SEBI proposes tighter norms for CIS 

The Securities and Exchange Board of India (SEBI) has proposed tightening the regulatory framework for collective investment schemes (CIS) to bring them on par with the norms for mutual funds on certain aspects. 

In a consultation paper issued on Friday, the capital markets regulator has proposed, among other things, increasing the net worth requirement for CIS while capping the expense ratio and making it mandatory for such firms to have a profitable track record at least for three of the last five years. 

More importantly, the regulator has highlighted the fact that the norms for mutual funds are tighter compared to CIS while both entities manage investor money, including that of retail investors. 

“Currently, there is no requirement to have previous track record of the applicant… in terms of carrying the relevant business or previous years net-worth or profitability. Further, CIS regulations require applicant to have a net worth of not less than rupees five crores, whereas in case of AMC of a Mutual Fund minimum required net-worth is rupees fifty crore,” stated the SEBI paper. 

The regulator is mulling whether it could be made mandatory for CIS that it is operating in the proposed line of business for at least five years and that the net-worth is positive in all the immediately preceding five years. 

Further, it has proposed a minimum net worth requirement of ₹50 crore and also that a CIS “has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year”. 

In terms of fees charged by CIS, the regulator has proposed capping the initial issue expense at 2 per cent of the fund raised with a similar cap on expenses & fee. “No incentive fee based on performance of the scheme shall be charged to the scheme,” stated the consultation paper. 

This assumes significance as currently CIS entities typically charge a basic fee in the range of 1 per cent and 1.5 per cent while charging an incentive fee of up to 25 per cent of the “excess returns realized over and above the indicative returns”. 

In terms of the minimum number of investors in a scheme, SEBI has proposed that each CIS should have a minimum subscription amount of ₹20 crore and that there should be a minimum of 20 investors and no single investor should hold more than 25 per cent of the assets under management of the scheme. 

“Currently, CIS Regulations do not mandate minimum number of investors, maximum holding of a single investor and minimum subscription amount in any CIS. In order to avoid the potential risk of controlling the scheme by few individuals or investors, there is a need to maintain minimum number of investors in any CIS,” stated the SEBI paper. 

The regulator has also proposed that a minimum of 20 per cent of the salary or perks of designated employees of the CIS be mandatorily invested in the scheme. Incidentally, this is similar to what has been made mandatory for mutual funds as well. 

Among other things, SEBI has also proposed a shorter duration for the CIS scheme to be open for subscription, refund process and the allotment of units.