To benefit small and micro units, MCA panel suggests creation of small LLPs

A panel appointed by the Ministry of Corporate Affairshas recommended the creation of a new category of Limited Liability Partnerships (LLPs) – ‘small LLPs’ – for the benefit of small and micro enterprises. This panel, which was tasked to look at decriminalisation of LLP Act 2008, has also suggested that LLPs be permitted to issue non-convertible debentures (NCDs) to entities (body corporate and trusts) regulated either by the SEBI or RBI.

Advantage of LLP

A LLP is quintessentially a hybrid between a Limited Liability Company and a partnership. It has the advantages of being a body corporate, but at the same time internal governance and inter se relations among partners and LLP are regulated by the LLP Agreement and not by any statutory provisions.

If this reform of allowing LLPs to issue NCDs gets Parliamentary assent, then AIFs, including private equity funds, will be able to pump funds into several Special Purpose Vehicles that operate under the LLP structure in the infrastructure and real estate sector, say economy watchers.

The creation of a new category of ‘small LLP’ is expected to enable ease of living for corporates and its stakeholders and also be beneficial for small and micro enterprises as it will reduce the cost of compliance, and subject such class of LLP to lesser penalties in the event of default as has been done in the case of companies under Companies Act 2013.

The panel, headed by MCA Secretary Rajesh Verma, has recommended that LLPs with capital contribution of up to ₹25 lakhand turnover not exceeding ₹40 lakh in a financial year be allowed to opt for small LLP structures.

CurrentlyLLPs are not permitted to raise capital by way of issuance of debt securities. Also, AIFs are permitted to invest in LLP only in the nature of pure equity interest (and cannot provide loans) and are therefore not able to invest in a significant number of infrastructure and real estate projects which have been structured as LLPs. In India, because of regulatory reasons, several infrastructure projects are undertaken as special purpose vehicles in the form of LLP structure, which provide lesser compliance requirements.

Debt markets

Permitting LLPs to issue NCDs for raising capital and financing operations of such structures are also expected to help deepen the debt markets, which are yet to develop in a big way. The panel has also said that LLPs should not be permitted to issue NCDs to retail investors.

The panel has recommended that 12 compoundable offences be decriminalised and one penal provision be omitted in the Act. No serious changes has been suggested in the serious non-compoundable offences provided under the LLP Act.

G Ramaswamy, former CA Institute President and a member of the MCA-appointed panel, said that allowing LLPs to raise monies from controlled resources through NCDs will help them and enable growth of several mini corporates in the country. Implementing the recommendations of the panel can be a great initiative for growth of business of start-ups and first-time business entrepreneurs, he added.

Amarjit Chopra, former President of ICAI and member of the MCA panel, said this will promote the growth of LLPs in the country and ensure that people are not scared to convert either private limited companies into LLPs or partnership firms into LLPs.