More Hurdles for LLPs

As we have previously noted on this Blog, the popularity of limited liability partnerships (LLPs) has not met with expectations since introduction of that business vehicle in April 2009. While the Government has taken certain steps to boost the utility of LLPs, such as by considering the possibility of foreign investment into LLPs discussed in this paper issued by the Department of Industrial Policy & Promotion, more recent steps taken and views adopted by the regulatory may amount to a retrograde step.

First, as the Economic Times reports, it is currently not possible for various corporate groups to restructure their holding companies so as to convert them into LLPs. The reasoning is as follows:

But, corporates planning to convert their holding companies into LLPs have been told by the registrar of companies (ROC) to get a no-objection certificate (NOC) from RBI; and the central bank is unwilling to give one. "There is a concern that the moment a company becomes LLP, it will be out of the RBI radar. These companies are core investment companies and under new rules they will be monitored, like non-banking finance companies (NBFCs), by the regulator," said an RBI official.
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Currently, the definition of NBFC under the RBI Act does not specifically cover LLPs. Only companies registered under the Companies Act can form NBFCs. "We have told RBI that the law has to be changed to enable recognition of LLPs as core investment companies under the NBFC format," said an official in the registrar of LLPs in Delhi. An RBI spokesperson confirmed that the central bank is in discussion with the ministry of corporate affairs on the subject.

The LLP structure was introduced primarily keeping in mind operating companies, and not holding and investment companies.

Although there is no restriction under the LLP Act as to the activities that an LLP can carry out, the lack of acceptance of the new business vehicle under other legislation such as the RBI Act has given rise to such ambiguities, thereby curtailing the utility of the LLP and its benefits.

Second, although FDI into LLPs is being actively considered, it has been reported that there is no momentum to permit LLPs to raise overseas debt in the form of external commercial borrowings:

The finance ministry and the Reserve Bank of India have opposed changes in the external commercial borrowings (ECB) policy to allow overseas borrowings by LLPs, while responding to a discussion paper on this form of business put out by the department of industrial policy and planning (DIPP), the policymaking body on foreign investment.

The ECB regime should be identical to the one applicable for partnerships, the finance ministry said in response to the paper. The finance ministry is of the view that while FDI can be allowed in this form of business entities, but not overseas debt, said a government official privy to the discussions.
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The current policy allows companies to raise ECBs, but sole proprietorship firms and partnerships are prohibited from accessing such debt. Though, LLPs combine features of the corporate form of business and partnerships, they are closer to partnerships. …