Limited liability model ideal for renewable energy firms

It is common in the renewable energy industry that each power generating project is under a separate special purpose vehicle.

Bankers are more comfortable to lend to a ring-fenced project that they have assessed as viable, rather than to a holding company that may have a plethora of projects.

Thus, you have a renewable energy company with a dozen subsidiaries, all ‘private limited companies'.

Now, under today's regime, it make a lot of sense to convert these ‘pvt ltd' subsidiaries into limited liability partnerships, says Mr M Muralidharan, Associate Director – Tax & Regulatory Services, Ernst & Young.

He lists several advantages of a LLP over a ‘private limited' subsidiary, in this context.

Dividend distribution tax

For instance, LLP is not required to pay a dividend distribution tax – a straight 17 per cent saving. The LLP can draw its accounts on cash basis, rather than accrual basis (mandatory for a company).

This means that if the generating company expects incomes (from carbon credits, renewable energy certificates etc) next year or later, it does not have to take them as income this year and pay taxes on them.

Entitlements to benefits

Furthermore, for a LLP, the entitlement to economic benefits need not be in the same ratio as shareholding.

For instance, a company may have 26 per cent stake in a LLP and yet be entitled to only one per cent of the dividends. This in particular is relevant to captive renewable energy subsidiaries—a shareholder consumer would need to have 26 per cent stake in the generating company.

Earlier, a company that had foreign direct investments could not make investments in LLP subsidiaries, but that is now gone.

Today, there is no such restriction.

Outlining these features of LLPs to the Indo American Chamber of Commerce last week, Mr Muralidharan also said that the flipside of LLPs is the perception of banks and governments.

“But these are initial hiccups; long term is clearly LLP,” he said.

Industry reaction

When Business Line asked some players in the renewable energy industry about this, what came across was that the industry was not too aware of the LLP advantages. Those who are, have yet to think it through.

“We need to deliberate on it,” said Mr G Suresh, CEO & Managing Director, Auro Mira Energy Company Pvt Ltd.

Orient Green Power Ltd said it had earlier looked at converting its private limited subsidiaries into LLPs but had given it up due to the limitations on forming LLPs where the parent is a FDI investee.

“Now, it looks feasible so we are re-examining the advantages,” said Mr T Shivaraman, Vice-Chairman, OGPL.

“In the original avatar, LLPs were exempt from MAT which was an additional advantage. This seems to have been removed,” Mr Shivaraman said.

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