Will amended LLP Act give start-ups a boost?

Pallavi Mishra/Trisha Shreyashi | Updated on September 08, 2021

A ray of hope for smaller firms   -  iStock

The changes are projected to deepen the bond market, enhance tax efficiency and improve ‘ease of doing business’

The government shepherded the Limited Liability Partnership (LLP) Amendment Bill, 2021 through Parliament in an attempt to provide an impetus to the ‘ease of doing business’ reforms. The amendment follows the recommendations of the Company Law Committee (CLC).

It is essential to understand that an LLP, by virtue of its structure, enjoys the benefit of fewer compliance and due diligence laws compared to a corporate governed by the Companies Act, 2013. Through this amendment, the legislature aimed to enhance the internal adjudicatory mechanism along with decriminalising certain offences. Further, it has widened the scope to raise capital through the issue of non-convertible debentures, introduced auditing standards, special courts and a class of Small LLP as a parallel to the small corporates under the Companies Act.

Earlier, the Act made contravention of compliance, like failure in notifying partnership alterations, change in registered office, filing statement of accounts, and notifying arrangements and amalgamation of LLP, punishable with fines under the ambit of criminal law. The amendment has decriminalised some of these provisions substituting the fines and punishment with monetary penalty.

The CLC, relying on the basic principle of gravity of offence, recommended the decriminalisation of minor and non-substantive omissions and commissions to ease the apprehensions of investors and involvement of the partners in initiating a start-up business and continuing it as a going concern.

Alternatively, the adjudication of these decriminalised offences shall be shifted to an ‘In-house Adjudication Mechanism’ (IAM) to reduce the burden on criminal courts consequently speeding up the process, and saving the resources of the partners involved.

Moreover, for a better adjudication process, the amendment also mandates the establishment of Appellate Tribunals, and Special Courts for speedier trials. This amendment is also in line with the idea of establishing a “self-regulatory organisation” allowing for better resolution of disputes.

To further streamline the categorisation of offences, the Bill has omitted provisions for offences that already fall within the contours of existing laws. For instance, non-compliance of quasi-judicial orders will now be dealt under the contempt jurisdiction of the tribunals formed under the Act to adjudicate and resolve corporate civil disputes. The underlying objective for this is to ensure that the LLP is not subjected to double jeopardy while also easing out the procedural knots in offences under the business regimen that do not involve any mala fide intention.

While the amendment frees LLPs from minor compliance breach, it continues to deal firmly with offences entailing the elements of fraud and public interest (as the Act now allows for the issue of debentures to raise capital). Such serious and non-compoundable offences include furnishing false material statements, misappropriation at the time of incorporation, and acting with the intention to defraud. The amendment makes fraudulent activities liable for higher penalties by increasing the maximum imprisonment from two to five years, thereby protecting the interests of transacting parties and the public resources.

Vital concept

The addendum also introduces a vital concept of ‘Small LLP’ wherein it has extended the turnover per financial year from ₹40 lakh to ₹50 crore. It has been introduced to expand the risk appetite of the LLPs, thereby increasing their expected profit margins. This will push the idea of turning an LLP into a company upon achieving high turnovers, thereby generating employment opportunities as well in the long run.

Fewer compliances, lower costs and smaller penalties address the previous cumbersome framework and boosts entrepreneurial growth. To further introduce a uniform method of financial diligence, Section 34A lays down accounting and auditing standards to be deliberated upon and recommended by the Institute of Chartered Accountants of India.

Further, this amendment authorises LLPs to raise capital by issuing secured non-convertible debentures (NCDs) to corporate bodies and trusts. Formerly, the legislation was silent on whether LLPs could raise borrowed funds by way of loans and issuance of debentures, a la corporates registered under the Companies Act do.

This route is beneficial for small firms with large investment requirements. In fact, preferred entrepreneurial hubs like the UK and Singapore also allow LLPs to raise funds via the NCD route. NCDs are not only a structured mode of raising funds but are flexible compared to loans. It must be noted that such issuance is restricted only to SEBI and RBI regulated bodies in order to safeguard the interests of investors. This might, however, be perceived as restricting individual participation and an impediment to ease of doing business.

A cursory glance at the amendment sheds a ray of hope among start-ups and smaller corporate entities. Earlier, the authorities had opened up the LLP for foreign investment via the automatic route. This amendment is projected to deepen the bond market, and enhance taxation efficiency, thereby furthering the ease of doing business. It remains to be seen if the plethora of reforms plays out in finally making India a corporate haven, or, the alleged ill-timing complicates the structural dynamics.

The writers are lawyers

Published on September 08, 2021

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