Recently Rwanda enacted a new law to govern collective investment schemes (CIS), the Law N° 062/2021 of 14/10/2021 Governing Collective Investment Schemes.

 This law is yet another legal reform spearheaded by the spirit of Kigali International Financial Centre to position Rwanda as an investment hub on the continent with a sound legal framework.

The new law is regarded as a step forward to the continuous journey of creating a more lively investment landscape in the country and it also aims to accommodate best practices in the collective investment schemes scene in Rwanda which still presents a huge portion of intact market share for interested new players to tap in.

How does a CIS work?

A Collective Investment Scheme is an investment vehicle where a number of individuals come together and pool money to invest their whole fund collection in selected assets.

The fund created by those collective contributions is managed by professionals referred to as "investment managers” or "portfolio managers”. CIS usually makes non-alternative investments, thus, investing in assets such as bonds, equities, or cash to make returns for its investors. Assets under a CIS are called a "portfolio”.

Each investor (participant) in the CIS arrangement holds a pro-rata unit (share) of the portfolio and he/ she is entitled to share in the profits and losses that accrue to the assets in the portfolio.

To simplify, let’s use a hypothetical example to discuss further; if you were to invest through CIS today, your money would be pooled together with that of other investors. The money you invest is moved across the wide range of assets within that particular fund you are investing in. Then, your money in the fund is divided into units (shares); the number of units you hold represents your proportionate ownership of the fund’s overall assets.

Consequently, the income and capital growth appreciated over those assets will be shared among the fund participants comparably to the units held by each one. As the underlying value of the assets rises and falls, it affects the prices of your units’ fluctuation. Just like in traditional companies, your stake in the fund will rise and fall depending on the number of units the fund issues against its total value.

Operationalization of a CIS

CIS can only be created, managed, and operated by a body corporate technically known as "operator” and not individuals. The operator ensures compliance of the scheme with applicable laws and regulations. Assets and documents of title of assets of the CIS are kept by another body corporate licensed by Rwanda’s Capital Markets Authority (CMA) for assets safekeeping function known as "custodian”. Custodian is appointed and entrusted with the custody of the assets of the CIS.

Investment managers are the ones to run the show in a CIS. They manage the portfolio of investments, formulate investment policy for the CIS, decide on which assets to invest in, and if the income made by the scheme should be distributed or reinvested (among other functions).  An investment manager is a firm licensed by CMA to conclude investment agreements, manage instruments and give advice in relation to the capital market.

To operate a CIS, a license issued by CMA is mandatory. Apart from granting operational licenses, CMA is also charged with the overall regulatory and supervisory authority over CIS. Rwanda’s Financial Intelligence Centre (FIC) is entrusted with some authorities in relation to compliance. The office of the Registrar General at Rwanda Development Board (RDB) has some responsibilities towards CIS such as keeping the prospectus and the register of beneficial owners of concerned CIS. 

A CIS can be structured either as a unit trust scheme; investment company scheme; partnership scheme; or contractual scheme.

Unit trust schemes can either be a single scheme that may be an open-ended or interval scheme or an umbrella scheme where the sub-schemes are open-ended or interval schemes. The operator who intends to establish a unit trust scheme does so by use of a trust deed effected between the operator of the scheme and a trustee. The CIS body should be registered according to the Law governing trusts (which was enacted recently). Here trustee would mean a body corporate that is licensed by CMA to serve as a trustee.  Unit trust schemes do not have a legal personality.

An investment company scheme is another structure to consider of a CIS.  A CIS can either be an investment company with fixed capital (which must be a single scheme); an investment company with variable capital (which may be a limited or indefinite life scheme); or a protected cell company. Investment company schemes should be incorporated as limited liability companies in accordance with the laws governing companies. Investment company schemes should be established as a protected cell company with a single scheme or an umbrella scheme. Sub-schemes in umbrella scheme do not exist as separate legal entities to such an extent that in the event of any sub-scheme being unable to meet its liabilities, these may be met out of the assets of the other sub-schemes.

