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Creating a Hedge Fund in India: The Structure

In Kaushik Gala’s excellent essay on creating an equity fund structure in India, he touches upon the regulatory problems in creating a fund in India. This essay takes you through different investment fund structures.


Thanks to Kaushik Gala and @Prashanth_Krish for inputs.

The Concept

Create an investment vehicle that will:

  • Collect money from investors.
  • Invest that money into anything – money markets, bonds, stocks, commodities, real estate whatever makes sense.
  • Use derivatives to hedge or make outsized bets or what have you.
  • Have limited liability for the members restricted to their investment capital.
  • Allow for partial or full exits, additions of new investors and addition of extra capital at any time.
  • Compensate the fund managers in a transparent and simple manner. Typically there is an annual management fee, and a profit sharing fee, with a hurdle rate and a high watermark.

This is the typical structure of a hedge fund or venture fund. Once you have such a structure, you can then create the investment plan and approach investors for capital.
This applies if you want to create a fund to invest in startups as well, a PE or VC fund.
Let’s say I figured that certain stocks are cheap today, and banks expensive. In the next two years, bonds will peak. We will also see real estate prices bottoming out after that, and in the meantime, there will be long and short opportunities in all sorts of markets. Can I create a fund that allows a few friends to put in their money behind my assertions?

Notes and Points to Consider

Taxation: Some investors might prefer an independently taxed entity (like an company). It saves them hassles of putting the gains into their accounts, and then having to file returns for business income. Foreign investors, on the other hand, prefer pass-through mechanisms, where the capital gains occurs in their hands, since Mauritius based FIIs pay no cap-gains taxes. Other VHNIs may want to offset other losses with your investment gains, and prefer pass-through.
For the tax department, there is capital gains for most investments. Income from derivatives is business income, unless you can prove it is a hedge or such. Income from intraday trading is “speculative income”.
Pooling: It is useful to collect the capital in one entity or account and invest, compared to having to manage separate individual investor accounts. For example, if I need to buy 10 lots of Reliance Industries, and I have six equal investors, what do I do if they all have separate accounts? If it were pooled I could buy the 10 lots out of the single account, and eventually distribute the profits. Unfortunately some of the structures don’t allow pooling.
Regulators: Remember that if you put this out there for *anyone* to invest, SEBI will get ticked off; this investment vehicle must be restricted only to people you know. (Unless you choose the SEBI registered options) Other regulatory issues are about if you need a minimum capital to apply.
Foreign investors: Three different categories exist – institutions (FIIs), foreign individuals and Non Resident Indians (NRIs or PIOs). Some can buy in India, some can’t. FIIs can’t buy into certain sectors. NRIs can’t buy Indian company debt. Such ring fencing impacts the structure you create. Foreign individuals can’t invest in most structures, so let’s consider FIIs or NRIs in this discussion.
To understand, let’s see what kind of structures exist.

Related Links:

Indian Hedge Funds were the Best Performing Ones in 2014!

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A Partnership

My friends and I could enter into a partnership, but this does not let me do limited liability. Plus, the partnership will have trouble opening brokerage accounts and so on. This route is closed before further discussion.

An Advisory

I create a company called Shenoy Advisors, in which I am the primary investor. I then ask my investors to create accounts with a brokerage, a bond dealer, a mutual fund, and so on. When I finalize an investment or a change, I talk to each investor and tell him to do this transaction. At the end of each quarter, I give them an account of the profits and hope that they will pay me.
Why “hope”? Because a contract may not necessarily give me the legal right to charge profit-sharing fees, which SEBI might maintain is only chargeable by SEBI registered PMS providers (discussed later). I’m not very clear about this but there are opinions favouring SEBI’s argument. Note: SEBI now has a “Registered Investment Adviser” category which may be allowed to charge a higher fee and also reduce the “hope” layer by providing more comfort.
Taxation: Pass through.
Pooling: Not allowed.
Foreign Investors: Yes. Account creation hassles, for each investor.
Capital requirement: None. A SEBI registered RIA needs about Rs. 1 lakh in net worth, though.


