CIS & AIF

Collective Investment Scheme (CIS)

•  An investment scheme wherein
several individuals come together to
pool their money for investing in a
particular asset(s) and for sharing the
returns arising from that investment as
per the agreement reached between
them prior to pooling in the money
• CIS is defined in Section 11AA of the Securities and Exchange Board of India
Act, 1992 (hereinafter referred to as the “Act”) as per which CIS is any
scheme made or offered by a company under which –
• Contribution made by individuals are pooled and utilized solely for a
common scheme or arrangement;
• Contributions and payments made by individuals with a view to receive
profits, income, produce or property, whether movable or immovable from
such scheme or arrangement;
• Property, contribution or investment forming part of scheme or arrangement,
whether identifiable or not, is managed on behalf of the investors; and
• Investors do not have day to day control over the management and operation
of the scheme or arrangement.
 SEBI’s Action
• In light of a lot of news relating to sham entities garnering funds through
fraudulent investment schemes with promise of huge returns mainly in the name
of property development and agriculture, SEBI has in the last few years,
intensified its scrutiny of investment structures that raise domestic capital on an
unregulated basis. Securities Appellate Tribunal (hereinafter the “SAT”) recently
passed an order upholding SEBI’s findings against Alchemist Infra Reality
Limited. The SAT order along with recent pronouncement by the Supreme Court
have probed unregulated investment arrangements to conclude whether or not
they constitute CIS, as Schemes are required to be registered with SEBI in
pursuance to Securities And Exchange Board Of India (Collective Investment
Schemes) Regulations, 1999 (hereinafter referred to as the “Regulation”).
 Alchemist Infra Reality Limited
• The Company accepted contribution from investors for collective utilization and pooled the investment with
the object of carrying out the overall scheme/ arrangement because the Company had the discretion to allot
such area in its project as it considered appropriate. Further, under a conveyance deed the area of plot for
each individual was denoted as ‘proportionate undivided interest’. The purchaser was thus not entitled to
claim division and/or partition of the said proportionate undivided interest. The purchasers could not either
interfere with the working, managing, controlling and supervising of the said plot in any manner whatsoever.
• This in SEBI’s view, were not limbs of a buy-sell arrangement, but a pooling of money pursuant to a scheme
or arrangement.
• Based on these findings, SEBI concluded that the company’s activity were in the nature of a CIMC and held
it to be in violation of the Regulation as the company didn’t have the requite approvals from SEBI.
• SEBI accordingly passed directions to the Company and its directors to wind up the existing Scheme and
further ordered the Company to refund all the collected money.
• SAT confirmed SEBI’s finding and upheld the SEBI order under appeal which was made by the Company
and its directors, by adopting the reasoning similar to that provided by SEBI in the SEBI order.
 Collective Investment Scheme Types
• Unit Trust
• Venture Capital Funds
• Open-ended Investment Companies
• Real Estate Investment Scheme
• Specialized Funds
Participants of CIS
 Exclusion to CIS
There are many types of schemes and arrangements to collect funds from individuals which has been excluded by
SEBI from the definition of CIS. CIS will not include schemes and arrangement –
• Offered by Co-operative Societies or societies registered under any state or central act;
• Offered by Non-Banking Financial Companies to accept deposits;
• Contract of insurance to which Insurance Act applies;
• Providing for pension or insurance schemes under Employees Provident Fund and Miscellaneous Provisions Act,
1952;
• Under which deposits are accepted under Section 58A of the Companies Act, 1956;
• Under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section
620A of the Companies Act, 1956;
• falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982; and
• Under which contributions made are in the nature of subscription to a mutual fund.
 Pros & Cons of CIS
PROS CONS
• Spreading Risk • Paying for a fund manager
• Reduced Dealing Cost • Lack of choice
• Cost Averaging
• Loss of Owner’s rights
• Reinvestment of Income
• Professional Fund Management
• Reduced Administration
 ALTERNATIVE INVESTMENT FUND
• Alternative Investment Fund or AIF means any
fund established or incorporated in India which
is a privately pooled investment vehicle which
collects funds from sophisticated investors,
whether Indian or foreign, for investing it in
accordance with a defined investment policy for
the benefit of its investors. These investments,
however, are not covered under the purview of
SEBI. But they are governed by Regulation 2 (1)
(b) of the Regulation act of 2012.
SEBI has categorized the AIF’s into three categories.
•Category I - Here the funds are invested into those businesses which are new and hold high growth
potential. They are viewed as economically and socially viable. Even the government promotes and
incentivizes these as they lay the road for the country’s development as a whole. 

Venture capital funds 

Infrastructure funds 

Angel funds 

SME funds 

Social venture capital funds 
•Category II-  Those funds which do not take leverage or borrowings other than to meet day-to-day
operational expenses fall under this category. 

Private equity funds 

Debt funds 

Fund of funds 

Real estate funds 

Fund for distressed assets 
 Category III - These are funds that offer short-term investment vehicles for investors. The
following funds fall under the same. 
 Hedge funds 
 Private investment in public equity funds (PIPE) 

How to set up an AIF?

An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or
incorporated in the form of a trust or a company or a limited liability partnership or a body
corporate. Most of the AIFs registered with SEBI are in trust form.
Criteria's to invest in AIF
• You may be an NRI or PIO or OCI; you are still eligible for investment in these types of funds. 
• The minimum investment which an individual can undertake is fixed as Rs 1 crore. 
• However, in the case of angel investors, the lower limit has been fixed at Rs 25 Lakhs. 
• If you are an employee, fund manager, or director of AIF, then the minimum limit is again Rs 25
Lakhs. 
• The number of investors per fund is also restricted. The count is generally 1000, and in the case
of angel funds, it is 49.
• These funds have a minimum lock-in period of 3 years.
Advantages of AIF
• Alternative investments typically don't correlate to the stock market, which means they can be used to
add diversification to a portfolio and help mitigate volatility.

• Some can also offer tax benefits not available in traditional investments.

• Like any investment, the rate of return for alternatives is not guaranteed, but there is potential for it to
be higher than that of traditional investments.

• Proponents of alternatives in the portfolios of individual investors maintain they now have access to
sophisticated investments and potentially higher returns that until relatively recently were only
available to institutions, such as pension funds and foundations.
Disadvantages of AIF
• Alternative investments are more complex than traditional investment vehicles.

• They often have higher fees associated with them.

• They also are more volatile than traditional investments such as stocks, bonds, and mutual
funds.

• Most are relatively illiquid, meaning they are difficult to sell quickly.

• Most of these alternatives are complex and often have higher risks than traditional investments.

• A wise investor might see alternative investors as a means toward diversification rather than the
central strategy of a long-term plan.