup of

who responded to our survey.

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The results are as follows.

Are you aware of Collective investment schemes?

Yes No0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

48.80% 51.20%

Are you aware of Collective investment schemes?

Pretty close there, slightly more than half of our respondents were not aware of CIS.

2. Have you invested in a fund, which will be used for buying Art, painting, plantation, real estate

etc?

63

Yes No0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

14.80%

85.20%

Have you invested in a fund, which will be used for buying Art, painting, plantation, real estate 

etc?

Q3.Before investing in any scheme which of these factors do you consider in order of priority

Return Risk Promoter Experience of other in-vestors

Track record Credit Rating

Series1 0.42 0.321 0.025 0.049 0.136 0.049

2.50%7.50%

12.50%17.50%22.50%27.50%32.50%37.50%42.50%

Top priority when investing in a scheme

Axis Title

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Would you invest in a scheme based on anyone's recommendation?

Yes No0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

36.60%

63.40%

Would you invest in a scheme based on anyone's recommendation?

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Do you know anyone who has invested in above schemes?

Yes No0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

37.80%

62.20%

Do you know anyone who has invested in above schemes?

Do you check whether the scheme you are investing in is registered with SEBI

Yes No0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

100.00%

72.20%

29.80%

Do you check whether the scheme you are investing in is regis-

tered with SEBI

66

 Do you check where your funds are invested in? (excluding MFs)

Yes No0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

70.40%

29.60%

 Do you check where your funds are invested in? (excluding MFs)

8. Are you aware of any of these scams? Anubhav Plantation,Sahara

Yes No0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

25.60%

74.40%

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9. How much % of you saving do you invest in MFs?

5-10% 10-15% 15-20% >20%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

66.70%

21.30%

8.00%4.00%

Do you prefer MFs and CIS over Equity?

Yes No42.00%

44.00%

46.00%

48.00%

50.00%

52.00%

54.00%

53.20%

46.80%

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