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Creating a Hedge Fund in India: The Structure


In Kaushik Galas 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.

Contents
The Concept
Notes and Points to Consider
Partnership
An Advisory Service
A Private Limited Company
An LLP
A Mutual Fund
A Mauritius Company

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A Trust + VC Fund
Conclusion

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Thanks to Kaushik Gala and @Prashanth_Krish for inputs.


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The Concept
Create an investment vehicle that will:

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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.

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Compensate the fund managers in a transparent and simple

the IT Service Industry

manner. Typically there is an annual management fee, and a


profit sharing fee, with a hurdle rate and a high watermark.

(Long)
January 3rd, 2015

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.
Lets 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,

GPA is not Title: Supreme


Court
October 16th, 2011

Dont Buy HDFC Crest It


is Not a Fixed Deposit
November 25th, 2012

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

ULIPs : A good

behind my assertions?

investment?
November 23rd, 2005

Notes and Points to Consider

Sell All The Excess Gold


In Temples

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

June 6th, 2013

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.

Recent Posts

For the tax department, there is capital gains for most investments.
Income from derivatives is business income, unless you can prove

The Food Corporation Of

it is a hedge or such. Income from intraday trading is speculative


income.

Introducing The Modi

Index by Capital Mind

India Continues to be
Overstocked by 2x
Premium: That New CPI

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

Inflation Number Is Both


Good and Bad
Q3 Results: Nifty

have separate accounts? If it were pooled I could buy the 10 lots

Companies Y-on-Y Profits

out of the single account, and eventually distribute the profits.


Unfortunately some of the structures dont allow pooling.

Decline; Quarterly
Performance Shabbiest in
FY 2015

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.

Greece Talks Fail,

Grandstanding By All
Involved, But We Think
Greece Will Win This

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Foreign investors: Three different categories exist institutions

Round

(FIIs), foreign individuals and Non Resident Indians (NRIs or PIOs).


Some can buy in India, some cant. FIIs cant buy into certain
sectors. NRIs cant buy Indian company debt. Such ring fencing
impacts the structure you create. Foreign individuals cant invest in
most structures, so lets consider FIIs or NRIs in this discussion.

Twitter
Follow

Tweets

To understand, lets see what kind of structures exist.

Capital Mind

20 Mar

@CapitalMind_In

Andhra Bank
Employees Take To
Shaming Defaulters
By Holding Dharnas.
The NPA Situation
Is ift.tt/1xF1hLy
pic.twitter.com/xILsWlog7F

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

Expand

Capital Mind

Andhra Bank
Employees Take To
Shaming Defaulters
By Holding Dharnas.
The NPA Situation
Is Getting Worse.

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

20 Mar

@CapitalMind_In

Tweet to @CapitalMind_In

is only chargeable by SEBI registered PMS providers (discussed


later). Im not very clear about this but there are opinions favouring
SEBIs argument.

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Taxation: Pass through.


Capital Mind

Pooling: Not allowed.


Foreign Investors: Yes. Account creation hassles, for each investor.
Capital requirement: None.

Like

1,679 people like Capital Mind.

Upsides

Clean and doable by anyone. Requires next to zero registration (I


could advise as an individual).
Downsides

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.

Tags

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Investment pain: My friends dont want me to pain them

BigMoCorner

BHUSANSTL

every time theres a trade its too much of a pain for them to
execute. If I executed the trade on their behalf, there are

Bitcoin

regulatory issues involved (but I could take a specific power of

Buffett

attorney).
Multiple Account Maintenance: Lastly I need to keep each

CAPMPortfolio

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.
Cant do a large number of retail investors. You will lose
your sanity.

Budget2015

Charts
Elections
Food
Japan

CPI

ETNow

FCI

GDP

IIB

FSB
JKBank

LearnTA

Macronomics
The PMS

MARUTI

MoneySupply

MonthlySummary

A Portfolio Management Service is something that you get


registered through SEBI, and allows you to manage client

NSEL

Nifty

portfolios.

Optionalysis

This allows you to solicit clients publicly, and to manage them.

Policy

Pragati

Ranbaxy

RBIDollar

Technically you must not pool these accounts, but it happens


anyhow, and SEBI doesnt care to enforce it.

Russia

Update: PMS rules have been changed. They can take Rs. 25 lakhs,
no less.

