PLC objective, RBI's NBFC norms

I do investments in equity and Algorithmic trading in F&O. Currently i am in higher tax slab and soon enter in surcharge slabs of income tax.
I understand that we cannot open PLC with objective as investment and trading without NBFC license.
Can i open a PLC with objective as ‘Developing software products and services’, trade and invest in stock markets with its surplus cash?. As software products and services will be developmental phase, sales may be zero for initial few years.
Will trading income comes under ‘other income category’?
Will there be any problem in future if sales don’t kickin while other income keep on increasing in parallel?
Do i need to register company as NBFC in future even if it trades with its own money?

@Aishwarya_Shah @Kaushal_Soni can you help with this?

Hey @bharath_kumar

In order to open a PLC with the main object of trading, you’ll require an NBFC license. So, you can go ahead with incorporating your PLC with the main objective of ‘Developing software products and services’ and include trading as an ancillary/ other objective. This way, trading income will be classified as other income in P&L since its not a revenue from operations.

However, since you wont be deriving any income from main objective in first few years, it would lead to your 100% revenue from trading and a Pvt Ltd Co would require NBFC license when it derives more than 50% of revenue from financial activities. Hence, you might face issues in such a scenario.

Hope this helps!

That was helpful! Thanks :slightly_smiling_face: @Aishwarya_Shah .
My objective is to save tax legally without complications. Trading with own funds is somewhat grey area i guess.

  1. For registering PLC as NBFC, net owned funds should be atleast 5 Cr i guess. So can i operate below that limit peacefully without scrutiny of RBI with secondary objective as trading?
  2. Although PLC has flat 25% corporate tax, taking out money attracts tax in hands of shareholder. So effective tax rate is much higher which goes beyond 55 percent. Is there any legal way to take out profits with only corporate tax?
  3. I came to conclusion to open LLP with secondary objective as trading. As per tradingqna forum, LLPs are individualistic and doesn’t much attract attention/scrutiny from RBI/SEBI. Money taken out is tax free in hands of shareholders. Is it the best way?
  4. If i take a car on my name for business purpose now, can it be transferred later to a newly opened company/firm assets to claim depreciation?

Hey @bharath_kumar

  1. You can operate with trading as a secondary objective without any scrutiny from RBI as long as that income does not exceed 50% of the total revenue.

  2. Generally, it is very difficult to take out profits of a company with only corporate tax. Since, the money withdrawn will be considered dividend or deemed dividend tax u/s 2(22) of the Income Tax Act, it will be taxable in the hands of the shareholder.

  3. LLPs do not have the concept of secondary objective/ other objective since LLPs don’t have a Memorandum of Association or any such document. Hence, if you pursue any activity outside the purview of the LLP’s objective, there are always some chances of attracting scrutiny from MCA/ RBI or any other regulatory authority.

  4. Yes, you can take a car on your name for business purpose and later transfer the ownership to the company/ firm and claim depreciation.

Hope this helps!

Hi,

If I open a company for trading in stock market, and I recruit 02-03 team members for doing this trading activity on combined salary of 15 lacs and company earns 20 lacs profit in a year.
The liable tax in this case of the company will be on 20 lacs or on the balance 5 lacs(differential value) only. Pls help.

@Aishwarya_Shah can you?

Hey @Gaurav_Pratap ,

Taxes are calculated on profit (Income - Expense). Hence, the profit will be calculated after deducting the expenses from the revenue.

Hope this helps!

@Aishwarya_Shah

suppose PLC have 2cr surplus and if they only trade in FnO segment with 90-95 lakhs and rest amount will be store in form of FD’s in this case if FnO income constitute more than 50% of gross income then they have to register as nbfc or not.

Because NBFC definition is something like this “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 percent of the gross income.”
And if a company has more than 50% of assets in financial assets, but less than 50% income from financial assets or vice versa, then it won’t fall under deemed NBFC right ?

Also that “Fixed Deposits” are exempted from this definition, for the purposes of being called an NBFC.

Hey @MAULIK_MANDALI

You need an NBFC license if more than 50% of the total income of your PLC is derived from financial activities.

As per RBI, 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.

You can learn more about incorporating a company for trading purpose here

Hope this helps!