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Capital Mind – Creating a Hedge Fund in India: The Structure

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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.

 

Contents

The Concept Notes and Points to Consider

Partnership

An Advisory Service

A Private Limited Company

An LLP

A Mutual Fund

A Mauritius Company

A Trust + VC Fund

Conclusion

Thanks to Kaushik Gala and @Prashanth_Krish for inputs.

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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.

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Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

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Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

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.

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Taxation: Pass through. Pooling: Not allowed.

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

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

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Upsides

Upsides
Upsides
Upsides

Clean and doable by anyone. Requires next to zero registration (I could advise as an individual).

Clean and doable by anyone. Requires next to zero registration (I could advise as an individual).
Clean and doable by anyone. Requires next to zero registration (I could advise as an individual).
Clean and doable by anyone. Requires next to zero registration (I could advise as an individual).

Downsides

Downsides
Downsides
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.

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Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

The PMS

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. 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 1 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 wink-wink-nudge-nudge.

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Capital Mind – Creating a Hedge Fund in India: The Structure

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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 someone’s 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: can’t 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 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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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-investor’s name. Good, for instance, to cross-invest in competitors.

Downsides

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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 it’s simpler than a company.

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.

Upsides

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

Downsides

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.

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)

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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.

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

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 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.

Conclusion

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 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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and will be updated. Please post in with your views! Share: By Deepak Shenoy | June

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

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Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

About the Author: Deepak Shenoy

About the Author: Deepak Shenoy Deepak Founded Capital Mind , which mines financial data

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

Shravan

June 29, 2011 at 5:32 PM

Nice article DeepakJust one small inputI think the min cap requirement for PMS is 2 Crincreased from 50 lakhs earlierthere 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

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

Consider a Private Trust with a Pvt limited company as TrusteeIf a determinate trust, pass through nature in terms of taxPooling allowed. Foreign investment (probably notwill need VCF registration from SEBI if you want to bring in FDI) Capital: No minimum

from SEBI if you want to bring in FDI) Capital: No minimum Prashanth June 29, 2011

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

A Private Trust is simply a trust incorporated under the

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

under the Indian Trusts Act. Google for the act. Vivek August 2, 2011 at 5:21 PM

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

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

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

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

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?

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

 

shree June 30, 2011 at 6:13 PM

How about a convertible note/warrant which after a fixed period (2 years) can be cashed

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

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 don’t care to

check.

know some brokers and companies ( and you know as well) who is taking leverage in PMS.

I

Thanks,

Shailender

Parijat July 5, 2011 at 10:59 AM

Parijat

July 5, 2011 at 10:59 AM

Deepak,

 

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 July 15, 2011 at 7:05 PM

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

Capital Mind – Creating a Hedge Fund in India: The Structure

http://capitalmind.in/2011/06/creating-a-hedge-fund-in-india/#mau

adding this into the article as the article is live. i have started working on this.

as the article is live. i have started working on this. shreya July 26, 2011 at

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?

in say Singapore/HK. Any idea how this setup works? Deepak Shenoy July 26, 2011 at 11:50

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.

The advisory route allows the indian entity to charge fees. Kimi October 31, 2011 at 12:11

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.

similar investments made via a company is tax inefficient. Deepak Shenoy November 1, 2011 at 12:53

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.

as well! ANd yes, separation of income should be possible. Taha Merchant July 6, 2012 at

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 have any updates on this?

anyone

yet been implemented or not have any updates on this? anyone PRAMOD AGRAWAL December 2, 2011

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

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

Awaiting a kind reply, I remain, Best Regards, Avisekh Deepak Shenoy January 9, 2012 at 3:17

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 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 January 31, 2012 at 10:52 PM

kunal

January 31, 2012 at 10:52 PM

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

SARVASHWAR February 26, 2012 at 3:30 PM

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

company Vince March 28, 2012 at 4:39 PM Just to update, in case the

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 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. —–

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anirvan April 26, 2012 at 1:32 PM Hi Deepak Wonderful

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?

or is it better to do it with via setting up a legal entity? Deepak Shenoy

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

Hi, 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 June 7, 2012 at 4:58 AM

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-opens-

gate-for-hedge-funds-and-real-estate-funds/25913.html

Thanks

Vikas

Vin January 8, 2013 at 7:30 PM

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?

where do you think I can find a buyer for this company? Deepak Shenoy January 8,

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

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

Guruprasad V

August 18, 2013 at 1:51 PM

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.

returns. What are the implications of tax on returns. Deepak Shenoy August 18, 2013 at 6:23

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.

be interest income if you pay them as a loan of some sort. Guruprasad V August

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. 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.

to investors? Could you throw more light in this situation. Deepak Shenoy August 19, 2013 at

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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