SBILife

Stocks
SunPharma

The restrictions:
Investors must put in Rs. 5 lakh 25 lakh each, at least. This
may seem like a big deal when youre starting out, but note

MSF

Trade
Webinar

Payments
QE3

Results
SnowMan

StridesArcolab

Technicals
Uber

Viz

WonderLa

that most people who only have one lakh to give, will also give
you a lot of grief because it usually is money they cant afford
to lose. NEVER take money people cant afford to lose. (Even if
its 25 lakhs)

More at Capital Mind

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

Do More

reduces potential returns.


No commodities, real estate and all that jazz.
A registration cost of Rs. 11 lakhs and then Rs. 5 lakhs every

Categories

three years. You also need a net worth of around 1 cr. Thats
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 wink-wink-nudge-nudge.

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Foreign Investors: Yes.


Capital: 2 cr. net worth, 11 lakhs starting fee. (See FAQ)
Upsides

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 someones PMS license if you
have the right connections. Fee structures will be contractual and
SEBI would have given approval.
Downsides

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: cant do commodities or real estate
or such.
No leverage.
Given that accounts are separate, any money earned by the
investor goes straight to him.

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 youre 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

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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.
Upsides

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-investors name.
Good, for instance, to cross-invest in competitors.
Downsides

More than 50 investors cant 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 thats 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

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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 cant do
it in any time-bound manner. But India has the great jugaad, as in,
theres always someone waiting to buy a company from you, to
save setup costs.

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.
Upsides

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

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investors, and entry price can be the NAV of the pool plus an entry
load.
Downsides

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 its simpler than a
company.

A Mutual Fund
Creating a mutual fund allows pooling and allows you to get a large
number of investors.
Its 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) dont 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.
Upsides

Entry and exit is remarkably easy just calculate the NAV on any
given day and offer that to investors. Dividends for equity funds
dont get taxed. In fact even capital gains from transactions (buy

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low, sell high) in equity funds dont 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.
Downsides

No profit sharing and very tough regulation. Very difficult to enter


unless youre an established player. Can take inordinate amounts of
time to set up.
Investment restrictions: Cant invest well in derivatives (no short
options for instance) or in most commodities. Cant do real estate
and that kind of stuff.

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 dont 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 cant take Indian
money.
Capital: Expensive: You better be getting serious money (>$10m)
Upsides

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).
Downsides

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FII based investments are monitored by SEBI daily, so regulatory


reporting increases. The cost of setting up is very high.
You cant take investment from Indian investors. Which increases
fund-raising costs.
Investment restrictions: You cant 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 SEBIs 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.

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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)
Upsides

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.
Downsides

High regulatory and entry costs. And you cant invest in much other
than equity. So its a non-starter for a hedge fund, but could be
useful as a VC Fund.

Conclusion
If youre looking at a small fund of less than 10 crores, you cant
do any of the above other than the advisory.
At 10 crores, a PMS looks attractive.
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 isnt required, you could
consider creating a mutual fund too.

This is a live article and will be updated. Please post in with your
views!

Share:

By Deepak Shenoy | June 29th, 2011 | Categories: Essays, Slider | 36 Comments

Share This Story, Choose Your


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About the Author: Deepak Shenoy


Deepak Founded Capital Mind, which mines financial
data and provides analytics. Deepak is part of the core
team that helps build, grow and keep our data
platform up to date. He lives in Bangalore. Connect
with him at deepakshenoy@capitalmind.in.

36 Comments
Shravan June 29, 2011 at 5:32 PM

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 June 29, 2011 at 5:40 PM

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 scenarioperhaps a LLC
would be a better option? Any thoughts if it can be done?
Regards
Murali bangalore.

Hardik June 29, 2011 at 5:59 PM

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 notwill need VCF
registration from SEBI if you want to bring in FDI)..
Capital: No minimum

Prashanth June 29, 2011 at 8:37 PM

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

Hardik June 30, 2011 at 10:25 AM

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A Private Trust is simply a trust incorporated


under the Indian Trusts Act. Google for the act.

