Hmm… we have discussed earlier in the thread that if you setup a company only with the purpose of trading, you will end up needing to take an NBFC license.
A company or limited liability partnership (LLP) is created with those wanting their money to be managed being shareholders or partners. Their pooled funds are then used as trading capital. There are a couple of issues with this.
Firstly, an LLP with the objective of investing or trading is not allowed, so people use an alternate objective to create the LLP. This is a clear violation of MCA (Ministry of Corporate Affairs) rules. In the case of a Private Limited or Public Limited company, if more than 50% of revenue comes from financial income (trading), then the company is required to get registered as an NBFC (Non-Banking Financial Corporation) with RBI. One way to avoid this NBFC registration is by becoming a stockbroker and registering with SEBI. Both these registrations come with their compliance requirements, and as a stockbroker, an added cost of having to run a full broking stack as the firm cannot rely on other brokers for trading.
This could also be set up as a partnership firm to avoid the NBFC or SEBI registration requirement, but the issue with a partnership firm is that all partners have unlimited liability. In trading, where potentially there could be unlimited losses, partnership firms are not the right structure for investors.
While running trading through a setup like this allows flexibility in trading and collecting fees, you can’t actively seek new investors in the business promising returns from trading the markets. This would qualify the entity to register as an AIF. Check this SEBI order (Page 14, Point ix) banning the entity and the promoters for actively seeking capital to be invested into the stock markets as an LLP (without AIF license). So at best, if you did create a company or partnership firm, this can be set up only with family (white or allowed) and friends (grey) as a proprietary trading firm (grey). But you can’t actively seek capital from outsiders to manage (black).
There is definitely an NBFC requirement, but unless you reach out to RBI for something or RBI reaches out to you for something or if your auditor doesn’t file the exception report to RBI (which is required if financial income is more than 50%), then you may not get spotted.
Also like @TAXIQ.IN said, whenever RBI spots and asks for registration, they will provide time.
By the way, if this really has to be done, maybe partnership firm is a better option.
Apologies, it sounds like I’m arguing, but I intend to clarify things. How does F&O trading come under investment? Aren’t Futures and Options contracts between two parties rather than assets? If so, shouldn’t the profit/loss be classified as capital gains/losses? My principal business is not the acquisition of shares but underwriting options. Like how a car insurance company cannot consider the policies underwritten as investments, the options I sell are just contracts and not investments.
@TAXIQ.IN Do you have any supporting documents for your claim?
Hey, you can take whatever stance you want. You don’t have to get us to change our view on this.
@somnath248@Bhuvan@ShubhS9 maybe we can get a legal opinion from a leading law firm and post it on Tradingqna. This topic is interesting for our podcast series planned as well. Get a couple of popular lawyers and CAs to talk about everything around this.
That will be a very good initiative…please do this
Also cover the way out if someone has incorporated a company in the discussion…if at all, nbfc license is required for trading derivatives only
Also i was checking AIF cat 3 registration…it says corpus of 20 crore is required…in the definition of corpus they have mentioned " corpus is the total amount of funds committed by investors to the AIF by way of written contract"… Does it mean a minimum of 20 crore is needed to setup AIF cat 3…please guide @nithin
Also let say i got NBFC license , how much tax i could save vs personal tax? How much you think will go to compliance costs? I think with 2 Cr capital we can go for NBFC license
However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be ₹ 2 crores. It is clarified that there is no change in the existing regulatory minimum NOF for NBFCs – IDF, IFC, MGCs, HFC, and SPD.