You will need to get NBFC license from RBI
It is a good idea of trading without any investment. It needs lots of practice and knowledge because you’re taking responsibility for people’s assets. It can be done on a vast level by establishing a non banking financial company.
I would advise you to trade with your own money. If you want to grow big, avoid loans. You can take from family and set up partnership from them but highly recommended to not borrow from friends or anyone else.
The regulations say, you can collect fees and profit sharing isn’t a fee. But in any case, here’s an informal guidance that makes this explicit.
Will there be any legal problem if I set up a private limited company with shareholders and directors from within family and using our own family fund(not taking any money from outsider). The sole purpose being derivative trading. The company would be just for efficient expense and tax management.
As I have mentioned in the post, you will be forced to get yourself an NBFC license.
Trading with other people’s money has become a popular option for many traders over the years. It is a way of trading without risking your own capital. If you have skills and you are good at making returns, it may benefit both you and the lender or you may end up piling up with debt. So choose carefully.
Use your own income to trade or borrow it from friends. This is the only way or else you might go into debt.
Forex is significantly risky so I would like to trade with my own money.
Using others’ money for trading is never a good idea even if you have a good experience in the field. But, if you have made up your mind, then you should use risk management strategies to ensure that you don’t lose big.
How will this work in the context of copy trading software such as 1cliq or many others? These allow one person to copy trades in multiple accounts. Would be interesting to hear from Nitin Kamath on this issue.
I was planning to go for a partnership firm with one of my friends as a partner. We shall raise funds from family/friends in form of unsecured loan at fixed percentage and trade with funds in Shares as well as Derivatives. We would encash the surplus. Is it a legal structure?
Copy trading isn’t allowed in India, at least automated copy trading. Any automated strategy that someone is selling needs to be approved, but if the strategy isn’t an Algo but human trading, it can’t be approved. So not possible.
If the person copying is manually copying and the main person charges a fee to display the trades, then the main person must be an RIA/RA.
Check this post
Did you read this post?
A company or limited liability partnership (LLP) is created with those wanting their money to be managed being shareholders or partners. Their pooled funds are then used as trading capital. There are a couple of issues with this.
Firstly, an LLP with the objective of investing or trading is not allowed, so people use an alternate objective to create the LLP. This is a clear violation of MCA (Ministry of Corporate Affairs) rules. In the case of a Private Limited or Public Limited company, 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.
This could also be set up as a partnership firm to avoid the NBFC or SEBI registration requirement, but the issue with a partnership firm is that all partners have unlimited liability. In trading, where potentially there could be unlimited losses, partnership firms are not the right structure for investors.
While running trading through a setup like this allows flexibility in trading and collecting fees, you can’t actively seek new investors in the business promising returns from trading the markets. This would qualify the entity to register as an AIF. Check this SEBI order (Page 14, Point ix) banning the entity and the promoters for actively seeking capital to be invested into the stock markets as an LLP (without AIF license). So at best, if you did create a company or partnership firm, this can be set up only with family (white or allowed) and friends (grey) as a proprietary trading firm (grey). But you can’t actively seek capital from outsiders to manage (black).
Yes Sir, I did read it.
“So at best, if you did create a company or partnership firm, this can be set up only with family (white or allowed) and friends (grey) as a proprietary trading firm (grey). But you can’t actively seek capital from outsiders to manage (black).”
As per the above line, I need to make the contributing persons as partners and then take trade on their behalf. But, I intend to raise the money as loan and keep myself as one of the partners. The amount I am planning to raise in form of unsecured loan, as of now, would be less than 50 lakhs.
SEBI has guidelines for AIF in upwards of 20crore.
Sir can this structure fall into grey category considering the amount raised is way less than the amount stipulated by SEBI?
Is it possible to have a 30-minute live Q&A session with you on YouTube or Zoom—I mean, all traders meet with Zerodha?
It would be easier to get so many questions answered. Despite the fact that this might seem excessive, it is important to remember that complex questions demand carefully considered solutions.
If not, I believe that everything you’ve contributed to this thread is quite satisfactory and explicative.
30 mins will not be enough. Easier in this Q&A format. We were thinking of having an AMA again on Tradingqna soon.
This was the last one.
My Name is Prasen Lonikar. I run a small startup called STOQ Club. We provide Algo trading services. This is self trade platform where the user himself selects the strategy and uses the platform to execute the trade.
- Which category does this fall into ? (black, white or grey)
- Do we need RIA license or RA license ? (please also suggest which one is better)
- Can we trade the market as well ? (with disclosure given)
- If we charge software fees does that come under advisory fees ? (are advisory fees and software fees seperate ? )
- Can we give advisory for to clients for investment into ETF or any long term growth options ?