Clean and doable by anyone. Requires RIA registration by SEBI, which can take about six months, but gives you a certificate to do so.


  • No pooling. There is the fragmentation issue noted above.
  • Contract of hope: You may not be able to enforce payment. But this is not a big deal, usually.
  • Investment pain: My friends don’t want me to pain them every time there’s a trade – it’s too much of a pain for them to execute. If I executed the trade on their behalf, there are regulatory issues involved (but I could take a specific power of attorney).
  • Multiple Account Maintenance: Lastly I need to keep each of their data updated at all the investment avenues – should one address or phone number change, the KYC details at multiple entities needs to change.
  • Can’t do a large number of retail investors. You will lose your sanity.


A Portfolio Management Service is something that you get registered through SEBI, and allows you to manage client portfolios.
This allows you to solicit clients publicly, and to manage them. Technically you must not pool these accounts, but it happens anyhow, and SEBI doesn’t care to enforce it.
Update: PMS rules have been changed. They can take Rs. 25 lakhs, no less.
The restrictions:

  • Investors must put in Rs. 5 lakh 25 lakh each, at least. This may seem like a big deal when you’re starting out, but note that most people who only have one lakh to give, will also give you a lot of grief because it usually is money they can’t afford to lose. When you are doing aggressive trading, NEVER take money people can’t afford to lose. (Even if it’s 25 lakhs)
  • Only equities and derivatives.
  • No leverage in derivatives. For instance, a bull call spread (buying a call, selling another of a higher strike) has zero risk beyond the net premium paid, but a PMS will be required to show it as two separate call exposures, which dramatically reduces potential returns.
  • No commodities, real estate and all that jazz.
  • A registration cost of Rs. 11 lakhs and then Rs. 5 lakhs every three years. You also need a net worth of around 2 cr. That’s quite some money just to start operations.
  • Reporting to SEBI on a monthly and quarterly basis, on a client-wise and overall basis.

Taxation: Pass through.
Pooling: No, but we have seen some PMS providers do so with derivative trades.
Foreign Investors: Yes, but only NRIs. PMS can only advise FII clients.
Capital: 2 cr. net worth, 11 lakhs starting fee. (See FAQ)


The PMS is a clean structure, and can be transparent, if you design it right. Reporting is not very difficult, though SEBI can be inquisitive and audit you.
You may be able to piggyback on someone’s PMS license if you have the right connections. Fee structures will be contractual and SEBI would have given approval.


  • Regulatory approvals are tough, and costs are high. The 11 lakh is a bummer – you have to spend that much just to begin.
  • Non-pooling is a requisite, even if it is not being enforced today.
  • Instrument restrictions: can’t do commodities or real estate or such.
  • No leverage.

The Alternative Investment Fund (AIF)

AIFs are new SEBI registered vehicles that allow pooling and leverage. You have to register as a Category III fund for the leverage. Category I and II are for Venture capital (unlisted mostly) and debt oriented structures and don’t allow leverage. Cat I also has a sub-category for angel funds. We’ll not discuss those as the idea here is to invest in listed entities.
The concept is that you build a company or LLP that will be registered with SEBI. You need to put in, as a manager, Rs. 1 cr. at least, as your part of the capital. Every other investor needs to put in at least Rs. 1 cr. The total fund size needs to be at least 20 cr. just to start. Then you can trade stocks and derivatives. It’s not apparent you can trade commodities or currencies yet, so let’s assume we can’t.
You can lever you trades. Some say it’s 2x, some say it’s 3x. But this part is not written in stone.
Taxation: Pass through.
Pooling: Yes.
Foreign Investors: Yes, we think, if it’s an AIF structure that allows it.
Capital: 2 cr. net worth, SEBI registration fees etc.


The AIF is a clean structure, and while it requires high capital, you can use it to do leveraged trades and pool in capital.
It allows complicated option trades, shorting through leverage, increased diversification etc.


  • Regulatory approvals are tough, and costs are high.
  • Per-customer restrictions of minimum 1 cr. reduces your customer market size.
  • Instrument restrictions: can’t do commodities or real estate or such.
  • SEBI might frown on more than 2x/3x leverage.

