Analysts were of the view that the memo would impact not just the government’s efforts towards enhancing ease of doing business, but also the drive for corporatisation of un-incorporated entities.
The ministry of corporate affairs (MCA) on Wednesday withdrew the office memorandum (OM), which directed that companies whose business includes manufacturing and allied activities can’t be incorporated as liability partnerships (LLPs). It may, however, revisit the plan, while being sensitive to the concerns expressed by a section of the industry.
“Manufacturing and allied activities were restricted in LLPs vide OM No CRC/LLP/e-Forms dated March 6, 2019. This OM invoking the restriction regarding manufacturing and allied activities has been withdrawn with immediate effect,” MCA said.
Analysts were of the view that the memo would impact not just the government’s efforts towards enhancing ease of doing business, but also the drive for corporatisation of un-incorporated entities. They also said this could impact more than 12,500 LLPs involved in manufacturing activities, which is around 11-12% of the total LLPs in the country.
The MCA’s central registration centre (CRC) had come out with the OM. It said the definition of ‘Business’ as defined in the LLP Act, 2008, includes trading, profession, service and occupation. ‘Manufacturing and allied activities’ have been excluded from this definition. Consequently, the Registrar of Companies (RoC) instructed officers not to allow incorporation of LLPs or conversion into LLPs with proposed business activities including manufacturing and allied activities.
MCA sources said the ministry will review the OM and come out with the required changes. “MCA might set up a panel that would include officials and representatives from the industry to chart the next course of action regarding the OM,” a senior official said.
Government sources, however, stressed that LLPs are set up for the purpose of carrying out business activities related to the service sector.
The OM had caused widespread concern in the industry. AMRG & Associates partner Rajat Mohan said: “In the era of ease of doing business, this seems to be an overly technical and flawed interpretation of parliamentarian law after 10 years of its operation which would not contribute any tangible benefit corporate governance. Interpretation of the said definition by MCA is totally wrong and the intention regarding exclusion of such activities is unreasonable, illogical and inappropriate.”
Even the Institute of Company Secretaries of India (ICSI) wrote to MCA urging for clarifications. It said LLPs open avenues for those who want to avail benefits of limited liability but do not want to open a company and join hands with one or more partners to conduct a business as an incorporated entity.
ICSI suggested that in case there is an apprehension that manufacturing businesses incorporated as LLPs would become very large and therefore not suitable as an LLP, a threshold limit on share capital or turnover may be considered as in the case of One-Person Company and small companies.