Can a private limited company invest/trade in stock market?

Regardlessless registered with RBI as NBFC or an Investment company, no company can indulge in trading of stocks or derivatives. However, every company is free and well within its right to invest it's funds in securties markets.

For a company to be considered as NBFC, it has to pass the 50–50 test.

For NBFC

1.Financial assets should constitute more than 50 per cent of the total assets and
2.Income from financial assets constitute more than 50 per cent of the gross income.
If the company falls under this test then it will be considered as an NBFC and it has to get itself registered with RBI. Till it is registered, it cannot do trading of stocks and derivatives.

Just asking for clarification : As per RBI 50:50 rules and 10 cr NOF is required to apply for registration. So why cant someone trade in with own fund by incorporating a private limited company. Also if no assets are owned for example all trades are short term and never held for long term also as on 31st march if all the short term trades are squared off irespctive of their holding period or holding is shown as stock in trade rather than investments so it will not qualify for registration. So in this case what do you suggest.

Yes, a company can invest or trade its own funds. The constraints are regulatory and tax, not a prohibition:

• Main objects: check that the MoA permits investment activity. If not, alter the object clause (Sec 13).

• NBFC registration with RBI is required only if financial activity is the principal business, i.e. financial assets are more than 50% of total assets and financial income more than 50% of gross income (RBI's 50-50 test). An idle IT company deploying surplus funds in shares can cross this test, so monitor it each year-end.

• Sec 186 limits: if investments in other bodies corporate exceed 60% of paid-up capital, free reserves and securities premium, or 100% of free reserves and securities premium (whichever is higher), a special resolution is needed.

• Tax: under the Explanation to Sec 73, a company whose main activity is trading in shares has its trading losses treated as speculation losses (exceptions: principal business of banking or granting loans, or main income from interest, capital gains or house property). F&O is non-speculative (Sec 43(5)). Investment holdings are taxed as capital gains (12.5% LTCG / 20% STCG on listed equity).

• Companies pay a flat 22% / 25% / 30% (no slab benefit). Plan accordingly.