Collective Investment Schemes – Securities Laws and Capital Markets Important Questions

Collective Investment Schemes – Securities Laws and Capital Markets Important Questions

Question 1.
Write a short note on Collective Investment Scheme [June 2011 (5 Marks)]
Answer:
A Collective Investment Scheme (CIS) is an investment scheme wherein several individuals come together to pool their money for investing in a particular asset(s) and for sharing the returns arising from that investment as per the agreement reached between them prior to pooling in the money.

According to Section 2{ba) of the SEBI Act, 1992, “collective investment scheme” means any scheme or arrangement which satisfies the conditions specified in Section 11AA.

Collective Investment Scheme [Section 11AA(1) & (2)]: Any scheme or arrangement which satisfies the following conditions shall be a collective investment scheme.

Any scheme or arrangement made or offered by any company under which:

  1. The contributions or payments made by the investors are pooled and | utilized solely for the purposes of the scheme or arrangement;
  2. The contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement;
  3. The property, contribution, or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;
  4. The investors do not have day-to-day control over the management and ) operation of the scheme or arrangement.

Question 2.
What is a ‘collective investment scheme’? What are the restrictions on their j business activities? [Dec 2010 (5 Marks)]
Answer:
Collective Investment Scheme [Section 11AA(1) & (2)]: Any scheme or arrangement which satisfies the following conditions shall be a collective investment scheme.

Restrictions on business activities [Regulation 13]: The CIMC shall not:
(a) undertake any activity other than that of managing the collective investment scheme;
(b) act as a trustee of any collective investment scheme;
(c) launch any collective investment scheme for the purpose of investing in securities;
(d) invest in any collective investment scheme floated by it.

However, a CIMC may invest in its own collective investment scheme:

  1. if it makes a disclosure of its intention to invest in the offer document of the collective investment scheme, and
  2. does not charge any fees on its investment in that collective investment scheme.

Question 3.
Collective investment scheme to be constituted as trust. Comment. [Pec 2011 (3 Marks)]
Answer:
Trust Deed to be registered under the Registration Act, 1908 [Regulation 16(1)]: A collective investment scheme shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908 executed by the CIMC in favor of the trustees named in such an instrument.

Appointment of trustees [Regulation 16(2)]: A CIMC shall appoint a trustee who shall hold the assets of the collective investment scheme for the benefit of unitholders.

Contents of trust deed [Regulation 17]: The trust deed shall contain such clauses as are specified in the Fourth Schedule and such other clauses as are necessary for safeguarding the interests of the unitholders.

No trust deed shall contain a clause which has the effect of:

  1. Limiting or extinguishing the obligations and liabilities of the CIMC in relation to any collective investment scheme or the unitholders; or
  2. Indemnifying the trustee or the CIMC for loss or damage caused to the unitholders by their acts of negligence or acts of commissions or omissions.

Question 4.
What is a collective investment scheme (CIS)? Discuss the scheme or arrangement which are not included in CIS. [Dec 2012 (5 Marks)]
Answer:
Scheme or arrangement that cannot be regarded as collective Investment schemes [Section 1IAA(3) of the SEBI Act, 1992): Following scheme or arrangement shall not be a collective investment scheme:

  1. Any scheme or arrangement made or offered by a cooperative society
  2. Any scheme or arrangement under which deposits are accepted by non-banking financial companies
  3. Any scheme or arrangement is a contract of insurance
  4. Any scheme or arrangement providing for Pension Scheme or the Insurance Scheme
  5. Any scheme or arrangement under which deposits are accepted u/s 74 of the Companies Act, 2013
  6. Any scheme or arrangement under which deposits are accepted by a company declared as a Nidhi or a Mutual Benefit Society
  7. Chit fund business
  8. Mutual fund.

Question 5.
What are the restrictions on business activities of Collective Investment Management Company? [Dec 2013 (5 Marks)]
Answer:
Collective Investment Scheme [Section 11AA(1) & (2)]: Any scheme or arrangement which satisfies the following conditions shall be a collective investment scheme.

Restrictions on business activities [Regulation 13]: The CIMC shall not:
(a) undertake any activity other than that of managing the collective investment scheme;
(b) act as a trustee of any collective investment scheme;
(c) launch any collective investment scheme for the purpose of investing in securities;
(d) invest in any collective investment scheme floated by it.

However, a CIMC may invest in its own collective investment scheme:

  1. if it makes a disclosure of its intention to invest in the offer document of the collective investment scheme, and
  2. does not charge any fees on its investment in that collective investment scheme.

Question 6.
Define collective investment scheme and discuss the restriction on business activities. [June 2014 (5 Marks)]
Answer:
Collective Investment Scheme [Section 11AA(1) & (2)]: Any scheme or arrangement which satisfies the following conditions shall be a collective investment scheme.

Restrictions on business activities [Regulation 13]: The CIMC shall not:
(a) undertake any activity other than that of managing the collective investment scheme;
(b) act as a trustee of any collective investment scheme;
(c) launch any collective investment scheme for the purpose of investing in securities;
(d) invest in any collective investment scheme floated by it.