Related Links:

How Alternative Investment Funds Raised Record Amounts in 2014 – A Premium Offering

A Private Limited Company

You could create a limited company, where you issue your investors shares, and they put in the money proportionately. You put in some money as well, and you then outsource the main activity (the fund management) to your advisory service or entity – this could be you as an individual, or an advisory entity you create.
You can calculate the per-share value of the company every day by valuing the pool, and here pooled investment is possible.
Note: you may not even be able to take this approach, because of a rule that says: If a company makes more than 75% of its income through investments, then that company needs to be an NBFC registered by the RBI. More on that later, but NBFCs require RBI approval and Rs. 2 cr. as capital, so if you’re smaller, you might as well forget about it.
Note: Reader Krishnaraj points out that RBI has new draft rules out about investing companies, but these seem to apply only to holding companies and not to companies that trade.
Taxation: No pass-through, the company is taxed. 30% taxes, with investment as the objective, could be classified as business income, not capital gains. Note however – as Reader Krishnaraj points out – the MAT of 20% means that even if the income is classified as capital gains, you will pay 20% tax on the gains.
Pooling: Yes.
Foreign Investors: Yes. For more than 50% of equity, or large sums may need FDI approval. They may not be able to invest in an NBFC.
Capital: Starting a company is as cheap is Rs. 10,000. But if you need to be an NBFC, the minimum networth is Rs. 2 cr. and the costs are heavy.


A company can invest in anything, even go abroad. You can even borrow money to trade. Pooled account is possible. Separately taxed.
Having a company also effectively hides the end-investor’s name. Good, for instance, to cross-invest in competitors.


More than 50 investors can’t get in. That makes it a public limited company, which has more stringent regulation. Of course you could always build another company.
Exiting is tough. Investors own shares. They have to sell those shares to someone else – that is, someone needs to be buying shares as they leave. In India, it is not easy to sell shares back to the company itself – there are buyback rules that require you to offer the same price to all investors, and then you can only do one buyback every two years. Partial exits are seriously difficult.
Entry is also tough: A new entrant will probably need some level of handshaking with everyone else before he can get in, because their approval might be required (if they own more than 10% stake in the entity)
Distribution of profits is costly. Even the post tax profits that are in the company, if they must be distributed will be charged 15% Dividend Distribution tax (Plus the surcharge and cess). So if you earned Rs. 100, you would be taxed, say, Rs. 34. That leaves Rs. 66. If you wanted to give that as dividend, you pay another 16% as DDT – so you can only distribute about Rs. 57; effectively that’s a 33% tax.
Companies are painful to set up and maintain – you need at least two directors, the process takes many days, and because you will issue shares at par, you need a very high paid up capital (which costs higher in terms of registration fees). And then, you need all regulatory disclosures and so on.
Winding up in case you need to shut down the fund (say all investors want to leave) is a big problem in that you simply can’t do it in any time-bound manner. But India has the great jugaad, as in, there’s always someone waiting to buy a company from you, to save setup costs.

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A Limited Liability Partnership (LLP)

The LLP is almost like a private limited in that investors have limited liability. Setup time is around the same, but regulatory disclosures and restrictions are lesser.
Each investor becomes a limited liability partner, and you become the managing partner.
Exiting is much easier, as is distribution of profits.
Taxation: No pass-through, the LLP is taxed. 30% taxes, with investment as the objective, could be classified as business income, not capital gains. Note however – as Reader Krishnaraj points out – the MAT of 20% means that even if the income is classified as capital gains, you will pay 20% tax on the gains.
Pooling: Yes.
Foreign Investors: Partially. Only in sectors where 100% FDI is allowed, but with govt. approval. FIIs and VC Funds are not allowed. While foreign investors are allowed, further downstream investments from a foreign funded LLP are not allowed. (HT @dearvishy)
Capital: Cheap: Rs. 10,000. Cannot run as an NBFC unless you get RBI approval.


