Collective Investment Scheme: SEBI cannot remember its own rules

In 2008, SEBI declared that art funds are collective investment schemes as per its regulations issued in 1999. In 2012, it dismissed a complaint filed by an investor against Osian's Art fund saying that the case does not fall under its purview. What exactly is happening?

Collective Investment Schemes (CIS) are rampant across the country but the market regulator Securities and Exchange Board of India (SEBI) which regulates CIS is unable to spot them. But when it does a flip flop over the most celebrated recent case of CIS, on wonders does it really intend to apply the CIS rules seriously. Indeed, the way it has changed its stance over the years regarding regulation of art funds, especially Osian's Art Fund, makes one wonder, whether the market regulator is under some kind of amnesia.


  • CIS rules came into effect in October 1999 after rampant loot by the so-called plantation companies such as Anubhav Plantations, AVI Plantation and Floriculture (SEBI’s data on companies who run CIS, contains 605 names, mostly of the plantation companies. SEBI’s CIS regulations stated that “any person proposing to carry any activity as a Collective Investment Management Company on or after the commencement of these regulations shall make an application to the Board for the grant of registration in Form A.”
  • In 2006 Osian’s launched an art fund which pooled money to invest in art. This was an open and shut case of CIS. But Osian’s did not care to be registered under SEBI’s CIS rules. The SEBI chairman then was M Damodaran, a member of Indian Administrative Service (IAS).
  • In November 2007, SEBI served a show-cause notice on Osian’s asking as to why the Fund should not be regulated. There was no consequence of this notice.
  • Osian’s half-yearly report released in February 2008, states, “Osian’s presented the case to SEBI through its legal galaxy, explained their viewpoint at length on legal as well as industry-specific issues and made submissions; since then, there has been no further communication from SEBI. No directions for registration under the CIS Regulations have been issued to the Art Fund or Oseta Investment Trustee Co Pvt Ltd as of date”. In other words, SEBI couldn’t care much.
  • In February 2008, though, SEBI issued an official advisory that art funds were collective investment schemes and would have to be registered with it or be liable to civil and criminal action. The advisory states that “in terms of section  12 (1B) of the SEBI Act, 1992, no ‘person’ shall sponsor or cause to be sponsored or cause to be carried on a collective investment scheme unless he obtains a certificate of registration from the Board in accordance with the regulations.” SEBI clarified that for a collective investment scheme to raise money from the public it is prerequisite that the entity must (a) be a company, and (b) registered with SEBI as a Collective Investment Management Company. “Therefore, the launching/ floating of the  ‘art funds’ or schemes without obtaining a certificate of registration from the Board in  terms of the provisions of the Regulations amounts to violation of the provisions of Section 12 read with Section 11 and 11AA of the SEBI Act and the Regulations. For such violations, appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies,” the advisory said. Strangely, despite this, it took no action against Osian’s.
  • It woke up and granted Osian’s an opportunity for a hearing before the whole-time director of SEBI on 5 September 2008. Again, there was no further communication from SEBI after the hearing. By this time, SEBI chairman was another illustrious member of the elite IAS, CB Bhave, whose Sebi reign has been among the worst.
  • While SEBI seemed uninterested to act against Osian’s, AK Muthuswamy was knocking on SEBI’s doors about the failure of the Osian’s Art. The three-year fund was supposed to return investors’ money by 2009 but did not do so. SEBI dismissed this complaint by arguing that the case did not fall under its purview! Yes, the February 2008 advisory notwithstanding.
  • Mr Muthuswamy approached the Securities Appellate Tribunal (SAT) which asked SEBI to re-examine the issue but this time SEBI came up with another excuse. It pointed to a Madras High Court of 16 April 2012 which ostensibly ruled that the regulator does not have power to review its own orders.
  • This was somewhat of a white lie. The SAT noted that the High Court has categorically stated that its order “shall not bar the petitioner to challenge the order passed by SEBI, if so permissible in law, by filing an appeal or taking other remedies to address the grievance.”


You wonder what will be SEBI’s next step and when it will take that step. After all, the regulator is not accountable to work within a specific timeframe. Osian’s Art Fund was a three-year close-ended fund launched in June 2006.


