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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • 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

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