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SEBI tightens screws on vanishing finance companies

The board of the Securities and Exchange Board of India today approved the final draft regulations for Collective Investment Schemes based on the Dave Committee recommendations.

SEBI has made it mandatory for the CIS firms to register themselves under the provisions of the Companies Act, 1956 and also seek registration with SEBI as Collective Investment Management Company.

SEBI chairman D R Mehta said that the CIS should be constituted as a two-tiered structure comprising a trust and a CIMC. At the time of SEBI registration, each CIMC must have a minimum networth of Rs 30 million which would be increased to Rs 50 million over a period of three years.

While mandatory ratings are required for each collective investment scheme by a recognised credit rating agency, the CIS are prohibited from guaranteeing assured returns. Indicative returns could be mentioned, based on the projections in the appraisal report.

SEBI was empowered by the Union government on November 18, 1997, to deal with the growing numbers of plantation companies floating various collective investment schemes. The decision was taken after fraudulent companies collected billions of rupees under various schemes and vanished with public money.

According to Mehta, about 654 CIS firms responded to SEBI inquiries and submitted reports related to their activities including collection of about Rs 25.89 billion through such schemes.

About 60 companies went for seeking rating from agencies but could not be qualified for investment level.

Later, SEBI constituted a committee under the chairmanship of S A Dave to examine and formulate the regulations for companies floating CIS to collect public deposits. The committee submitted its final report to SEBI on April 5 this year. The SEBI board today approved the suggestions for immediate implementation.

For the existing CIS schemes, Mehta said that these companies would be allowed to register themselves with SEBI as well as under the Companies Act 1956 and they should start their business with a minimum capital of Rs 10 million for the first year which would have to be raised to Rs 50 million over a period of five years.

The existing companies will gradually have to comply with all regulations as suggested by the Dave Committee which included compulsory filing of offer documents containing adequate disclosures, mandatory rating requirement, listing of schemes on recognised stock exchanges and accounting and valuation norms as stipulated by the CIS guidelines.

They would need to seek SEBI registration within a period of two months from the date of notification.

SEBI insisted that the duration of the CIS schemes shall be for a minimum period of three years while no scheme shall be kept open for subscription for a period of more than 90 days. The schemes should be closed ended in nature.

The initial issue expenses for schemes of duration of upto eight years shall not exceed seven per cent of the corpus mobilised and for schemes of duration exceeding eight years shall not exceed nine per cent of the corpus mobilised. The compulsory insurance cover for the assets of the scheme and personal indemnity cover for the CIMC shall be obtained.

The management fees payable to CIMC shall consist of basic fee and incentive fee. The basic fee shall not exceed one per cent each year of the funds raised under the scheme for the first five years of the operation of the scheme and 1.25 per cent for the next five years.

The incentive fee shall not exceed 25 per cent of the excess return realised over and above the indicative return at the time of termination of the scheme.

SEBI eases norms for depositories

SEBI has also decided that the value of portfolio of securities of the beneficiary accounts with a broker Depository Participant could be increased to 100 times of his networth from the present limit of 35 times, upto a networth of Rs 75 million, and 50 times above the networth of Rs 75 million, subject to the approval of the SEBI board.

In a meeting of SEBI, depositories, DPs, registrars and share transfer agents and the Registrar Association of India, a standing committee co-chaired by the managing directors of National Securities Depository Limited and Central Securities Depository Limited has been formed.

The panel will resolve issues between DPs, registrars and depositories which may arise from time to time. The standing committee will meet at least once a month.

The other members of the committee are Stockholding Corporation of India Limited, HDFC Bank, Standard Chartered Bank, Integrated Enterprises India Limited, Karvy Consultants, ICICI Limited and three persons from RAIN, SEBI said.

At a meeting of the registrars on July 27, 1999, the registrars had assured SEBI that they would dispose of dematerialisation requests pending as of that date by August 10, 1999. It was stated by the registrars that they have, by and large, adhered to the commitment.

Among other decisions taken today, it has been agreed that every company shall appoint the same registrars and share transfer agents for both the depositories.

In the case of inter-depository transfers, it was confirmed today by RAIN, on behalf of registrars and share transfer agents, that the registrars would communicate their confirmation of transfer from one depository to the other depository within two hours, failing which it shall be deemed to have been confirmed.

RAIN also confirmed that registrars will not reject any inter-depository transfers except on the ground that a depository did not have adequate balance of securities in its account or if there was mismatch of transfer requests from the depositories.

It was also decided that the procedure for rectifying wrong credits or debits to a beneficiary account will be laid down.

If a DP has sent information about dematerialisation electronically to a registrar but physical shares not received, the registrar will accept the demat request and carry out dematerialisation on the indemnity given by the DP and proof of dispatch of document given by DP, the meeting resolved.

CDSL and NSDL shall persuade major DPs to open branches in cities where DP services are not available. NSDL shall review the cost structure of the software used for the DPs.

It was decided that the broker DPs who are also registered with SEBI as share transfer agents, shall be allowed to change their DP status to that of share transfer agent or registrar DP.

SEBI relaxes registration rules for FIIs' clients

SEBI has also decided to relax rules for registration of sub-accounts of foreign institutional investors, Mehta said.

"The SEBI board approved amendment of the SEBI (FIIs) Regulations, 1995, so as to relax the broad-based criteria for registration of sub-accounts from 50 investors to 20 investors and the maximum holding of a single investor to 10 per cent from five per cent," Mehta said.

SEBI officials said sub-accounts are clients of FIIs abroad. There is a separate criteria laid down for sub-account registration, they said.

The officials said current investment requirements are that a fund which wants to come to India as a sub-account must have at least 50 investors with no individual investor contributing more than five per cent.

"The funds had been representing that when they start a new fund it is difficult for them to straightaway find 50 investors," Mehta said.

He said the relaxations would allow higher contributions from the investors.

UNI

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