You need to be aware of SEBI’s guidelines on Collective investment schemes. Check out the order against HBJ capital by SEBI. They banned them from the market, one of the reasons was also because of running a similar scheme.
If you are looking at running this as a business model to raise capital by advertising and then put into markets, advise you against it. The only legal way to do is through PMS or AIF.
Not legal if you go out and there and put out a prospectus/advertisement to come be part of a LLP which invests in the market. If it was legal, there wouldn’t be any portfolio managers, everyone would take this route for convenience purposes.
If a bunch of people come together to form a business and that business also invests/trades, nothing wrong with it. But if this business is formed with the idea to raise capital from people to trade the markets and active source new people, yeah problem.
The only legal way arround PMS is to get an investor advisor license and manage 100 demat acccounts via a AP terminal with 100 different bilateral agreements on fees. The challenge is compliance of recorded confirmations before each trade is executed.
@nithin: this is based on my understanding without any legal opinion. Will defer to your knowhow in this if this is indeed allowed as I think.
As long as you are getting a client to confirm before every trade and record it via voice as a proof, yeah this route can be taken. The challenge here though is that as an RIA, you need to charge your fees separately and collect it separately. Whereas in a PMS you charge it on the funds you already hold. We Indians are extremely finicky when paying a fees separately. Btw, managing 100 different portfolios and executing them separately while getting confirmations is almost an impossible task.
Yes sure, managing any business with 100 accounts that needs same transactions or confirmation is an issue without technology. Totally agree.
@nithin: Cant someone just keep a voice copy of yes/no for each client and have a platform replay that as a confirmation ? Are the compliance rules only about having a recorded confirmation or does it also state that these have to be recorded real time telephonic conversations ? Can someone automate it legitimately ?
nah that would defeat the purpose right? Over 90% of all complaints to SEBI is around unauthorized trading. SEBI is trying whatever it can to stop it from happening. So automating a yes, wouldn’t be in the spirit of the law. That person can always go back and say he never authorized.
The partnership firm will have no client. It will only trade on its own account (prop trading). The capital is already raised via all partners contributing in ratio to their partnership % …
If this is a problem, then technically if my wife and I form an LLP and I open a trading / investing / dmat / commodity account with Zerodha for the LLP and trade through it. That should be illegal too rite ? Why would it be legal to trade through LLP having 2 partners and be illegal to trade via LLP having 10-100 partners.
Hi Nitin, I am not looking to advertise or raise money from strangers. The numbers I gave were just example. What I am looking to do is speak to 10-12 friends / family and form a partnership. Each partner contributes amount based on which his/her partnership % is decided. So for starting trading activity with 1cr, a 1 lakh contribution gets you 1% partnership of the firm. The managing partner who will actually trade, will get a salary / compensation and the rest of the profit is divided equally among all partners (in % ratio) after all statutory fees, taxes etc.
Another way would be to form a Pvt Ltd Company which trades in F&O on Company account. Profits are shared with shareholders via dividends after all statutory fees, expenses, taxes. The company / partnership firm will not take a loan from anyone or have any clients per se. Only partners / shareholders.
Thanks for pointing me towards the case order against HBJ Capital. Will read in detail to understand more.
If more than 50% of your income comes from trading/financial assets, you will need to make this pvt ltd into a NBFC. Don’t think pvt ltd company makes sense. But yeah, as long as it is small and just 10 to 12, no one will notice. But what you need to know is that, even if one of these complaint to SEBI tomorrow (if you were to lose some money), this can come back to haunt.
Adding to that, when you trade on behalf of a coporate body (a LLC is treated as a person in eyes of law), you need to have an investment advisor and NISM certified dealer terminal atleast to make it legal.
The PVT company thing works legally only for one person company where you are the sole proprieter. Anything else is potentially a violation including the NBFC norm I think. If you traded on demat of others based on advise given by LLC, then its advisory income which is outside the NBFC norm. But for that you need to have IA and NISM certification.
If you want to trade only in F&O then you can go for Pvt Ltd. and even you can do advisory or other services under that after getting registered by SEBI.
Cost of compliance will be high. Many people are doing this.
But I think you can’t buy and hold another listed company shares. For that you may need more permissions.
Wouldn’t it be easier to register a LLP and then accept money from the investors or people as a loan and enter into an agreement with the investor to get a fixed interest in addition to a predecided share of profits over and above the fixed interest for his loan.
eg. The Company XYZ LLP Ltd borrows 10 lacs from Mr. A for a fixed interest of 8% and profit sharing of 20% of the overall business profits (after deducting the fixed ROI) provided at the end of a 12 month period.
The managing partner/proprietor will keep 80% of the profits after deducting for the 8% interest.
There will be no advertisement for the same and the publicity will be only by word of mouth.
Like I have mentioned above, this would come under Collective investment scheme, this is not allowed. Check out the SEBI order on HBJ capital, among the various other issues, SEBI banned them for also raising money and managing it this way that you have mentioned.