Trading F&O via LLC or Pvt Ltd


#1

Hi,

Can someone please comment if a NBFC license is required if the sole purpose of forming a company is to use it for trading F&O segment ? This will be investing/trading only money recieved from the directors.

Would be grateful if @TAXIQ.IN or @nithin can clarify if a NBFC license is required to open a trading account in the name of the company and would there be any issues if the company has no other operations except to trade derivatives in the market to generate non-speculative business income


Is it necessary to register as an NBFC when forming a company to trade in the markets?
#2

More over you will be paying double income taxes and compliance issues.

If your company makes profit it should pay 33% income tax. Net profit if paid as dividend then Company should pay 15% dividend distribution tax.

If you receive salary that is also taxed at your slab rates. Highest is 33%.

You have to appoint company secretary if it is Pvt. ltd. Additional returns to be filed with MCA charges also apply. Need to conduct board meetings and maintain records.

Other licenses from local authorities, paying of ESI, PF. PROFESSIONAL TAX, Fire license etc are mandatory.

If it is your personal trading business it would be the best.


#3

Thanks @haribabu: My main concern is that if I trade a lot using my company’s accounts it will add to the turnover of the business. I want to seperate it from my regular business turnover. Can you please comment on the requirement of NBFC if you know ?


#4

NBFC license not required if you are trading for yourself. That is required if you need to lend money.

Zerodha itself got NBFC only recently and they are doing prop. Trading for years


#5

I am a bit confused when I read https://www.rbi.org.in/scripts/FAQView.aspx?Id=81

To me its not clear - but I take your point on prop trading. Maybe @nithin can share his experience doing so as well.


#6

NBFC Licenceis not required to trade in F & O Segment. Trading can be Object of the company .


#7

Thanks @TAXIQ.IN - The main purpose of doing so is to prevent scrutiny into the files of operational business because of high business turnover vs profit when trading F&O. Do you think setting up a seperate company helps in ring fencing the transactions of F&O in the books of the company ?

Also can you kindly please suggest what is the most appropriate structure if all the capital will come from directors of the commpany ? Should it be a partnership, LLC or pvt ltd ?


#8

Is there any issue trading with personal name?


#9

If you are yourself planning to do this alone then OPC is the best idea.


#10

What is OPC ? The issue is to avoid harrasment by tax scruiny.


#11

One person Company LLC.

Partnership firm is the best. All else will be having more compliance issues


#12

Hmmm… there is absolutely no issue on how much turnover you generate, as long as you file your ITR on time. You can do it in your personal name itself. NBFC won’t help in anyways, NBFC will actually be a lot more painful - since you are regulated by RBI as a NBFC. NBFC is for lending money, not for trading the markets.

If you really want to separate it out (which is not required), create a LLP and trade through that. Btw turnover when filing ITR as a trader is not contract turnover but sum of gross P&L. Check this.


#13

Oh wow ! Thanks @nithin. I thought that turnover is the sum of sells of contract value.


#14

So @nithin @TAXIQ.IN , when the turnover is calculated in the contract note for stamp duty etc - is a different method than that used for calculating for the purpose of income tax ?


#15

Yeah I checked - its very well documented in Zerodha Varsity.

“But it is not the contract turnover the IT department is interested in; they are interested in your business turnover.”

And the business turnover (for futures only) = The total of favorable and unfavorable differences shall be taken as turnover

Hence if I do 20 nifty futures trades that generates a total PNL of 10000 - it will be the PNL which is the turnover.

In that case, one question remains, given PNL is the turnover, the profit/loss will always be 100% of the turover if we trade only futures ? So in that case we never need an audit ? Any thoughts @TAXIQ.IN or @nithin


#16

@abbanerjee you are going to be Future Competitor of Zerodha ?


#17

Do go through the entire module to get a better context of taxation.

If you buy and sell 10 lots of Nifty at around 10000. Your contract turnover is 1.5 crores. This is on which stamp is charged.

But if you buy and sell and say make a loss of Rs 10k, your turnover for IT calculation of audit is Rs 10000.

Turnover calculation when trading is only to determine if you need an audit. As an active trader, I think it is best for everyone to get their statements audited. Quite a simple process, explained in the module again.


#18

Okay @nithin - thanks for your attention on this.


#19

LLP/ Partnership firm will be better than a Company as there are restriction on fund flow in the company. Scrutiny are system generated , you wont able to avoid , you need to make policy clear and been in trading , the books are clean unless you play with it as its organised industry.


#20

@nithin Nithin, I am planning to form a LLP company to trade only Futures, Options and commodities ( no stock investments/trading) 95% would be day trades and trading with company directors money. I am in same doubt whether it required NBFC license to trade FnO segment and I am not clear about it. I found this link 50-50 rule says it requires license if gross income more than 50% from asset generation. Can you please help.

Here is the link https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92

  1. What does conducting financial activity as “principal business” mean?
    Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.