1. What is Collective Investment Scheme (CIS)?
  2. Why is it in news?
  3. What is Multi-level marketing? Why is it bad?
  4. Menace of CIS frauds

What is Collective Investment Scheme (CIS)?

  • The company pools money from various investors and uses the money for a specific purpose. (for example buying gold or real-estate property or raising pigs/ goats / trees).
  • To run Collective Investment scheme, you have to get permission from SEBI.

Why is it in news?

  • Beetal Livestock & Farm (P) Ltd
  • This company claimed to have large goat-rearing farms in North India and offered following type of investment opportunity.
  1. You give them money, they raise a goat on your behalf.
  2. Each goat would give birth to four babies per year, and the new goats would be sold to other investors, and you will be given profit.
  3. This way, you can double your money in very quick time!
  • This is one type of Collective Investment scheme scheme. But this firm (Beetal livestock) has not registered with SEBI, so it could be a Typical pyramid/Multi-level marketing (MLM)/Ponzi scheme.

What is Multi-level marketing? Why is it bad?

  • Suppose you and I ‘invest’ our money in this Goat scheme.
  • First problem: There is no way to verify that particular company actually has 2 goats! i.e. It may have only a single goat, it’ll show that goat to you at one time and show it to me at second time. Because company is not giving physical possession of goat to us, it merely promises to raise the goat using our money!
  • Second problem: We will get profit, only if someone buy babies of that goat. Since we want to recover our money, we’ll tell our friends to join the game and invest in that scheme, then they’ll tell their friends and relatives to invest in the same.
  • Thus the pyramid of ‘goat-owners’ keeps growing.
  • In such schemes, the company would pay money to people for a while, (to gain good will and marketing) and then one day, when they have collected enough cash, they’ll shut down the office and run away to Dubai or restart the same fraud with a new scheme “get your own Sandalwood tree!

Ponzi MLM Schemes

Menace of CIS frauds

  • There are estimated to be more than 500 companies in the country that have undertaken CIS activities without complying with SEBI.
  • 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.
  • Then they restart similar business under a new name and scam some more investors, before they come under the SEBI scanner.
  • As per SEBI data, more than one lakh investor complaints are currently pending with it in connection with such schemes.
  • Most common CIS frauds are related to investments for real estate properties, plantation and agriculture industry (e.g. goat scheme), art funds, time-sharing schemes and multi-level marketing (MLM) schemes, among others.
  • There is lack of clarity about roles of different agencies like MCA, SEBI, RBI, State Governments, Registered co-operative societies etc. These fraudsters take advantage of it.
  • Therefore, SEBI has recently asked the government to come out with a separate set of norms and an independent regulator for collective investment schemes(CIS).