It raised Rs102.40 crore from 656 unit-holders across 39 cities, most of them high net-worth individuals (HNIs). The scheme used to declare NAVs showing 30% returns, but when it was time for redemption, the money wasn’t forthcoming. The scheme was wound up on 10 July 2009.


The turn of events, change in stance by SEBI in the Osian's case makes one wonder, what exactly is happening. Is the market regulator under amnesia so much so that it does not even remember its own regulations, advisory and stance taken earlier? Or are Osian’s lawyers too ‘persuasive’?



Bosco Menezes

4 years ago

The word "tragicomedy" was designed for exactly this sort of thing - it would be hilarious if not so tragic !!

Hindi-Chini relations: Is it bhai-bhai or bye bye?

In the last eight years when Wen Jiabao was the Chinese premier, nothing worthwhile was achieved. On the other hand, China has been asserting its rights on Indian territories as well other regions in Asia. India must be on guard before it is too late

In the last few weeks, China has been on the front pages of newspapers all over the world, mostly for wrong reasons.


The outgoing premier, Wen Jiabao, who had met Indian prime minister Manmohan Singh fourteen times in the last eight years, has reassured the latter that the new Chinese leadership will give ‘importance’ to ties with India! Jiabao will be demitting office by March next year.


It is a different story altogether that in the last eight years when Jiabao was the premier, nothing worthwhile was achieved. Though there were no border skirmishes (as such of the 1962 scale), Indian airspace was violated several times; repeated claims were made on Arunachal Pradesh and Indians from this part of the country were “treated as persons not requiring visa to visit China” and so on. Initially, they were refused visas to visit China because they were carrying Indian passports.


In fact, when Dalai Lama visited the area, there were ‘protests’ and considered this as an ‘unfriendly’ act! Now the latest documentary onslaught involves the Chinese citizens visiting India have maps of Arunachal Pradesh and Aksai Chin being shown as parts of China. It may be recalled that Aksai Chin has been illegally occupied by China.


In an immediate retaliatory move, when the Indian Embassy in Beijing issued visa to Chinese nationals visiting India, these very areas are shown as Indian territory. So far, China has not responded to this counter move! The passports of the visiting Chinese nationals will show the conflicting maps, regardless.


To complicate the situation internationally further, even the disputed areas in South China Sea, claimed by Vietnam, Philippines, Malaysia and Taiwan, are shown in these maps as ‘Chinese’ territory.


In fact, on some of these islands, China has even started construction work! American leadership has not sent the 7th fleet to the region!


And the latest brazen move in this regard is the announcement by the Hainan Provincial authorities that they will exercise the right to inspect vessels on the South China Sea, even if they are outside the 22km international sea border!


Except for verbal protests and suitable utterances by some western spokesmen that these “unilateral actions” are ‘unacceptable’, and expect the Chinese leadership to settle the matter ‘peacefully’, as we go to the press, nothing really has happened so far....


None of the claimants like Vietnam, Malaysia, Philippines or Taiwan can match China in any way.  Besides, the trade involved with China is too big a prize to lose and yet protest they must, which is what they can do at best!


Closer at home, Pakistan is a puppet and a close ally of China. And the Chinese encirclement of India is actually tightening. The all-weather port work at Baluchistan is in full swing; the Myanmar military government is heavily dependent upon Chinese support; Bangladesh has economic ties as does Sri Lanka in many ways.


Read more India and China, here.


Set against these Chinese moves, the Indian government has not been able to gather much real support from these nations.


One cannot venture even to speculate what might happen if there is a break-away situation in Baluchistan or the Taliban from Afghanistan makes sudden moves in that area. How would the Chinese react?


In any case, India must now be on guard also against the strong possibility of China trying to occupy or making intrusions in the uninhabited islands in the Andaman group.


Chinese assurances are not worth the paper they are written on—if they write!


