Thursday, January 30, 2014

Gold Purchase Schemes and CIS

In 2013, an Ordinance was promulgated to enhance SEBI’s powers to regulate investment pools. The Ordinance introduced section 11AA of the SEBI Act, which details the parameters of a collective investment scheme (CIS). It states that “pooling of funds under any scheme or arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be a CIS whether or not it is registered with SEBI. This considerably expands the scope of fund-raising that could potentially fall within (and be regulated as) CIS.

In this context, a recent informal guidance issued by SEBI clarifies the scope of this new provision as to its applicability to a gold purchase scheme. MMTC Limited approached SEBI for an informal guidance on a scheme, which presents to customers of MMTC-PAMP India Pvt. Limited (MPIPL) the flexibility to purchase and accumulate fractional amounts of gold in accordance with the customers’ own discretion as to time and quantity. The customer has the option to obtain physical delivery as low as one gram of gold. The question that arose was whether such a scheme would fall within the definition of CIS so as to the registered with, and regulated by, SEBI.

SEBI came to the conclusion that the purchase scheme does not fall within the definition of CIS as the same is a straightforward transaction for purchase and sale of gold, and that there is no unit, instrument or other form of “security” being issued or traded. It observed:

e.         The proposed business activity primarily contemplates purchase or accumulation of gold by such customers who aspire to purchase gold but have limited financial resources for an outright purchase. The timing, quantity, and frequency of purchase are at the discretion of the customer.

f.          For every 1 gram, the customer can take delivery and fractional entitlement can be redeemed.

g.         A customer entering the flexible gold purchase scheme of MPIPL retains control over his investment at all point of times. In other words, the customer is not under any obligation to make continuous or recurring payments. On the other hand, he can take delivery of gold and redeem the factional entitlements (if any).

The gold purchase scheme could potentially pose risks to the customers. On the one hand, SEBI’s powers under the 2013 Ordinance have been considerably (and consciously) expanded to cover different types of schemes that might involve investment risk. On the other hand, it appears from this advance ruling that SEBI will be unable and unwilling to deal with all those types of risks, and the key is whether they are in the nature of “securities” and therefore carry investment risk.

1 comment:

vswami said...

Spontaneous > As per common knowledge and simple understanding, SEBI is a regulatory authority for overseeing and regulating the “securities” market. As such, powers as originally vested or expanded from time to time could not conceivably extend or be expanded to any area or aspect not coming with that scope. As rightly said, “the key is whether they are in the nature of “securities” and therefore, carry investment risk”. In this view of the matter, the suggestion made in an article in Business Line, authored by a learned CA, Regaining audit’s credibility saying, - “There is no reason why a beginning cannot be made with listed companies that come under the SEBI. The SEBI should appoint auditors of private, listed companies just as the CAG does for public sector companies”- does not seem to carry any courage of conviction or make any sense.
In this context, not without relevance, what irresistibly comes back to one’s mind is the shameless misadventure, widely ridiculed as Turf / Ego War , fiercely fought for sometime but had to meet its natural abrupt end; refer the coverage in SEBI V IRDA – Unfolding Turf War - TaxGuru