- By Diana Mathias and Vaibhav Gandhi
Ease of Doing Business for MSMEs: India introduced the LLP Act in 2009 and over a decade since its introduction, Limited Liability Partnerships (LLPs) have steadily gained momentum as an alternate format to the traditional form of partnerships and highly regulated form of a company. LLPs have offered the much-required flexibility for entrepreneurs to conduct their businesses along with the protection in the form of limited liability.
However, many startups and entrepreneurs were shying away from the LLP format on account of lack of enough incentives for startups, flexibility in issuance of instruments like debentures, and criminalisation of many procedural lapses like delay in appointment of designated partner, maintenance of registered office, etc. Thus, in a move to facilitate ease of doing business and encourage more entrepreneurs, the government has introduced the Limited Liability Partnership (Amendment) Bill, 2021.
Dealing of offences under the Act
Defaults in the current LLP Act are “punishable with fine” on the LLP and the partners. Fine is the amount of money that a court can order to pay for an offence after the conviction of an accused in a process of the criminal trial. Whereas penalty is the punishment imposed by the appropriate authority for failing to comply with provisions of law where no harm to public interest is caused or no criminality is intended.
Based on the recommendation of the CLC in January 2021, the Bill thus seeks to decriminalise various offences under the Act and has thus changed the provisions from “punishable with fine” to “liable to penalties”. Further, an adjudication mechanism has been introduced for adjudication of penalties under the Act for offences that are not of criminal nature.
Recently, the Union Cabinet also approved decriminalisation of 12 offences under the Act relating to default of procedural compliances like responsibilities of designated partners to file document, return, etc. or appointment of designated partner on vacancy, maintenance of registered office, filing of annual return, etc. The Bill has also reduced some of the penalties from the maximum threshold of Rs 5 lacs to Rs 1 lac for LLPs and Rs 50,000 for partners.
Apart, from the above compoundable offences are reduced to seven offences dealing with the maintenance of books and accounts, default under providing information to registrar or production of information, etc., and non-compoundable offences to three which deal with fraud, intent to deceive, or injury to the public interest. However, if an LLP or its partners carry out an activity to defraud their creditors, or for any other fraudulent purpose, the Bill increases the maximum term of imprisonment from two years to five years for every person party to it knowingly. The Bill also proposes to establish a Special Court under the Act for speedy trials of offences committed under the Act.
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Introduction of the concept of small LLP and start-up LLP
The Bill proposes to introduce the concept of small LLP in line with the concept of small companies. Small LLPs shall be LLPs having contribution not exceeding Rs 25 lacs which can be extended to Rs 5 Crores and turnover not exceeding Rs 40 lacs which can be extended to Rs 50 crores. The concept of startup LLPs has been introduced in the Act. While the definition of a start-up LLPs is yet to be notified by the Government the move is being seen as a boost to the start-up ecosystem whereby start-ups who do not intend to register as companies now have an alternative operating structure.
To incentivise small and startup LLPs, the Bill seeks to limit the penalty levied on the Act for any non-compliances under the act to only one-half of the amount of penalty prescribed subject to thresholds. However, unless tax sops are introduced for small and startup LLPs like they have been made available to small and startup companies, this initiative would be rather lackluster.
The Bill for the first time has dealt with the issuance of debentures by an LLP as a mode of fundraise. These debentures shall have a charge on the assets of the LLP and can be raised from entities regulated by SEBI or RBI. This move will definitely attract institutional funding to LLPs which were resistant in providing funds as there were no laws in LLPs that would provide a secured instrument.
Amalgamation with companies
The Bill proposes to restrict LLPs from amalgamating into companies. Thus, all LLPs who intend to enter into any M&A activity with a company in the future would necessarily have to first convert themselves into a company first and then proceed to amalgamate with another company. This could result in increased timelines and may also derail M&A opportunities.
Currently, it is mandatory to have one designated partner resident in India which means a person who has stayed in India for a period of not less than 182 days during the immediately preceding one year. With Foreign Direct Investment permitted in LLPs for sectors in automatic route, this requirement proved a dampener for foreign investors intending to set base in India.
The amendment now seeks to reduce the number of days to 120 days during the financial year. This may provide some relief for the foreign investors who had difficulty in maintaining one designated partner resident in India.
Accounting / Auditing Standards
A new section 34A has been introduced so as to empower the Central Government to prescribe the Accounting Standards or Auditing Standards for a class or classes of limited liability partnerships in consultation with NFRA constituted under Companies Act, 2013.
The objective of the Bill is to promote the idea of LLP as a body corporate to enable professional expertise and entrepreneurial initiative in a flexible, innovative, and efficient manner. The Bill comprises of long-awaited changes required to facilitate greater ease of doing business for corporates and stakeholders in the industry and particularly decriminalization of offences shall incentivize compliance and promote congenial business climate.
Diana Mathias – Partner and Vaibhav Gandhi – Senior Consultant, N. A. Shah Associates LLP. Views expressed are the authors’ own.