Collective Investment Schemes: formula sheet

Key formulas

Four conditions of a CIS (Section 11AA(2))

Pooling + Profit motive + Management on behalf of investors + No day-to-day control = CIS

All four conditions must be satisfied together. Missing one means the scheme is not a CIS under sub-section (2).

Deemed CIS (proviso to Section 11AA(1))

Unregistered pooling not covered by Section 11AA(3) + corpus ₹100 crore or more = deemed CIS

Applies to schemes not registered with SEBI and not within the exclusions list.

Exclusions (Section 11AA(3))

Listed schemes, such as co-operative societies, NBFC deposits, insurance, EPF, chit funds, Nidhi and mutual fund subscriptions, are not a CIS

The exclusions apply notwithstanding sub-sections (2) and (2A). The Central Government may notify others.

Registration (Section 12(1B))

No person shall sponsor or carry on a CIS or mutual fund without a SEBI certificate of registration

Penalty for default is in Section 15D.

Four tests of a CIS

Pooling + view to receive profits/income/produce/property + managed on behalf of investors + no day-to-day control by investors

Section 11AA(2). All four conditions must be met.

Deeming rule

Unregistered pooling, not covered under s.11AA(3), with corpus of ₹100 crore or more = deemed CIS

Proviso to Section 11AA(1).

Registration requirement

No sponsoring or carrying on a CIS without SEBI certificate of registration

Section 12(1B). Applies to CIS including mutual funds.

Suspension or cancellation

SEBI order + reasonable opportunity of being heard

Section 12(3).

Penalty for operating without registration

Not less than ₹1 lakh, may extend to ₹1 lakh per day, maximum ₹1 crore

Section 15D(a). Same band and cap apply to the other defaults in 15D(b) to (f).

Test of a CIS

Pooling + profit motive + managed on behalf of investors + no day-to-day control by investors

Section 11AA(2). A scheme meeting all four conditions is a CIS. A scheme meeting conditions specified under Section 11AA(2A), or caught by the deemed-CIS proviso to Section 11AA(1), is also a CIS.

Registration requirement

No person may sponsor or carry on a CIS or mutual fund without SEBI registration

Section 12(1B).

Suspension or cancellation

Order by SEBI only after a reasonable opportunity of being heard

Section 12(3) proviso.

SEBI control over offer documents

SEBI may prohibit, or permit on conditions, any prospectus, offer document or advertisement soliciting money from the public for the issue of securities

Section 11A(1)(b). This is a general power over companies issuing securities. CIS-specific offer document requirements come from SEBI's CIS regulations, not covered by the supplied text.

Deemed CIS

Unregistered pooling of funds with a corpus of ₹100 crore or more is deemed a CIS

Proviso to Section 11AA(1), where the scheme is not registered or not excluded under sub-section (3).

Penalty for running without registration

₹1 lakh for each day of default, subject to a maximum of ₹1 crore

Section 15D(a). The text reads: 'not less than one lakh rupees but which may extend to one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds subject to a maximum of one crore rupees'. The minimum and the maximum per day are both ₹1 lakh, so there is no range per day. Read it as ₹1 lakh per day, capped at ₹1 crore.

Other registered-CIS defaults

Same penalty for each failure under Section 15D(b) to (f): ₹1 lakh for each day the failure continues, subject to a maximum of ₹1 crore

Covers breach of registration terms, no listing application, no despatch of unit certificates, no refund, wrong investment.

Penalty range under Section 15D

Minimum ₹1,00,000; maximum ₹1,00,000 per day of default; overall cap ₹1,00,00,000

Applies to each of clauses (a) to (f). The penalty is a range, not a fixed sum.

Clause (a)

Sponsoring or carrying on a CIS (including a mutual fund) without a certificate of registration

Days counted are those during which the scheme is sponsored or carried on.

Clause (b)

Registered CIS fails to comply with the terms and conditions of its certificate of registration

Days counted are those during which the failure continues.

Clauses (c) and (d)

(c) no application for listing of schemes; (d) no despatch of unit certificates as per regulations

Both are failures to follow the regulations on listing and despatch.

Clauses (e) and (f)

(e) no refund of application money within the specified period; (f) no investment of money collected as specified

Check the regulations for the period or manner. The default is failing to meet it.

Factors for quantum (Section 15J)

Gain or unfair advantage + loss to investors + repetitive nature

The adjudicating authority considers these when deciding the amount within the range.

Credit of penalty (Section 15JA)

All penalties realised under the Act go to the Consolidated Fund of India

The penalty does not go to SEBI or to investors.

Quick revision

• Section 2(1)(ba): CIS means a scheme or arrangement satisfying the conditions in section 11AA.
• Condition 1: contributions or payments by investors are pooled and used for the scheme.
• Condition 2: investors contribute with a view to receive profits, income, produce or property.
• Condition 3: the property or investment is managed on behalf of investors, whether identifiable or not.
• Condition 4: investors do not have day-to-day control over management and operation.
• Sub-section (2A) covers schemes meeting conditions specified in the regulations.
• Proviso: unregistered pooling not covered under sub-section (3), with corpus of ₹100 crore or more, is deemed a CIS.
• Section 11AA(3) exclusions include cooperative societies, NBFC deposits, insurance contracts, chit business and mutual fund subscriptions.
• Section 15D defaults: no registration, breach of registration terms, no listing application, no despatch of unit certificates, no refund of application monies, no investment as specified.
• Section 15D penalty: not less than ₹1 lakh, may extend to ₹1 lakh per day of default, maximum ₹1 crore.
• Section 15JA: penalties realised go to the Consolidated Fund of India.

Common mistakes

• Saying a CIS must be run by a company. Fix: Write that the scheme can be made or offered by any person, as Section 11AA(2) now says.
• Listing only three features and forgetting lack of day-to-day control. Fix: Always write all four conditions and tie each to the facts.
• Calling any pooling of money a CIS without checking all four conditions. Fix: Write all four Section 11AA(2) conditions and apply each to the facts.
• Ignoring the Section 11AA(3) exclusions. Fix: Always scan the list. Chit funds, Nidhi deposits and mutual fund subscriptions are common traps.
• Calling a scheme a CIS without checking all four conditions Fix: List all four tests from Section 11AA(2). Missing one of the four tests means it is not a CIS under sub-section (2), unless sub-section (2A) or the ₹100 crore proviso applies.
• Forgetting the exclusions in Section 11AA(3) Fix: Remember the main ones: cooperative societies, NBFC deposits, insurance contracts, chit funds and mutual fund subscriptions.
• Stating the penalty as a fixed ₹1 lakh per day. Fix: Say it is a range: minimum ₹1 lakh, up to ₹1 lakh per day, capped at ₹1 crore.
• Forgetting the ₹1 crore ceiling when many days are involved. Fix: After multiplying, compare with ₹1 crore. Anything above 100 days is capped.

Exam tips

• Write all four conditions every time; markers look for each one.
• Always add the Section 11AA(3) exclusions line, even in a short answer.
• For CIS versus mutual fund questions, anchor the difference in Section 11AA(3)(viii) and mention that both need registration under Section 12(1B).
• In case studies, tick each condition against a fact from the question, then conclude clearly.
• Quote the section numbers 11AA, 12(1B) and 15D only as they appear; avoid guessing other numbers.
• Write the four Section 11AA(2) conditions in a list. Examiners look for all four.
• Cite Section 11AA, 12(1B), 12(3) and 15D by number, and give a clear conclusion at the end.
• For case questions, always mention the Section 11AA(3) exclusions before concluding.