A CIS can also establish as a partnership scheme which must be a registered limited partnership in accordance with the Law governing partnerships. A limited partnership is a kind of partnership that has one or more partners each with unlimited liability and one or more partners each with limited liability for the debts of the partnership.  In a limited partnership, a general partner is responsible for the management of the limited partnership affairs and takes part in the management of the partnership business whereas a limited partner does not take part in the management of the partnership. 

Finally, a CIS can establish as a contractual scheme that is based on a scheme agreement concluded between the operator and the depositary. Depositary refers to a body corporate licensed to supervise and oversee the activities of the scheme and who may also act as a custodian of the scheme assets. It is worth noting that a contractual scheme does not have a legal personality and its assets are held by the depositary or the custodian for the benefit of the participants (investors) as tenants in common.

However, it must be noted that some arrangements are excluded from CIS regulations. Those are; pension schemes, insurance contracts, health, and funeral plans or schemes issued by insurance companies, deposit-taking arrangements of financial institutions, construction companies, and cooperatives, non-deposit taking lending financial institutions, employee shareholding funds, sales arrangements and related commissions, franchise arrangements, condominium property arrangements, and arrangements under which the rights of the participants consist of the benefits related to capital rather than shares in an investment company.

What are the benefits of investing under a CIS?

Investing under CIS offers a lot of benefits for individual investors especially those who wish to make conventional investments but lack specialized knowledge of how it works. Below are some benefits;

The most applauded benefit of investing through CIS is diversification.  CIS exposes you to invest in a broad range of assets. This significantly limits investment risk against your investment by reducing your exposure to a possible decline in the value of one asset. This implies that your investment benefits from diversification techniques that are usually only available to large investors who are able to buy significant positions in a wide variety of assets. CIS allows investors to participate in diversified portfolios at moderately low contributions which at some point maybe through monthly investments plans.

Another benefit to consider is that investments portfolios under CIS are managed by full-time investment professionals who hold licenses for that particular function. This means that your investment is in good hands with vast knowledge and expertise in investments transactions.

These managers have real-time access to important investment information which are not available to an ordinary individual investor. This results in the execution of relevant deals in a very quick and cost-effective manner on behalf of the CIS participants. Investment managers are charged with the responsibility of deciding what assets to trade on behalf of the participants which offers you comfort against analyzing what risks to take or not.

Again, investing through CIS allows you to get your money back in a prompt manner at the relevant market-related prices. Though the Regulatory body is yet to issue particular regulations determining modalities for transferring units in CIS as it is anticipated, usually it is not arbitrary restricted.

 In addition, CIS is heavily regulated which guarantees some sort of transparency. Investors are supposed to get regular information on the value of their investments and they may also be able to obtain information on the specific investments that are made by the CIS.

Tax benefits for a CIS

Under the existing income tax law (which is under review), investors in collective investment schemes are exempted from capital gain tax on the sale or transfer of units or shares of the collective investment scheme. Normally, a beneficiary of the sale of shares in a traditional company is subjected to paying capital gain tax on the income made throughout the transfer.

CIS is also exempted from withholding tax on payments or other methods of extinguishing an obligation applicable to dividends. This suggests that an income distributed to the holders of shares or units in collective investment schemes is exempted from paying withholding tax applicable to the issuance of dividends which stands at 15% under current income tax law. 

Government of Rwanda in the attempt to streamline investment, CIS registered investors in accordance with applicable investment rules, upon fulfilling certain conditions, can enjoy some fiscal incentives including a 3% preferential corporate income tax and 0% preferential withholding tax on dividends, interest, and royalty payments. Some of the conditions to be eligible include an investment with a minimum fund size not less than USD 1,000,000 within the first 3 years with minimum expenditure in Rwanda of USD 50,000 per year. Collective Investment Scheme manager, custodian, and operator should be established in Rwanda also provided that at least 30% of the professional staff are Rwandans.

Even though CIS largely relies on developed and liquidity financial markets, with the ongoing reforms in place, collective investment schemes present investment opportunities for exploitation as Rwanda eyes to be among the leading financial centers on the continent.

 The views expressed in this article are of the author and do not constitute legal advice. Please seek professional advice in relation to any particular matter you may have.

The writer is a corporate and commercial lawyer and Trainee Associate at K-Solutions & Partners

Email; :felix@ksolutions-law.com