However, a CIMC may invest in its own collective investment scheme:

  1. if it makes a disclosure of its intention to invest in the offer document of the collective investment scheme, and
  2. does not charge any fees on its investment in that collective investment scheme.

Question 7.
Collective Investment Schemes provide a relatively secure means of investing on the Stock Exchange and other financial instruments. [June 2015 (3 Marks)]
Answer:
A collective investment scheme is a trust-based scheme that comprises a pool of assets that are managed by a collective investment scheme manager and is governed by the Collective Investment Schemes Regulations given by SEBI. Collective Investment Schemes (CIS) are a popular form of investment, and they are accessible to all. Each investor has a proportional stake in the CIS portfolio based on how much, money he or she contributed.

The word ‘unit’ refers to the portion or part of the CIS 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 CIS investor. Collective Investment Schemes provide a relatively secure means of investing on the Stock Exchange and other financial instruments. The sums of money that are exchanged on the Stock Exchange and in the Money Markets make them too pricey for most people. With a CIS, the money or funds from a group of investors are pooled or collected together to form a CIS portfolio.

Question 8.
“Collective investment scheme (CIS) is a popular form of investment and it is accessible to all.” In the light of this statement, explain the meaning and conditions for eligibility of CIS. [June 2016 (5 Marks)]
Answer:
Conditions for eligibility [Regulation 9 of the SEBI (Collective Investment Schemes) Regulations, 1999]: For registering with SEBI as CIMC following conditions are required to be fulfilled:

  1. The applicant is set up and registered as a company under the Companies Act, 2013.
  2. The MOA has to specify the managing of CTS as one of its main objects.
  3. The applicant has a net worth of not less than ₹ 5 Crore. However, the applicant having a net worth of ₹ 3 Crore can also make an application if he agrees to increase the net worth of ₹ 3 Crore to ₹ 5 Crores within 3 years from the date of grant of registration.
  4. The applicant is a fit and proper person.
  5. The applicant has adequate infrastructure.
  6. The directors or key personnel of the applicant shall be persons of honesty and integrity having adequate professional experience in a related field. They should not have been convicted for an offense involving moral turpitude or for any economic offense or for the violation of any securities laws,
  7. At least 50% of the directors of CIMC shall consist of persons who are independent and are not directly or indirectly associated with the persons who have control over the CIMC.
  8. No person, directly or indirectly connected with the applicant has in the past been refused registration by the SEBI.

Question 9.
What are the restrictions imposed on business activities for collective investment management companies? [Dec 2016 (7 Marks)]
Answer:
Restrictions on business activities [Regulation 13 of the SEBI (Collective Investment Schemes) Regulations, 1999]: The CIMC shall not:
(a) undertake any activity other than that of managing the collective investment scheme;
(b) act as a trustee of any collective investment scheme;
(c) launch any collective investment scheme for the purpose of investing in securities;
(d) invest in any collective investment scheme floated by it.

However, a CIMC may invest in its own collective investment scheme:

  1. if it makes a disclosure of its intention to invest in the offer document of the collective investment scheme, and
  2. does not charge any fees on its investment in that collective investment scheme.

Question 10.
Write a short note on Winding-up of collective investment scheme [June 2017 (3 Marks)]
Answer:
Winding-up of collective Investment scheme [Regulation 37]:
1. Compulsory winding-up: A collective investment scheme shall be wound up on the expiry of a specified duration scheme or on the accomplishment of the purpose.

2. Voluntary winding-up: Collective investment scheme; nav be wound up
(a) on the happening of any event which in the opinion of the trustee requires the scheme to be wound up and the prior approval of SEBI is obtained; or

(b) if unitholders holding at least 3/4th of the nominal value of unit capital pass a resolution that the scheme be wound up and the approval of the SEBI is obtained or

(c) if in the opinion of the SEBI, the continuance of the collective investment scheme is prejudicial to the interests of unitholders; or

(d) if in the opinion of CIMC, the purpose of the scheme cannot be accomplished and it obtains the approval of the trustees and also of the unit holders holding at least 3/4th nominal value of the unit capital with a resolution that the scheme be wound up and the approval of the SEBI is obtained.

3. Notice of winding-up: Where the scheme is to be wound up, the trustee shall give notice in a daily newspaper having nationwide circulation and in the language of the region where CIMC is registered.

4. Disposal of assets: The trustee shall dispose of assets of the scheme in the best interest of the unitholders. The proceeds of assets sold shall be first utilized towards the discharge of liabilities and after making appropriate provision for a meeting of winding-up expenses, the balance shall be paid to the unitholders on a proportionate basis.

5. Filing of report & certificate: On the completion of winding-up, the trustee shall forward to SEBI and the unit holders:
(a) a report on the steps taken for realization of assets, expenses for winding up and net assets available for distribution to the unitholders, and

(b) a certificate from the auditors to the effect that all the assets of the collective investment scheme are realized and the details of the distribution of the proceeds.

6. Treatment of unclaimed money: The unclaimed money shall be kept separately in a bank account by the trustee for a period of 3 years for the purpose of meeting the investor’s claims and thereafter shall be transferred to Investor Protection Fund.

Securities Laws and Capital Markets Questions and Answers

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