Vivek August 2, 2011 at 5:21 PM

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 June 29, 2011 at 6:25 PM

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

Nooresh Merani June 30, 2011 at 9:02 AM

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.
Regards,
Nooresh

Amit June 30, 2011 at 3:49 PM

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

Amit June 30, 2011 at 3:55 PM

One more question Deepak Can I create a hedge fund


with Indian investors and Foreign investors fund pooled
into it?

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shree June 30, 2011 at 6:13 PM

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 June 30, 2011 at 11:31 PM

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 dont care to
check.
I know some brokers and companies ( and you know as
well) who is taking leverage in PMS.
Thanks,
Shailender

Parijat July 5, 2011 at 10:59 AM

Deepak,
I dont 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. Its just MCAs 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 July 15, 2011 at 7:05 PM

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

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adding this into the article as the article is live. i have


started working on this.

shreya July 26, 2011 at 6:03 PM

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?

Deepak Shenoy July 26, 2011 at 11:50 PM

Yes, the funds are registered abroad and come in as


FII sub-accounts or such. The advisory route allows
the indian entity to charge fees.

Kimi October 31, 2011 at 12:11 PM

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
(http://www.incometaxindiapr.gov.in/incometaxindiacr
/contents/DTL2011/cirsec28.htm) 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.

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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.

Deepak Shenoy November 1, 2011 at 12:53 PM

Thanks! Updated teh post.


FOr 3. I think the link http://www.rbi.org.in/Scripts
/bs_viewcontent.aspx?Id=2136 is what you are
talking about? That seems to apply only to holding
companies, not to trading companies.
Thanks for the heads up about MAT as well!
ANd yes, separation of income should be possible.

Taha Merchant July 6, 2012 at 6:52 PM

For point No. 3, I think what Kimi is referring


to is this
http://www.rbi.org.in/scripts
/BS_PressReleaseDisplay.aspx?prid=24972
http://www.rbi.org.in/scripts
/PublicationReportDetails.aspx?UrlPage=&
ID=647#S4
Not still sure whether the recommendations
have yet been implemented or not.. anyone
have any updates on this?

PRAMOD AGRAWAL December 2, 2011 at 5:47 PM

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 January 8, 2012 at 1:33 PM

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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,
Avisekh

Deepak Shenoy January 9, 2012 at 3:17 PM

LLP and PVt Ltd. are taxed similarly; LLP has the
advantage that people can exit easily when you are
managing other peoples 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 January 31, 2012 at 10:52 PM

super article. not didactic. just like someones reading


your inquisitive mind and answering like an oracle.
cool.

SARVASHWAR February 26, 2012 at 3:30 PM

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

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company

Vince March 28, 2012 at 4:39 PM

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 clients 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.

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anirvan April 26, 2012 at 1:32 PM

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?

Deepak Shenoy April 27, 2012 at 2:49 PM

It is tax efficient to do it in your own account, if hte


income is less than say 10 lakhs, since the slabs are
an advantage.

Gaudham June 1, 2012 at 11:12 PM

Hi,
After reading your essay and valuable responses, all i
could figure is Indian government doesnt 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 June 7, 2012 at 4:58 AM

Hi,
Deepak
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..
http://www.moneylife.in/article/sebi-aif-regulation-opensgate-for-hedge-funds-and-real-estate-funds/25913.html
Thanks
Vikas

Vin January 8, 2013 at 7:30 PM

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

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the buyer save money in taxes, where do you think I can


find a buyer for this company?

Deepak Shenoy January 8, 2013 at 9:27 PM

If the losses are sizeable and carry-forward-able,


then you can find a buyer through an accountant.
You need to have filed returns before the due date
for all relevant years.

Sanjay March 3, 2013 at 12:16 PM

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 August 18, 2013 at 1:51 PM

Lets say Im a proprietor and some 5 investors would like


to invest with me. They are simply writing cheque in my
name and Im promising returns. What are the
implications of tax on returns.

Deepak Shenoy August 18, 2013 at 6:23 PM

Complex, likely to be interest income if you pay


them as a loan of some sort.

Guruprasad V August 18, 2013 at 8:05 PM

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. Lets say Im
taking Rs.100 as investment and making Rs.10 as profit .
Im 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.

Deepak Shenoy August 19, 2013 at 8:39 AM

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

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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)

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No content on this blog should be construed to be investment advice. You should consult a qualified
financial advisor prior to making any actual investment or trading decisions. All information is a point of
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