One of my client is planning to set up a company wherein he will take money from friends, relatives etc. and invest in stock market. Further he would pay a guaranteed return to the person who has given money. The trading will be on company's account and the proceeds after paying guaranteed returns will be earned by the company. The trading can even be made on clients own account instead of company's account.
My question is whether the company will have to take any registration, approval under any Act applicable in India under both the cases: 1. Company invests money on its own account OR 2. Company invests money on its clients account
20 July 2025
Hey! Your client’s plan to pool money from friends/relatives and invest in shares with guaranteed returns involves some important legal considerations.
Here’s a breakdown for the two cases:
1. Company invests money on its own account (using pooled funds) Is this allowed? Generally, raising money from the public or friends with a promise of guaranteed returns can be seen as a Collective Investment Scheme (CIS) under SEBI regulations. Registration required: If your client is raising money from the public or a group of investors with a promise of returns, it requires registration/approval from SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999. Operating a CIS without SEBI registration is illegal and can lead to penalties. If the money is borrowed as a loan or advance from known persons without a promise of guaranteed returns or collective investment scheme structure, the company may operate but must be careful about regulatory implications. 2. Company invests money on clients’ accounts This typically makes the company a Portfolio Manager or Investment Advisor. Registration required: The company must register as a Portfolio Manager or Investment Advisor with SEBI under the SEBI (Portfolio Managers) Regulations, 1993 or SEBI (Investment Advisers) Regulations, 2013. Managing investments on behalf of clients without registration is illegal. Important points: Guaranteeing returns is generally not permitted in capital markets and raises regulatory red flags. If your client promises guaranteed returns, SEBI may classify this as an unauthorized CIS or a fraudulent scheme. Before proceeding, consult a legal expert on SEBI laws to avoid running afoul of regulations.
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