Can invest in pretty much anything, but as a new type of entity, certain sectors may not have application formalities set up. Taxable entity.
Profit sharing is easier – post tax, profits can be shared without any distribution taxes.
Exits are easy: each partner can take his/her (post-tax) share whenever they like.
Entry of a new investor involves getting a signoff from existing investors, and entry price can be the NAV of the pool plus an entry load.


Getting RBI approval to act as an NBFC (see the section in the “Private Limited Company” section) is painful.
Conversion to a company later can be cumbersome, involving stamp duty and capital gains.
Winding up may not be quite simple, but it’s simpler than a company.

Related Links:

What is the Structure of a Typical Fixed Income Fund? – A Primer

A Mutual Fund

Creating a mutual fund allows pooling and allows you to get a large number of investors.
It’s cumbersome to set this up, though. You must get SEBI approval. First you need to have a sponsor company that has some kind of track record. Then you need to appoint trustees that will honour investor interests. Finally, you need the actual fund which will receive the money. Each scheme you create must be approved by SEBI and an offer document and “Key Information Memorandum” created.
Any public advertisement needs to have specific wording included. You need to submit information monthly and quarterly to SEBI.
You can only charge a management fee, limited to 2.5% per year. No profit sharing. You must use a registrar and transfer agent (RTA) like CAMS or Karvy to service investors.
Taxation: The mutual fund is not taxed on dividend or other income. Equity funds (more than 65% equity) don’t get charged dividend distribution tax.
Pooling: Yes.
Foreign Investors: Partially. Allowed in Equity, not in debt. Now foreign individuals can also invest.
Capital: Expensive: Needs a multi-crore networth and established presence.


Entry and exit is remarkably easy – just calculate the NAV on any given day and offer that to investors. Dividends for equity funds don’t get taxed. In fact even capital gains from transactions (buy low, sell high) in equity funds don’t get taxed under current laws, even if you distribute the to investors. This is a remarkably tax efficient structure.
You can create Exchange Traded Funds (ETFs) to offer stock investors entry into your investing strategies.


No profit sharing and very tough regulation. Very difficult to enter unless you’re an established player. Can take inordinate amounts of time to set up.
Investment restrictions: Can’t invest well in derivatives (no short options for instance) or in most commodities. Can’t do real estate and that kind of stuff.

Related Links:

Did You Know that You Can Invest Directly in Mutual Funds Without Having to Pay Commissions?

Equity Mutual Funds Returns Beat Market Returns!

A Mauritius Based Company

If your investors are abroad, and you get a lot of money, you can register a company in Mauritius, set it up as an FII sub-account, and use that to invest. The sub-account needs to be registered by SEBI. Then you get a broker to do your trading or give you a terminal, and you run the money from here.
This is cumbersome and costly. It could take time to setup, and I have heard of costs going to more than a few lakhs.
What you then do is to charge this company your management and profit-sharing fees.
Taxation: Mauritius based companies don’t get capital gains tax in India currently. This is great because Mauritius has next to no capital gains taxes either.
Pooling: Yes.
Foreign Investors: Only foreign investors. You can’t take Indian money.
Capital: Expensive: You better be getting serious money (>$10m)


A mauritius based fund can be structured such that entry and exit are easy. There is low capital gains tax.
You can invest outside India very easily (even if that is not the point).


FII based investments are monitored by SEBI daily, so regulatory reporting increases. The cost of setting up is very high.
You can’t take investment from Indian investors. Which increases fund-raising costs.
Investment restrictions: You can’t invest in many products, like commodities or currencies inside India. Even within stocks, investment is restricted in certain sectors like Banks or power.

