Trading in Others Account for living

General
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I am looking at meeting all legal requirements to trade in someone elses account and establish it as a business. And this is not by registering with SEBI for PMS etc etc.

Like I have a few people in my circle who can open account with Zerodha and I can have an arrangement to trade in their accounts for a fee or profit sharing. What all things should be taken care to do this arrangement in legal way. I have drafted a limited Power of Attorney (POA) which will be signed by me and respective person, who will give me POA to operate his Zerodha trading account. I will retain the original POA for my records. This POA only contains the rights for allowing me to trade in the account and does not contain any commercial terms. The commercial terms are made on other agreement on Stamp Paper.

I would like to know whether I will need to submit the POA to Zerodha so that I can trade in their account or I do not have to submit the POA to anyone. Can I ask my client to share his /her trading password and keep the original POA with me and do this business.

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@nithin
Your views are solicited. I know this may not be the best way, but just as many people trade in their family members account, this arrangement will be quite similar.

I mean, if one can get a POA to operate a particular account, bank account or even a trading account per se, what can legally stop that person (the donee) to trade in the donor account. Now the question of consideration is different and that can be done outside the POA part. Or for that matter assume that there is no consideration at all.

  1. So even in case of RI or NRI can the trading account be operated by a POA holder?
  2. Will the POA copy have to be submitted to the broker?
  3. How will the POA holder (donee) have access to the trading account? I mean will he be able to also give his /her mobile and email id details and the same will be captured in your system, so that CNs, trade details, password resetting etc can be done by the POA holder with his/her own credentials.

Please understand that here I am talking of legitimately doing trading in someone else account on the basis of POA given by the person who has trading account. Every where else people do manage/trade in others account by taking userid and passwords. And this is legally wrong. So exploring if POA can be a work around. So your honest views on this are highly appreciated.

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ah thanks, @portfolioplus911

@AS82 the links shared have my answers.

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@portfolioplus911,

Thanks for the links. I already know what all is stated there and that’s why I was exploring the POA route.

@nithin
I wanted your take on the POA arrangement. POA is a legal document. Like there are different types of POA, limited, general. Even in banks, there is a Mandate facility, where the mandate can operate, withdraw/deposit money in the primary account holders name. Even for Mutual Funds the purchase/redemptions can be done by the POA holder by signing respective forms. In both the cases, bank and MFs, the mandate holder or POA holder’s KYC, signature etc etc is all registered with the organisation.

So my question is why not a POA for trading account. Maybe no brokerage has thought about it. But it can be legal. Like a Limited POA to operate a trading account can be given to any person.

Infact clients do sign a POA in favour of stock brokers to debit demat account, fees from trading account and to place orders, isn’t it?
So an additional POA can be given to some other person to operate the trading account, placing orders. Legally POA can be given to two or even more person for the same account operation.

So what is your take on enabling POA based order placement with your brokerage firm. I know it will be a tricky business proposal, but you can understand that any client entering with such arrangement with any person will not be totally unrelated or will for sure know all the pros and cons of giving such POA. But if you look at it legitimately then there will be so many people who will follow the law by taking POA from their family members, old people in the family, who’s account otherwise they are illegally managing on their own at present.

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If i am not wrong , trading on others account is ilegal and SEBI actually discourages this practice.

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The POA brokers get is only to debit shares, doesn’t give the right to trade on behalf of the clients. If POA was allowed to trade on behalf, why need AIF/PMS/MF license etc. SEBI would never be okay with this (we have already spoken to them). Over 80% of complaints that go to SEBI is due to unauthorized trades. SEBI has even put up a new regulation that stipulates that there has to be a recorded authorization from a client whenever trade is executed on a dealer terminal (when broker employee is placing order on behalf of the client). So even the sub-broker/AP route that people were taking to manage money is technically shut now.

So yeah, the only real way is to get PMS/AIF license.

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@nithin,
Friend, you got it wrong way. The PMSes, AIFs, MFs of the world are commercial ventures with consideration. So it is wrong to say that if POA was allowed, all of them were not needed.

Arent people allowed to give POA to manage their properties, bank account (through Mandate facility for NRI, which is equivalent to a POA. The mandate can virtually do everything except for opening and closing the bank account). RBI has a process in place for this and many of the NRI bank accounts are managed by their Mandate holders in India.
Dont MFs allow to transact by POA holders on behalf of their Principal. Yes. MF are also regulated by SEBI. The POA holder can do all, purchase, redeem, switch, and what not, by putting his signatures on the forms.
So either RBI or SEBI both have processes in place to allow the “Agent” the POA holder to operate their “Principals” account.
Now consider this, why have the above people who give mandate to manage bank account or MF given this, because there was a genuine need, isn’t it. It is wrong to say that POA for trading account will always be misused. Wouldn’t there be need for genuine people to have someone manage their investments too. Is PMSes or AIFs the only route for them? If yes, then does this route meet all requirement for a client who is either busy or ailing or old or too young to do it himself.

Like if I have to manage my grandfathers money of say 5 Lacs, what should I tell him - You are too poor for PMS or AIF so do it on you own. Or my brother who is in Sales job and has no time and knowledge to invest, saves 20k every month, what options does he have. Nothing. So even if someone in the family itself who is capable of taking investment decision there is no legal way of managing others money. Isn’t it? Is the only way to take their account access and make investments. Is it right?

Does the regulator have any logical explanation for such cases. It is always easy for the Regulator to say, No, to start with any idea. Infact the default answer is always a No. Even when you started this discount broking business, I am sure that first thing you would have got from the Regulator would be No, you cant do this.

