@ricky, There are many sub-brokers/Authorized persons in India who run a similar model. As an AP, you get a dealer terminal from the broker that allows you to place orders on behalf of all clients that are mapped to the dealer terminal. Using this multiple portfolios are managed.
Some people have profit sharing as revenue model, while others just earn from passback of brokerage from the main broker whom they are an AP to. Usually the guys who rely on brokerage passback, end up generating a lot of trading volume to generate some revenue for themselves.
Is this compliant to SEBI regulations?
No. The only way to manage portfolios is by taking portfolio management license. Btw, PMS license doesn’t allow you to trade in futures and options and there is a restriction on minimum portfolio value of 25lks. So if derivatives need to be traded, the company needs to get registered as an Alternate Investment Fund (Category 3). The only issue with AIF is that, minimum corpus of Rs 20 crores and minimum entry of Rs 1 crore per client.
What is a compliant way of doing this?
The only way I see this possible today is by registering as an investment advisor. Send the client a notification/message to trade when there is an opportunity. Get that trade confirmation from the client through email/sms/mobile app/ etc.
Why does the main broker allow it if it is not compliant?
The main broker sees an easy business opportunity of earning on brokerage. The AP/sub-broker sources the client, manages the relationship, so an earning without a running cost. And this giving out dealer terminal is a common practice to help support client, if a few sub-brokers/AP run this PMS kind of model, maybe it goes away un-noticed.Also maybe some of them compromise on compliance over business.
So is the person running the PMS or the broker in trouble?
Hmm… As long as the person is making money/not losing capital/meeting the expectation set, there isn’t an issue - as no one gets to know. But the day the client loses money and complaints to exchanges/regulators, that is when all of this crash lands.
What is SEBI doing about this?
For every one good guy managing money like this, there are 10 bad ones that lose money for clients. Even clients are to be blamed sometimes, because they get carried away by people promising ridiculous returns - thinking all of this will happen without risks. This is a big problem for the brokerage industry. SEBI has just put out this circular which goes live from Jan 2018. This requires an authorization to be captured from a client everytime a trade is executed on his behalf by a broker/AP.
So post Jan 2018, it will be extremely tough to run this business model. It is sad because, a lot of good people in this industry have taken this route to grow their careers. But I guess there is no other way out considering the number of unqualified people losing money for public and bringing bad reputation to stock markets.
ps: As Zerodha, we don’t allow anyone to place orders on behalf of another unless the client himself wants to trade. Authorization is taken as ZPIN + Mobile + Voice call (call n trade).