A Trust as a VC Fund

You can create a trust, with a set of trustees (can be a ltd. company). You then apply to SEBI to register the trust as a VC Fund, where you will collect money from investors and invest in companies. See SEBI’s How to get registered as a VC Fund and the SEBI VC Regulations.
Also, see my Budget 2012 post on How you can create a Venture Fund.
(HT: Hardik, who has commented below)
SEBI needs the backgrounds of the investment manager (you) and the trustee company. You also need to provide the investment strategy for the fund, with target fund size and investor profiles, along with letters of commitment from investors. (At least Rs. 5 crores committed)
The SEBI Fees are Rs. 5 lakhs, plus 1 lakh for the application. If you get the registration, a placement memorandum must be created with full details such as promoter history, tax implications, investment strategy, profit distribution, etc.
According to the earlier links:

  • Minimum Capital is 5 cr.
  • Minimum per investor: Rs. 5 lakhs (employees of the fund can invest lesser)
  • At least 2/3rd of the funds should be in unlisted equity shares (Not suitable for a PE or hedge fund)
  • No buying into an NBFC, Gold Financing and other such activities.
  • Constant reporting is necessary.

Taxation: Majumdar and Co. say passthrough only works if you invest in unlisted firms.
Pooling: Yes.
Foreign Investors: Depends on whether you are a foreign VC fund or otherwise. Very tricky this bit.
Capital: Expensive: You better be getting serious money (>$10m)


Simple structure, but so expensive! But it is useful for a potential pass-through structure if you get into unlisted equities. Many such trusts continue to work, even against the spirit of the law, by becoming quasi-PE funds and going fully into public markets.


High regulatory and entry costs. And you can’t invest in much other than equity. So it’s a non-starter for a hedge fund, but could be useful as a VC Fund.


If you’re looking at a small fund of less than 10 crores, you can’t do any of the above other than the advisory.
At 10 crores, a PMS looks attractive.
At 20 crores, an AIF may also work if each customer is very high net worth.
At 50-100 crores, you may be able to get some level of interesting in starting (or buying) an NBFC. NBFC rules might change and prevent you from investing in certain sectors, or abroad, or in other such areas. If the profit sharing piece isn’t required, you could consider creating a mutual fund too.
This is a live article and will be updated. Please post in with your views!

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  • Shravan says:

    Nice article Deepak… Just one small input… I think the min cap requirement for PMS is 2 Cr… increased from 50 lakhs earlier… there is a proposal to increase it to 5 Cr…

  • Muralidhar says:

    Hi Deepak,
    Good work! I had very similar thoughts running in my mind about starting a Hedge fund in India and was discussing with a group – similar issues of upsides and downsides came up and finally decided it would not be possible in India in the current scenario…perhaps a LLC would be a better option? Any thoughts if it can be done?
    Murali – bangalore.

  • Hardik says:

    Consider a Private Trust with a Pvt limited company as Trustee…
    If a determinate trust, pass through nature in terms of tax…
    Pooling allowed….
    Foreign investment (probably not…will need VCF registration from SEBI if you want to bring in FDI)..
    Capital: No minimum

    • Prashanth says:

      Any links for Private Trust. Googled but did not find any such info. Thanks in advance.

      • Hardik says:

        A Private Trust is simply a trust incorporated under the Indian Trusts Act. Google for the act.

        • Vivek says:

          Hi Hardik,
          A private trust may be possible as you say, but can it be structured in such a way that investors can keep coming in and going out? My understanding is that if the trust route is used, it may not be possible to have investors keep coming in and going out?

  • SV says:

    nice one there again.. I like the fact that it is a live article..

  • Hi Deepak,
    Have you looked into the angle of opening a hedge fund based in Mauritius or some other tax haven. That seems a good option and viable for a good corpus.

  • Amit says:

    Hi Deepak,
    Nice article with full of knowledge. For some time I have been trying to start a hedge fund operating from Gurgaon and I have got some foreign investors interested in investing in my fund. What are your views regarding that, whether to create a fund in USA and trading in India or create a fund in India itself as LLP or Pvt Ltd co.?
    If you advise for creating hedge funds, I would like to avail your services for this….
    Thank You,

  • Amit says:

    One more question Deepak – Can I create a hedge fund with Indian investors and Foreign investors fund pooled into it?

  • shree says:

    How about a convertible note/warrant which after a fixed period (2 years) can be cashed out based on underlying assets price. Provide a set time & notice for cashing out (end of quarter/bi-annual)..
    Depending on tax treatment warrants/notes can be bought by company or converted to equity for dividend distribution + buyback..
    Warrant holders are not share holders it might simplify things.