Also btw, PMS and AIF are for investment and knowledge savvy customers and hence the higher threshold of entry. Anyone who is doing PMS or AIF is not because he does not have time and wants someone to manage his account. It is for higher returns or for to show off… exotic products… in their peer groups where all they have their investments rather than plain vanilla stocks or MF portfolio.

See I am not making you a punching bag on behalf of the present system, but I am putting something with is illogical. Legally, if POA can be given and taken to manage bank accounts, MFs and also Real Estate (infact mostly POA are used in RE) then why not for trading accounts? Well it is beyond ones understanding how the same Regulator can allow POA for MF investments and not for direct Equity investments, the POA holder has equal opportunity to screw up at either place.

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Yep, agree. SEBI definitely over regulates, the reason they say is because of the huge number of complaints that come to them daily. Their over regulation stifles innovation for firms like us as well.

SEBI wants people like your brother/grandfather to invest in mutual funds and not give POA to anyone or trade derivatives, etc. They are on record about this.

SEBI/Exchanges were very welcoming about discount broking idea when I had originally pitched. They loved the fact that we were trying to bring transparency in terms or pricing to the industry. I think they will support anything that will help the end consumer without too many loopholes that potential manipulators can abuse. Let us be honest, if POA on trading was allowed, potentially all these tipsters could get this POA promising some crazy returns and cause huge losses. SEBI wouldn’t want something like this to happen.

I am your side, such regulations hurt skilled money managers by putting a huge entry barrier. But I don’t know if SEBI really has any other option considering all the scams that keep running around us.

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@nithin

Well principally I agree with you.

For NRI since they cannot trade in derivatives and intraday, can the POA thing be worked out for them with your firm.

Well if the regulator is concerned about leveraging and short term trading then I suppose they should be willing to have someone operate or manage investments or trades in direct equity for NRIs at least. Also the fact would be for an NRI it is practically too difficult to place orders and other logistic issues given the time difference. Well maybe this segment could be one which can be looked by your brokerage with the Regulators. And I am sure there could be a very genuine need here.

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SEBI wont’ allow anyone in India to accept POAs and trade on their behalf. As a business regulated by SEBI, we can’t do anything they say no to.

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@nithin

It seems you have concluded on behalf of the Regulator, that this wont be allowed for NRIs.

Don’t you feel that this segment needs someone manage their investments, be it RE, MF or even stocks?

If the concern is only leverage and short term trading then this is taken care off for this segment as they are not allowed to trade in those things. Also any NRI in general can be considered far more knowledgeable than a average Joe RI investor when it comes to giving something as POA or falling in trap of tipsters. A RI investor may not understand what powers he or she is giving but may not be the case with NRIs atleast.

Also isn’t is a well concluded fact that an NRI can per se not manage execution and decision making than his Indian counterpart just due to different geographies and different time zones as well. As what you stated that the Regulator would like to ease things for investor (NRI included) and ensure their well being too. So honestly don’t you think that NRI’s trusted Indian counterpart can do more justice to the job than NRI himself doing it far somewhere.

See the same yard stick cannot be used just to suit a narrow thought.

FYI, all banks allow RI to operate NRE/NRO account in the capacity of being a Mandate holder. The mandate form (though optional) is integral part of the account opening forms for NRIs. So RBI allows RI to operate these accounts. So should the SEBI if it is properly put it to them.

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We can debate about this, but I know that SEBI is trying everything possible to stop unauthorized trading. So I don’t see them ever allowing POA that gives right to trade on someone else’s account - be it NRI or otherwise.

You can always become a RIA and advise the clients to trade - Local and NRI. If the client shares his login/pwd with you, you can trade on his behalf, no broker will ever get to know.

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@nithin
How about starting a partnership firm and that partnership firm traded on behalf of all ? Via managing partner ?

  1. Is there any bar ?

  2. If new partners added or old partners retired how much time to report this to broker (zerodha)

Suggest some Best way legally to manage others account without costly or cumbersome procedures !
TIA

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No, this is also not allowed. Check the SEBI order on HBJ capital (they banned them from the markets). One of the reasons was also because they were doing this.

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The other there would be that the company has to register itself as NBFC since majority of its profits and activities are coming from investments.

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@nithin

You can’t start something which is not built on trust. Trust is the foundation of any or all associations, especially relating to money. Not my type to trade illegally even if the broker doesn’t know.

O&O

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Trading with someone else account and money is not a good option as it will not help you to develop the skills of psychological strength. I did this mistake when I tried to start live trading through my friends account and I lost badly. I will back the concept of trading with own money.

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Some salient points to permit POA based handling of trading accounts

  1. Wild fluctuations in Markets are cooled by allowing more cooling transactions by informed persons in order to leverage the anticipated price differences / arbitrage
  2. Will pool the idle money with un-trading persons to market to give more liquidity
  3. Will widen the Demat holder base and thereby encouraging spreading more awareness among more and more idle fund holding non traders
  4. Development of New Business Class of more informed-trading capable-tech savvy who will be able to leverage idle funds with common man without trading knowledge which funds were not available with them for trading
  5. Of course binding trading talent to the money by barring POA amounts to fleecing the unknown investors who loses their life savings in untimely booking of trades
  6. Thereby permitting the talented trading gobblers to swallow the money of hapless fence-sitter learners
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Hi @nithin
What if NRI is ignorant of this rule (NRI’s are barred from trading in f&o and intraday) and he/she keeps trading in f&o and intraday?
What are the penalties for that?