Problem 1:

Pushpa Ltd. had launched a scheme named the Richie Rich scheme. The scheme entailed a
one-time
payment of Rs. 10,000 in lieu of a unit of 10 Red Sandalwood Trees with a holding period of
20 years
and on maturity, the contributor/investor have an option to get the Red Sandalwood trees or
the
realized sale proceeds thereof. The scheme was launched by the company for one year.
Within such
short span of time, the scheme muster Rs. 1.5 crores from 1,500 contributors/investors. While
launching the scheme, Pushpa Ltd did not obtain registration from SEBI.
Referring to the SEBI Regulations, answer the following :
(i) State the provisions under which the registration was required.
(ii) What are the powers of SEBI in this regard ?
(iii) What should be the minimum duration of the scheme ?

Consequent to the notification of SEBI (Collective Investment Schemes) Regulations, 1999

(herein after referred to as the "said Regulations") dated October 15, 1999, every person who,
immediately prior to the commencement of the said Regulations, operating a Collective
Investment Scheme(s), was required to make an application to SEBI for the grant of
registration within a period of two months from the date of notification, under the provisions
of the said Regulations.

In terms of Regulation 73 of the said Regulations, an existing Collective Investment Scheme

which has failed to make an application for registration with SEBI was required to wind up
its schemes and repay its investors in the manner specified therein. Further as per Regulation
74, an existing Collective Investment Scheme which is not desirous of obtaining provisional
registration from SEBI is required to formulate a scheme of repayment and make repayment
to the existing investors in the manner specified in Regulation 73.

A Collective Investment Scheme is an investment scheme where various individuals come

together and pool their money in order to invest their whole fund collection in a particular
asset. The returns and profits arising from this investment would be shared as per the
agreement finalised amongst the investors prior to the act. Collective Investment Schemes, on
a global scale, has broader connotations which include mutual funds as well. However, the
Schemes, as prescribed in Section 11AA of the SEBI Act of 1992, excludes mutual funds and
other schemes in India. The Securities Exchange Board of India regulates them under the
SEBI (Collective Investment Scheme) Regulations of 1999.

In the case of PGF Ltd,[4] M/s P.G.F. Ltd. & ors vs Union of India & Anr [2013] the
Supreme Court of India has discussed the scope of Section 11AA of the SEBI Act, 1992. It
stated that the applications of the provisions of this section are not limited to the agriculture
or plantation activities or for that matter any specific type of activity. Instead, any activity
which satisfies all the condition specified under Section 11AA and is not regulated by any
authority/regulator will fall under the category of the collective investment schemes. It is
observed that this provision was introduced to protect the interest of the investors thus to give
effect to its object it is necessary to give wide connotation to it while any interpretation.
Regulatory Framework
Central Government has given powers to the SEBI to regulate CIS. According to Sec 12(1)
(b) of the SEBI Act, 1992 no entity is eligible to launch CIS before registering it with SEBI
as collective investment management company. But the constitutional validity of Sec 11AA
and Sec 12(1)(b) has been challenged on the grounds of the excessive delegation and
violation of Art. 14 of the Constitution of India[5].

The Apex Court was of the view that the provisions which were challenged were introduced
to protect the interest of the investors and adequate safeguards have been introduced on SEBI
and refrain it from abusing its power. Such provision is not arbitrary. In the case of M/s PGF
ltd. Vs Union of India[6], the court applying the doctrine of pith and substance stated that the
Parliament introduced such provision to protect the interest of the investors which is the
prime object of the SEBI.

Powers Of Sebi
Powers Under Cis Regulations,1999
In accordance with the power conferred by the CIS Regulations, Board can pass the
following order against the concerned persons, in case of default.

Action Against Concerned Person Of Company (Regulation 65, CIS Regulation, 1999)

 To stop collecting any further money from the investors and prohibition on launching
any further schemes.
 Forbid te concerned persons from disposing of the assets connected with the scheme.
 Direct the concerned persons from disposing of the assets associated with the scheme
in prescribed manner.
 Refund the invested amount with the specified interest to the investors.
 Forbid access to capital market for certain period.[8]

Action Against Intermediary:

The Board has power to suspend as well as cancel the registration of any intermediary who
did not perform proper due diligence or contravened any of the mandatory duties specified in
the regulations. While taking action against intermediary the Board has to follow procedure
mentioned in the SEBI (Intermediaries) Regulations, 2008.

The powers prescribed in the CIS Regulations are in addition to the powers of the Board
under the SEBI Act,1992.

Powers Of The Board Under The Sebi Act, 1992.

1. Powers To Issue Directions:

After the completion of the inquiry, the Board, if satisfied that the interest of
investors is at stake then it may issue directions to the company or intermediary
associated with the whole process of default to safeguard their interest. This
provision provides huge power to SEBI to issue any direction to protect the investors
and regulate the intermediaries. However, such direction must be preventive and
remedial in nature.[9]

2. Power To Order Investigation And Impose Penalty On The Non-Cooperation With The
Investigating Authority
 The Board can also appoint an Investigating Authority to investigate into the alleged
matter and form a report regarding the same. The investigating authority has power
to ask for any books, record or document required for investigation. It can also
examine officers and other employees of the company on oath. Also, if the authority
has reasons to believe that any relevant evidence might be hampered then it may
also order seizure of such evidence. The Directors and other employees of the
company have to compulsorily co-operate with the investigating authority and
provide him with all relevant information. In case of failure to do so the Board can
impose punishment for one year and fine upto Rs. 1 crore.[10]

3. Power To Impose Penalty For Fraudulent And Unfair Trade Practise:

Under the Act, SEBI has power to impose penalty for illegal and fraudulent money
pooling upto Rs. 25 crores or three times the amount of profit made out of such
practice.[11]

4. Power To Initiate Criminal Prosecution:

It has power to initiate criminal prosecution against the violators of the Act and
Regulations made thereunder. It can also impose fine to the tune of Rs. 25 crores
and order civil imprisonment upto 10 years. However, such a power has to be
exercised with caution and in rare cases as it has the effect of restraining the liberty
of an individual.[12]

5. Power To Initiate Recovery Proceedings:

In accordance to Section 28A of the Act, SEBI has power to initiate recovery
proceedings against every person who has failed to refund the money of the
investors as per an order of SEBI or has not paid the penalty amount. This power is
to be exercised by recovery officer. The recovery officer firstly formulated a
certificate regarding amount to be recovered and only then recovery proceedings
are initiated. The recovery officer can use any of the following methods to recover
the amount:

o Attach and sell the movable property

o Attach the Bank�s account
o Attach and sell immovable property
o Arrest the offender and detain him in prison
o Authorize a recover for managing the movable and immovable property of
the offender.

Conclusion
While the intent and purport of CIS regulation world over is quite clear, but the provisions
have been described as �extraordinarily vague�. In the shared economy, there are
numerous examples of ownership of property being given up for the right of enjoyment. As
long as the intent is to enjoy the usufructs of a real property, there is evidently a pooling of
resources, but the pooling is not to generate financial returns, but real returns. If the intent is
not to create a functional equivalent of an investment fund, normally lure of a financial rate
of return, the transaction should not be construed as a collective investment scheme.

CIS Regulations, if made effective by plugging in the loopholes, can serve as an efficient
instrument for financial inclusion. Collective investment schemes could very effectively be
used for channelling small savings of people into the economy. The entry size of these
schemes is usually very low. It can promote participation of large number of people in the
economic system. Thus, it is necessary to bring changes in the regulation in order to build the
confidence of public in investments and enhancing economic growth of the nation.