Ref: The Economics Times

THE capital market regulator, the Securities and Exchange Board of India (Sebi), has stepped up its drive against shady entities that operate collective investment schemes (CISs). While exploring the possibility of widening the classification of entities that float CIS, the regulator has initiated legal action against almost 550 entities as on July 31.

So far, around 56 CIS entities have been obilizin in various courts across the country. Though there are no official figures, industry officials said that amount initially raised by such entities could now have swelled to as much as Rs 3 lakh crore.

CISs were a craze in the early 80s, when around 2,000 entities lured common investors, promising higherthan-market returns. Back then, Sebi had not been formed and the entities, including plantation companies, had a free run, collecting about Rs 3,500 crore from investors.

Considering the high element of risk associated with such schemes, the central government decided that schemes through which instruments such as agro bonds, plantation bonds etc are issued by the entities would be treated as Collective Investment Schemes under the Sebi Act.

In 1998, Sebi directed that no existing CIS could obilizi money from the public under their existing schemes, unless the instruments of such schemes were rated by credit rating agencies. These companies were unable to comply with the Sebi regulations and most of them are untraceable, now.

But industry officials say unregistered CISs continue to mushroom across the country, taking advantages of some loopholes in regulations. Most of the entities offering collective investment schemes (CISs) use multilevel-marketing (MLM) compensation programme to market their schemes. Daniel R Pranjal, who heads Strategy India, an MLM consultancy firm in India, says, "The problem is that there is no regulatory body for direct selling in our country as of now and most of these schemes are operating under the disguise of MLM. There is a need for an active regulator, as many new firms continue to launch new such schemes attracting gullible investors to invest in them."

As per section 12(1B), no 'person' can sponsor a CIS without registering with Sebi. However, under section 11AA (2), CIS has been defined as any scheme or arrangement made or offered by any 'company'. Thus, a person other than a company can evade the regulatory provisions since only a company is referred in the definition of CIS. Against this backdrop, Sebi is looking to modify the existing rules to provide that any scheme or arrangement devised for pooling and obilizin the funds collected by any person or company from the public shall be a collective investment scheme. Mr Daniel adds that many such cases never come to light as individual victims complain to local police, who do not have much know-how on these types of scams, and may not be able to analyse the gravity of the case since the amounts collected from individuals may be as low as Rs 1,500.

CISs were a craze in the early 80s, when nearly 2,000 entities lured common investors promising returns So far, around 56 CIS entities have been obilizin in various courts across the country Entities that offered CIS schemes, including plantation firms, collected around as Rs 3, 500 crore In 1998, Sebi stopped schemes from obilizing money without ratings okay.