Actually prop desk can be set up as llp because they take memberships from exchange and are subject to sebi regulations ,not in purview of RBI.
Yes I got to know the same thing from people who registered earlier. Memberships for prop will make the setup costs far too excessive something like 50L just for deposits+ networth and other checks. Also I do not understand how props charge fees from clients?as in what business model they have once profits have been made on client accounts even with an alpha membership on nse. Right now Iâm planning an alternative like sub brokership model and then managing funds later on.
@TAXIQ.IN @nithin Iâve read through the whole thread. Seems itâs possible to trade F&O with own funds as a company but NBFC license is still ambiguous.
I wanted to do it as a Pvt Ltd and was considering OPC (lesser compliances), but name/objective has been rejected by ROC, saying financial activities need license. So is the idea to be vague in objective OR any F&O trading even with own funds is not allowed without NBFC license if trading constitutes > 50% of income ?
Trade at individual level with own money - lowest compliance cost and hassles. All other options below will add incrementally and significantly to compliance cost and time.
Trade at individual level with others money - not legal unless one registers for appropriate fund manager licenses from SEBI.
Trade as Pvt Ltd with own money - Register as NBFC (we fail the 50:50 test) unless we have another significant revenue source or we are a stock broker. RBI to appease.
Trade as Pvt Ltd with others money - Fund management licenses required from SEBI
Anything related to LLP lets say its grey area for now to our knowledge and not as clear as a Pvt Ltd company. As others have mentioned here we may not even be able to register as an LLP for doing exclusive proprietary trading.
Hope this helps.
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hmm i think if you take exchange membership you can incorporate as llp.
You will have to first go through MCA to incorporate as LLP. Only then you can become a member of the exchange in the LLP name. This means the MCA could look at the proposal as a violation of RBI notification.
We are a Pvt Ltd company. There was this idea to have a proprietary trading desk when we started. But then we realized the legal angles to this so we donât do any such activity. We trade on our individual accounts only.
have you already incorporated it?
Ya we started as a Pvt Ltd Company in 2011
Since Sub Brokers also come under SEBI, Can a Pvt Ltd Company which is registered as a Authorized Person with a Broker do Trading? @nithin
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Sub-broking concept was removed many years back by SEBI. Now there are only Authorized persons (AP). APs donâtâ register with SEBI and only with exchanges. So no, being an AP wonât work.
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Is it a big hassle to comply with RBI rules for NBFC which does F&O trading only with shareholderâs equity and loans from shareholders (no loan from anyone else)
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What are the major hurdle in doing F&O trading in PVT Limited companyâs trading a/c. Here it is assumed that this PVT Limited company has no other activity and it has not borrowed from public (just borrowed from shareholders only).
Check this
Thanks Nithin. Went through the article.
My objective to trade in the form of a company is to avail lower tax rate of 25.168% for a company against upto 42% for individuals. To manage other peopleâs money is not at all the objective.
Somewhere you have mentioned that when we draw money from the company in the form of salary or dividend or interest, shareholder has to pay tax on that. True. But still the overall tax would be lower because salary and interest are business expenses for the company and these things are not significant compared to the amount of profit generated by the company (we want to form company due to yearly profit in the range of 5-10 cr currently). Only dividend is not a business expense. So the idea would be to minimise the dividend and get the needed funds through interest on shareholder loans and salary. Personal expenses do not generally need a large amount of funds. In cases like buying real estate etc., such assets can be bought in companyâs name with company funds.
If NBFC compliances are not too cumbersome or costly, then it would be more tax efficient to trade in the form of a company instead of individuals.
Your thoughts please.
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There are many hoops and chains to go through to get an NBFC. And there are some internal contradictions as well when you are starting as a new company.
For instance when you file with the ROC for a Pvt Ltd with purpose of business as âF&O tradingâ anywhere in the AOA, ROC will ask for the Reserve Banks NOC for NBFC. At the same time if you need an NBFC license from RBI, you need to submit your CIBIL credit report. And to get this report you need to be in operation and your books need be older than 1 year.
IF you are considering NBFC as a tax-dodge only, you will face many unsavoury regulations and a winding road along the way. The tax benefit is definitively attractive, but these are provisioned for genuine NBFCs that are running an NBFC business. That is the nature of regulations in the first place to discourage operators with ulterior motives. More so when RBI gets involved.
- At least one of your MDs (or senior staff if you have any staff) need to have an NBFC background
- You need to maintain a net liquidity of 2 crs. Meaning you need to keep atleast 2 crs in your bank account at all times and not touch it.
- Your company will need a CIBIL rating as mentioned above. Which will warrant normal NBFC like and highly credible operations and has got a set of its own requirements.
- To Keep up with the regulations and compliance requirements, you might end up incurring cost of having and office, some staff, CAs & CS etc and a reduced liquidity, that might as well negate the whole purpose of tax benefit in the first place.
- You could consider combining F&O trading with your other businesses (if you have) and if your other business is worth more than 50% of companyâs total assets and income, you donât even need an NBFC license since you dont fall in the 50-50 test.
- You also could consider registering a company for some other purpose, operate it for some time and later convert it into an NBFC
Do not consider this as an expert advise and Iâm not an expert in this field but has gathered this much while researching this for my own need. If you are serious about this, you should consider contacting the âmost Jugaadoo CAâ in town and get some clinical advise 
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Thank you very much Rejeesh. This is indeed a comprehensive information that I needed. You have saved a lot of my research time.
In short, the current laws donât consider FnO trading as a worthwhile business to be encouraged to work in company form. I have no intention to do âjugaadâ. Would rather pay higher tax until they either reduce tax for individuals or they allow company to do FnO trading without having to become NBFC.
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to further shorten to the crux of it. "There is no way to not pay tax for an ordinary citizen.
" Glad to see that was helpful
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Actually there is one more thing if you get approval from roc and your company is been set up, Sebi does not have any issue with this ,roc has registered company ,problem will arise if RBI considers your company as deemed nbfc which is very unlikely and I am not a lawyer but donât think rbi will seize your funds or do much harm to you unless you do something against spirit of law like asking deposits from public and all this kind of stuffs.
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Wouldnât that be against the letter & spirit of the law?
Although, I genuinely see this as a gap in our corporate laws. An AIF with 10 Cr. capital is allowed a free run, but with 2 Cr. capital, one is stuck being an NBFC OR enter the grey area and be susceptible.
it maybe , maybe not . But the law was not made for this purpose. The thing is if you want to do nbfc activities you canât do it in individual name or propreitorship , you have a form a company and then need nbfc license. Unlike managing own money which you can do in any srtucture you want . So if some individual fund manager managing his funds needs to form a structure in form of corporation to manage his funds ,there shouldnât be any issue. Law canât restrict an individual to limit his liability by forming corporation for legal business objective. And with reference to markets all sorts of licenses are only required when managing outside capital , so there was never an objective to restrict individual for forming company. And practically i donât think rbi will pay a heed if someone his trading his own money in markets without nbfc license specially when the amount is very small like five or ten crore.
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