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The government is proposing to have a ‘principal regulator’ for tackling such schemes where investors are promised huge returns on making investments in certain schemes. In fact, the proposal is also to have threshold in terms of maximum number of investors and the minimum amount beyond which entities planning to raise money through CIS will have to mandatorily register with the principal regulator, Finance Ministry sources told The Indian Express.
The watchdog proposal is scheduled to be taken up in the Sebi board meeting on January 3.
Presently, Ministry of Corporate Affairs, Reserve Bank of India, Sebi and state government are the existing regulators governing various form of business entities in the country. While the Corporate Affairs Ministry regulates all companies, RBI regulates the deposit taking activities authorized by companies. State governments are secondary regulators for companies incorporated in states. Sebi looks after the CIS.
However, the sources said that it has been observed that there are regulatory overlap regarding different kind of entities and their methods of raising funds from investors. “Many companies are taking advantage of these loopholes in the legal position and lack of clarity of role of each regulator. They claim that their scheme is not a CIS and therefore they do not register with Sebi,” the official added.
Earlier in 1997, the government had said these schemes would be under the ambit of the market regulator and all such companies wanting to raise money through CIS will have to register with Sebi. Sebi (Collective Investment Schemes) Regulations, 1999 also laid down that all companies operating CIS would have to register with the market regulator within the period of two months from the date of notification. CIS is defined under section 11AA (2) of the Sebi Act, 1992. These schemes are also called art funds, funds/schemes launched by companies or any entity formed for the purpose.
“We also propose to do away with certain exemptions in section 11 AA, which deals with the issue,” the official added.
According to data with Sebi, in 1998-99, 664 entities had collected a sum of Rs 3,518 crore from the investors through CIS. Of these, 54 entities wrapped up and refunded to investors. Sebi ordered the remaining entities to refund the investors within one month from the date of order. Only 21 entities obeyed. Later, Sebi acted against the other CIS companies and asked other regulators to take necessary actions like initiation of criminal proceedings.
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