  • Shailender says:

    Hi Deepak,
    I have a Question on PMS.
    Are there any workaround for the No leverage in derivatives part of PMS or it just that SEBI don’t care to check.
    I know some brokers and companies ( and you know as well) who is taking leverage in PMS.

  • Parijat says:

    I don’t think the NBFC rules apply to LLP (not being a company). However, the RoC/MCA has been forcing people to get an NOC from the RBI if you register an LLP with the intention of trading. The RBI, for its part, has been sitting on these applications and there has been no movement. Note though, that this is not an NBFC registration and there is no formal law/regulation that requires the NOC from RBI. It’s just MCA’s pigheadedness – yielding turf to RBI for no good reason and RBI is very happy expressing its hegemony on all things money.
    Also, about derivatives and PMS. You can probably buy options for full premium down. But you cannot short. And you cannot short futures. At all. What the hell do I need a PMS for then?

  • Shiva Prasad says:

    Great article, up to the point, this will definitely save many months of work of evaluating the options and limitations. i was planning on the forex(EURUSD,USDJPY,etc and not in Rupee versus others) trading PMS, you can consider adding this into the article as the article is live. i have started working on this.

  • shreya says:

    Thanks for such a lucid explanation. Just the perfect thing I was looking for. If I understand correctly, a lot of big investors including institutional ( those with more than 50-100crs) also work through the advisory route currently. But I believe they are able to do pooling. Is that possible in any way? Its more like a single person as the advisor (under a different name than the institution) in India and a bigger boss sitting elsewhere in say Singapore/HK. Any idea how this setup works?

  • Kimi says:

    Great article and much needed to start a debate.
    My own notes to the above:
    1. With the DTC coming in (next FY or later) the confusion between business income and investment income will go away. (Refer BCAS Journal Aug 2011)
    2. As long as the objectives are clear and separate books are maintained it should be possible to successfully separate business income and investment income. I have been tracking some of the case laws based on recent judgments and if can be proved that CBDT guidelines ( have been followed you have a very high chance of separating trading and investment income. So I feel the issue should not arise for serious players who maintain clear books of accounts.
    3. RBI has recently brought out new draft rules for companies looking to carry out investments as an activity. Here RBI says there is no need for licenses if your asset size is less than 50 crores and in fact it has asked smaller players to surrender their licenses. I was at a seminar on NBFCs in Aug where the NBFC head in RBI said RBI is now more concerned about systemic risks than earlier and that is their focus in all regulations while not stifling innovation.
    4. Irrespective of Long Term Capital Gains being exempt from tax, MAT of 20% needs to be paid – this is a tax credit that will be carried for 8 years now (I was told it will be indefinite under DTC). So returns from similar investments made via a company is tax inefficient.


    Hi Deepak!
    I want to float a hedge fund at Mumbai.
    My objective is to make this fund as the best performing fund in the world.
    I am a researcher, trader and small money manager in financial markets (stocks, commodity, currency).
    I am not aware how to structure it? What Govt rules apply?
    My idea is to set up a small hedge fund initially and then based on performance to attract money to it.
    I have sent a separate email to you few minutes back.
    Pl advise how to go about it and the terms.
    Pramod Agrawal/ Mumbai

  • Avisekh Rakshit says:

    Hi Deepak,
    Thanks for the informative article. I am planning to set up a investment fund entirely in my personal capacity in the region of 2 cr (100% personal fund). If I invest in the financial markets as an individual entity then I feel the tax outgo will be high and besides I will not be able to claim much deductions or my infrastructure and sundry expenses. I am in for the long term as I intend trade/invest for a living.
    Firstly should I opt for LLP or private ltd company?
    If I open a private Limited company with 2 directors then I will be able to claim a lot of deductions and will be able to separate trading income and capital gains ( for taxation purpose).But I would like ask you whether this set up is tax efficient ? and The accounts which will be opened with broker will be in the name of the company or in my name as I am the director?
    Awaiting a kind reply, I remain,
    Best Regards,

    • LLP and PVt Ltd. are taxed similarly; LLP has the advantage that people can exit easily when you are managing other people’s money. There is no large tax or other efficiency in one versus the other when you manage your own money.
      You cna choose either or even a proprietorship to run this format, because inall of them you can claim expenses as a deduction. the account will be opened in the name of the LLP or PVT LtD, or if proprietorship, in the name of either the proprietor or the name of hte proprietorship, as the case may be. You should talk to an accountant for this – they will help you for as little as rs. 5,000.

