Sebi overhauls crowdfunding scheme rules, putting it on par with MFs

The Securities and Exchange Board of India (SEBI) on Tuesday overhauled the regulations governing Collective Investment Schemes (CIS), bringing them on par with Mutual Funds (MF) regulations. The market regulator said the move would “remove regulatory arbitrage” between pooled investment vehicles.

The Sebi Board of Directors has also approved amendments to the SEBI Trustee Regulations 1996 to enable registered custodians to provide custody services in connection with Exchange Traded Funds (ETFs) launched by local funds. The Board of Directors also made amendments to the Listing Obligations and Disclosure Requirements (LODR) regulations to facilitate the process of transferring securities to investors and ensure uniformity in the process. The Board also approved the budget estimates for the next fiscal year.



In a press release, Sebi said the major changes in CIS regulations include increasing the minimum net worth requirement and introducing a clause to have a track record in the relevant field of CIS creation. Also, the introduction of joint shareholding rules where no single entity can own more than 10 percent of the shares of more than one Collective Investment Management Company (CIMC).

This will be the first major review of CIS regulations since they were notified in 1999. The changes follow a consultation paper that Sebi put forward in January to review CIS standards.

Nowadays, there are many companies that raise capital from investors through schemes of pooling funds linked to gold, farms, goats, cows and emu birds disguised as CIS without proper permission. Such schemes often end up deceiving investors because they are structured in such a way that they escape regulatory scrutiny.

Industry players said changes in regulations will encourage large enterprises to set up CIS, which will help direct household savings to economy-boosting activities with appropriate safeguards.

Sebi also specified the minimum number of investors, the maximum ownership of one investor and the minimum subscription amount at the CIS level.

The discussion paper suggested there should be a minimum of 20 investors with one investor having exposure to a maximum of 25 percent of the system’s assets under management (AUM). Furthermore, sponsors and CIS employees will be required to maintain the skin in the game. Further, it mandated that the sponsor must invest 2.5 per cent of the body or Rs 5 crore, whichever is less, in the scheme. Also, just like MFs, key CIS employees will receive one-fifth of their compensation in the form of scheme units. According to the discussion paper, the minimum net worth to set up for CIMC was Rs 50 crore with a proven track record of profitability for five years.

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