Trading with other people’s money

https://zerodha.com/z-connect/rainmatter/trading-with-other-peoples-money

This post talks about how you can manage money for others legally and also some grey ways wealth management is done.

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I think we can set up Pvt Ltd company and trade own capital like Dolat investment or Tata investment corp. These are listed firms. Please advise.

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Yep, you can trade. But like I have mentioned in the post:

if more than 50% of revenue comes from financial income (trading), then the company is required to get registered as an NBFC (Non-Banking Financial Corporation) with RBI. One way to avoid this NBFC registration is by becoming a stockbroker and registering with SEBI. Both these registrations come with their compliance requirements, and as a stockbroker, an added cost of having to run a full broking stack as the firm cannot rely on other brokers for trading.

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Ok. I think AIF is the best way to manage 10 crs and above.

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@Matti

So after reading the article, I can conclude that if someone wants to trade using only his own capital, he can open a private limited company and get a NBFC licence. That’s it, and he will be free to trade anything including derivatives.

Is my understanding correct?

In case of PMS what’s the methodology to calculate total exposure. For example if I sold 15000 call and buy 15100 call ,assuming one lot of 75. Will total exposure will be
1.7500 or
2. 1500075 i.e 1125000
3.15000
75+15100*75 i.e around 2250000.

If it is your own capital, why would you want to trade through a company. The taxation will be much higher - corporate tax + dividend distribution tax in your hands as per your income tax slab when you take out the money. This is apart from you needing an NBFC license.

Best to trade in your individual name itself.

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Point 3. It is the notional contract value. This is how it is for AIFs also. This is why most AIFs even though they are hedge funds, don’t trade much options.

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Actually in one of the videos by P R Sundar, he told that he trades in his individual name as well as through a company, but trades more in the company name. And the reason he gave was: for individuals earning more than 5 cr the max tax rate is applicable which is around 43% whereas for company the max corporate tax rate is lower around 35%. So for tax saving he trades under the company instead on individual name.

But your point on DDT is also right, so why would PRSundar trade under a company name? Whats the benefit. Any ideas. Can DDT be avoided under some cases?

@nithin

Edit: also, to add to the above, Rakesh Jhunjhunwala also trades or invests through a company Rare Enterprises. Why would he do so if this is tax inefficient? What can be the reason?

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So by reading this, I have understood that there are no legal ways for small scale traders to raise money from people apart from family and friends and trade with it on their behalf, is that correct?

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Nithin ji ,i am a registered investment advisor(RIA) & Research analyst also(RA).

i advise to people & they trade on advise also.

** But some client say & force me to take trades on their behalf in account as they are very busy as now they’re very much comfortable with me if trust is concerned ,is it possible that i take any confirmation from them before doing trade,**

pls reply how to solve this issue.

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It makes sense to run it as a company if there is a small group of people who have come together to trade/invest. Taxation wise it makes no sense after last year’s budget when dividends were made taxable in the hands of the investor at their tax slabs.

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You shouldn’t. You take a regulatory risk by doing this. If you are executing these trades using a broker dealer terminal, make sure to get the consent to take the trade (voice recording or email confirmation).

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You could borrow money as a loan, but like I said it is best avoided. Setting up a company/partnership with family is okay, but friends is grey. You definitely can’t go out and actively seek money to manage.

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@Nithin: Thanks for the article. Understood that it is allowed to create a partnership firm within family and trade using this entity. I read that the max rate is 30% for partnership firm and no dividend taxation. [Slightly better than individual tax rates if profits exceed 1 crore due to 15% surcharge on top of 30% slab]
Does 100% income from trading in a partnership need NBFC license?

Hmm… I have mentioned in the post that a partnership firm doesn’t require NBFC or SEBI license right? Yep, not even if 100% income from trading.

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Hello Sorabh,
Could you please guide how can an individual get RIA license?
Any link explaining it would be of great help.

I would be interested to pursue RIA. Kindly help.

Under AMC section of the article, Nitin said "short selling are allowed, but intraday trading isn’t. F&O can be used only to hedge."

This isn’t contradictory, Short selling is allowed means we can take a short position in Futures not to hedge also?

@nithin Thanks for the article, great read, it came at just the right time for me. I’m in the process of setting up an LLP with my immediate family members pooling the money for trading and value investing. Part of the reason being not needing to manage multiple trading terminals/demat accounts.

We don’t plan (now or future) to raise any money (100% will be our own) and it would behave like a passive business. Reading your article, I can assume this is a safe and legal way to go forward? Moreover, we’ll be adding more investment vehicles as the company grows and not just limited to trading.

Let me know your thoughts.

Thanks!

@nithin Can an RIA please stock trades in client account after a written request from the client which specifically has stock name/date of execution etc? So the investment in made purely in a non-discretionary capacity in a buy/hold type of strategy? Recently, SEBI has allowed trade implementation by even individual RIAs as long as no compensation is received by the RIA for execution.