  • kunal says:

    super article. not didactic. just like someone’s reading your inquisitive mind and answering like an oracle.

  • SARVASHWAR says:

    Pls. can you describe process for a making a hedge fund company

  • Vince says:

    Just to update, in case the PMS route seemed viable earlier, now the SEBI (Portfolio Managers) Regulations have been amended:
    1. To enhance the minimum investment amount per client from Rs.5 lakh to Rs.25 lakh
    2. To ensure segregation of holdings in individual demat accounts in respect of unlisted securities also
    Regulation 15(1A):
    The portfolio manager shall not accept from the client, funds or securities worth less than twenty five lacs rupees
    Provided that the minimum investment amount per client shall be applicable for new clients and fresh investments by existing clients.( additional investment by an existing client should make portfolio value to at least 25 lacs )
    Provided further that existing investments of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012, may continue as such till maturity of the investment”.
    Regulation 16(8):
    Segregation of holdings in individual demat accounts in respect of listed and unlisted securities
    Provided further that the portfolio manager shall segregate each client’s holding in unlisted securities in separate accounts in respect of investment by new clients and fresh investments by existing clients:
    Provided further that existing investments in unlisted securities of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012 may continue as such till maturity of investment.

  • anirvan says:

    Hi Deepak
    Wonderful article. Had a question on a similar topic for some time now – if someone does not want to start a fund, but wants to trade with their own capital, is their any tax efficient way of doing it as in should he/she do it in their own account and pay income tax as per slabs or is it better to do it with via setting up a legal entity?

  • Gaudham says:

    After reading your essay and valuable responses, all i could figure is Indian government doesn’t want anyone to invest here, but i am gonna trade without establishing any company or anything, just paying 1.50 crore for the trading license (both cash and f&o). I am gonna show foreign funds from my friends as debt incurred for my trading activities, and get my profit taxed. then, payback their money and profit by moving into a trust located in a tax haven. I may sound cocky but i have no choice. When Indian officials are good enough to hinder, i am good as Gekko to break their system.

  • Vikas Panwar says:

    Recently SEBI issued guidlines on AIF, So now a Hedge Fund is possible in India. Would you Please update the page accordingly. Here is Money Life Link..

  • Vin says:

    Hi, you said, in India there is always someone waiting to buy your company to avoid set-up costs. I have a private limited company with carried forward losses that will help the buyer save money in taxes, where do you think I can find a buyer for this company?

  • Sanjay says:

    Just wanted to check if an HNI can set up a trust or something similar to manage his own money. Assume, for example, he has 50 crores of personal wealth and wants to invest in India (and abroad) through Mauritius route. Can it be done?

  • Guruprasad V says:

    Let’s say I’m a proprietor and some 5 investors would like to invest with me. They are simply writing cheque in my name and I’m promising returns. What are the implications of tax on returns.

  • Guruprasad V says:

    Could you help me further in this instance. How far its safe for my investors legally to safeguard their investments. Is it subject to dual taxation. Let’s say I’m taking Rs.100 as investment and making Rs.10 as profit . I’m taking Rs.2 as my fee and returning back 108. What would be the tax implication for both of us. If the returns are more than 40% is it legally acceptable to consider it as an interest ( if it has been considered as loan) payable to investors? Could you throw more light in this situation.

    • Best is to create an LLP in which all of you invest, I suppose. Then you can charge a fee as a manager, and the profits are anyhow split after the LLP pays tax (30%).
      The method you employ has complications – like you said, anything above 40% may be questioned. Taking a cheque is either income (on which service tax must be paid) or a loan (where the interest can be questioned like you said)