Read more from the same writer.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


How MLMs wave an annulled letter to claim legitimacy of their operations and con people

Spokespersons and promoters of MLM companies repeatedly refer to a letter from the ministry of consumer affairs (MCA) granting legitimacy and legal basis to the operations of their ‘business’. However, facts are rather different. The effect of the letter has been since nullified 

Spokespersons and dealers of multi-level marketing (MLM) schemes or network marketing  schemes respond to questions about their legitimacy by brandishing a 2003 letter issued by the then secretary, ministry of corporate affairs (MCA). What they omit to mention is that the letter was subsequently annulled following complaints about its misuse. This means, the letter used by these scamsters is no more valid.
The letter says, “...the provisions of PCMCSB Act [Prize Chits and Money Circulation Schemes (Banning) Act, 1978] are not applicable to ‘companies dealing with distribution of goods’ including multi level/net work marketing companies”. MLM and pyramid companies immediately used this letter as a sort of approval by the government of their dubious activities to ensnare people into what is essentially a losing proposition that only enriches a small percentage of people who promote these schemes. 
Soon after, the ministry began to receive references from the Central Economic Intelligence Bureau (CEIB) at the ministry of finance about the misuse of the letter by MLM, network-marketing companies. The MCA issued another letter (F NO 21/(22)/IT/2001 dated 23 September 2003), which in effect annulled the earlier one. 
The second letter said, “Subsequent feedback/response have showed that companies using pyramid structured marketing techniques to sell their products putting forth their schemes based on the clarification issued vide DO letter of even no dated the 31 March 2003 claiming that their activities also do not fall within the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.  It is clarified that this Department's clarification of even number dated 31 March 2003 does not cover pyramid structured marketing schemes. That area also does not fall within the purview of this Department”. 
In fact, both the mischievous letter that seemed to grant legitimacy to MLM schemes as well as the subsequent clarification both are badly worded and vague. What is worse, having issued a clarification based on specific complaints, the ministry does not seem to have found it fit to follow it up with action to stop or ban the proliferation of Ponzi schemes. So much so that a decade later, experts who have tried to warn people about Ponzi schemes say, “we can’t help it if your country is overrun by such schemes”. 
At the same time, unnamed government officials continue to pass the buck. Only yesterday, government officials told the Indian Express that they had asked ‘states’ to initiate action to ban MLM and Ponzi schemes. This is precisely what the Reserve Bank of India (RBI) has been doing for several years. It responds to complaints about Ponzi schemes by writing to chief secretaries of states to initiate action. 
The Indian Express, quoting unnamed government sources reported on Monday, 3rd December that – “An inter-ministerial committee comprising the Reserve Bank of India, and ministries of consumer affairs, corporate affairs, finance and law, was formed to look into the matter. It suggested setting up of a central agency to oversee MLM schemes and also proposed to filter and block websites above a certain number of subscribers to curb such schemes”. This report is however not in the public domain. 
The newspaper goes on to quote the source as saying, “In fact, we are working on bringing in these companies under the Companies Act. This is possible under Section 583 of the Act where such unregistered companies will be considered deemed registered, thereby bringing them under the MCA’s purview”. Ironically, this is in direct contrast to the newspaper’s initial assertion that state governments would be asked to impose a ban on MLMs and pyramids.
To add to the confusion and obfuscation, the report goes on to point out that the MCA has circulated The State Money Circulation Scheme (Banning), 2012 which had the state police as the nodal authority. This again contradicts the claim that the MCA is looking at a central legislation. This strange contradiction and obfuscation is only an indicator of the enormous influence that pyramid companies and their associations have on politicians and bureaucrats. 
It is important to remember that in 2003, the very same year that the MCA issued a dubious circular that appeared to legitimise pyramids and MLMs, minister Jaipal Reddy had initiated a detailed discussion in Parliament and demanded a new and strong central legislation to prevent people from being lured to invest in such schemes. 
This only shows how deeply compromised bureaucrats and politicians are only pretending to be serious about checking the proliferation of pyramid and MLM companies, while in fact muddying the regulatory environment to allow them to operate unhindered, as they are doing today. This works well for the UPA (United Progressive Alliance) government, since many of its regional political allies are funded by promoters of such shady finance companies. 
To read about MLMs and ponzy schemes, click here.



Sandeep Patel

4 years ago

Our govt needs to act fast ...

some action is required to curb the Qnet menace

Mushtaq Ahmad Sofi

4 years ago

a good step towards mlm industry

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