Sebi in talks with govt for tighter collective investment norms

The Securities and Exchange Board of India (Sebi) is in talks with the government to widen its jurisdiction over collective investment schemes (CIS), two persons familiar with the development said.

The capital markets regulator wants to be empowered to regulate all such schemes irrespective of the size of the corpus.

While expanding its scope in terms of size, Sebi is also seeking to fine-tune the definition of a CIS to ensure that certain legitimate activities don’t fall under this category.

Existing rules allow the markets watchdog to regulate or act against an entity pooling public funds only if such an entity is not regulated by any other regulator and the amount mobilized by the entity is Rs.100 crore or more.

According to the two persons cited above, who spoke on condition of anonymity, this loophole allows a number of entities to escape Sebi scrutiny until their corpus reaches Rs.100 crore.

“Through the amendment of the extant norms, Sebi will not only be empowered with significantly higher scope to act against illegal CIS but also will be able to avoid chances of unfairly preventing fund-raising towards legitimate social purposes,” said one of the two persons.

“There have been instances when a small group of non-connected individuals got inadvertently categorized as entities being involved in illegal CIS just because they had to raise money purely for the purpose of building or redeveloping certain legitimate projects or properties and housing societies,” this person explained.

A formal note on the amendments is yet to be prepared but there have been a number of discussions on the matter with the government and legal experts over the past few months, said the first person.

An e-mail sent to Sebi on Friday remained unanswered.

A CIS is defined as an investment scheme or arrangement in which several individuals come together to pool their money for investing in a particular asset and for sharing the returns arising from the investment.

Between March 2011 and October 2015, Sebi has passed orders against 95 illegal CIS entities, according to data from the regulator.

While removing the threshold could widen Sebi’s reach, the regulator may not have adequate resources to look into the activities of smaller entities, said an expert.

“The threshold of Rs.100 crore of money pooling to label a scheme as a collective investment scheme is a decent limit as Sebi may not have the bandwidth to look into money pooling for smaller quantum. However, what Sebi can do is to have a principle-based approach and do away with limits to verify whether there is illegal money pooling activity being undertaken,” said Parag Bhide, senior associate at Advaya Legal.

Anurag Jain, head of market development and risk at Thomson Reuters, however, said that removing the threshold will help plug some loopholes. “A threshold of Rs.100 crore under CIS is a good benchmark to clamp down on illegal money pooling activities. To safeguard public interest, multiple smaller schemes from the same entity or promoter should also come under the purview of a strong regulatory framework with stiff penalties for violations,” said Jain.

Separately, Sebi has also proposed the creation of a principal regulator, outside of existing regulatory agencies, to monitor CIS activities.

“Sebi has been raising concerns regarding the pooling of money from public by unscrupulous operators across the country in the absence of a clear regulatory framework… The jurisdiction of the principal regulator has to be defined in such a way that if no controlling or regulatory authority is responsible for a money collection scheme, it will by default come under the purview of the principal regulator,” said a September report by Standing Committee on Finance.

“In spite of such diverse and dispersed regulation, there are several entities/schemes which are not regulated by any of the financial sector watchdogs. These entities, therefore, take advantage of this regulatory vacuum/lacuna to raise large amounts of money from gullible people,” the report said.

The committee felt that there should be comprehensive and all-encompassing central law which covers all CIS, chit funds and direct selling schemes.