Sebi seeks preventive action against defaulter CIS entities

The Securities and Exchange Board of India (Sebi) has decided to share the names of over 500 companies that have garnered money from investors in violation of its collective investment scheme (CIS) rules with the ministry of corporate affairs (MCA).

Sebi would also give the names of the directors of such entities to the MCA so that necessary actions can be taken to prevent these companies and persons from being associated with any new firm, a senior official said. Collective investment achemes, where an entity pools in money from investors for certain pre-specified purposes and later distributes the profits or income, come under the ambit of the Sebi.

There are estimated to be more than 500 entities in the country that have undertaken CIS activities without complying with the Sebi regulations and the regulator has initiated necessary action against many of them in the past.

Many of these entities and their operators and directors tend to restart similar business under a new name and numerous investors are taken for a ride before they come under the Sebi scanner, the official noted. "Sebi has now decided to request the MCA to circulate the names of defaulter CIS entities and their directors among all the ROCs (registrars of companies) in India to prevent them from being associated with any new company," he added.

Sebi is also of the view that a complete overhaul of the current CIS regulations was needed, as loopholes in the existing rules allow for gullible investors to be taken for a ride, the official said.

Sebi will take up the issue of these regulatory gaps at the meeting of Financial Stability and Development Council (FSDC), which is chaired by finance minister and includes top financial sector regulators such as Reserve Bank of India (RBI) governor and Sebi chairman.

While hundreds of the companies have engaged in CIS activities in the country, just one such entity is registered with Sebi to undertake such kind of business. Generally, the operators of such schemes offer impressive returns in their initial days to lure unsuspecting investors and then suddenly disappear after some time, leaving their investors in a lurch.

Some of the most common CISs are related to investments for real estate properties, plantation and agriculture industry, art funds, time-sharing schemes and multilevel marketing (MLM) schemes, among others.