The Limited Liability Act (LLP Act), which was notified about two years ago, was welcomed as an effort to provide a structure, shorn of the unpalatable burden of unlimited liability and restriction of numbers under the Indian Partnership Act, 1932. Recommended by the Naresh Chandra Committee in 2003, LLPs were largely intended to provide relief to professionals, many of whom are precluded from operating as companies, under the restrictions imposed by the specific regulations governing their activities. However, with the introduction of the Bill and its passage, the LLP appears to be projected more as an investment option for entrepreneurs, and an alternative to a Company, rather than the partnership model.
I recall writing in this same column at that point of time that the LLP appeared to be the perfect structure – deregulated, transparent, and flexible, tax friendly and low risk. Two years later, with FDI being permitted in LLPs, it’s time to step back and take stock whether the LLP experiment as a business vehicle or otherwise has worked.
There have been instances of legal as well as and other advisory practices being converted or structured as LLPs. Many LPOs have adopted the LLP model, but large law firms, which have been protesting against the limit of 20 members, continue to operate as limited partnerships, with several retainer “partners” on the rolls. While small IT businesses have gone the LLP way, the large IT behemoths which aim at global listing are understandably reluctant.
Notwithstanding permitting FDI, there have been initiatives by regulators/ and the Government, which appear to indicate that the rosy hues around the LLP Model are fading. Last year, several provisions of the Companies Act were extended to LLPs under the concept of “Body Corporate”, which as per the Companies Act covers all ‘Corporations’ – except those specifically excluded. The LLP Act itself accepts Body Corporates as members and adopts the Companies Act definition in treating a LLP registered under the LLP Act as a Body Corporate. This reinforces the impression that the LLP is a company for all practical purposes, except in relation to its internal governance structure.
A MCA Notification dated January 06, 2011 has extended to LLPs the Companies Act regime for dissolution, which involves the entire procedural gamut of compliances and inherent delays with the involvement of the Official Liquidator’s office at all stages. Yet the Finance Act, 2009 provided that LLPs would be taxed as a partnership. But from 2011, Minimum Alternate Tax is made applicable to LLPs, thereby sending out a contrary signal.
LLPs have also tried to break the bastions of the sectors in which only limited companies can operate. On a plain reading of its regulations, the NBFC sector is one such. Section 45-1(f) of the RBI Act defines NBFCs as ‘companies’, whether financial institutions, banks or otherwise, unless specifically notified to the contrary. The net owned fund criteria and the minimum capitalisation norms are on similar lines. So far, LLPs aspiring to engage in or migrate to NBFC activities have not received RBI’s permission. And in view of the limitations on FDI, such approval may continue to be withheld. And not without reason, as the accountability is far less. The May 27 amendments which revised the guidelines on entry of NBFCs into Insurance Business refer to only ‘companies’ and not ‘Body Corporates’.
The FDI route has several riders, being permitted only in sectors where 100% FDI is allowed that too with FIPB permission. LLPs in NBFC, Real Estate, Urban Development, Infrastructure, and Construction have been excluded. LLPs with FDI will not be permitted to make downstream investments. However, existing foreign owned Indian companies may make downstream investments, only if the investor company and the LLP are both operating in sectors under the automatic route. The restriction on accessing foreign debt on LLPs continues, which is again a disincentive.
The approach is cautious and conservative, but does not dispel the existing ambiguities nor anticipate and address potential ones. LLPs are not intended to and cannot be a substitute for large corporations. LLPs are meant for SMES, and also for regulated professions. Whether it is possible to distinguish them within the four corners of the existing law, on the lines of private and public companies, is a thought that comes to my mind, though as of now, a LLP could provide legal services and manufacture cars under one umbrella. Tax issues may need to be revisited as well. To conclude, the LLP regime is rendered meaningless, without its own dissolution structure. Piggybacking on the Companies Act will not work.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at
kumkum.sen@bharucha.in
