Limited liability partnership (LLP), the new business vehicle that the government introduced a year ago, is moving from one hurdle to another. While Budget 2010-11 has cleared the way for small companies to convert into LLPs through capital gains tax waiver, the commerce and industry ministry is now having second thoughts on allowing FDI in LLPs.

The corporate affairs ministry, which pinned high hopes on the LLP structure’s ability to drive businesses, especially ventures of professionals, was sure the model, adopted globally, would be a runway success in India. Though it said half the 9 lakh registered companies would want to become LLPs, only 1,041 LLPs have been registered in the last one year. The LLP structure has the twin benefit of operational flexibility of a partnership firm and the limited liability of a company, in addition to significant tax incentives.

According to official sources, the government has decided to put the proposal for allowing FDI in LLPs in the freezer. “Although, a discussion paper to allow 49% FDI in LLPs in select sectors has been floated, the view among the economic ministries is to keep it in abeyance for sometime.

If 49% FDI is allowed in LLPs, companies converting themselves into LLPs will have to bring down their FDI limit in the case of sectors with a higher FDI limits or those without any cap,” a senior official in the department of industrial policy and promotion (DIPP) told FE. For example, in the IT sector, where 100% FDI is allowed, any foreign investor with more than 49% equity in an Indian IT company that proposes to be an LLP would need to bring down his stake to 49%. The official said the government cannot end the dilemma by allowing the same level of FDI limits for companies and LLPs, as it is guarded about the new business structure.

“The other reason working against the FDI in LLPs is that the government is not in favour of 100% FDI in LLPs, as these businesses are still new in India and their control should effectively rest in Indian hands,” said a source. Moreover, officials also feel that an FDI regime for LLPs, different from that for companies, could lead to complications.

So, the government is buying time to get a better grasp of FDI operations in LLPs. In the interim, it wants the control of these new business organisations to remain in Indian hands.

Further, conversion to LLPs would be discouraged to an extent through stamp duties levied by states.

India allows FDI in companies subject to sectoral caps, but does not permit foreign investment in partnerships firms. However, sole proprietorship firms can have investment from non-resident Indians on a non-repatriable basis. Most countries allow 100% foreign investment in LLPs though there are restrictions on their activities in certain sectors. The government had notified the LLP Act on April 1, 2009.

As the name suggests, in an LLP, partners’ liability is limited to the extent of their stake in the LLP. Unlike partnership firms where the number of partners is limited, an LLP can have unlimited number of partners. Besides, LLPs are not burdened with many cumbersome compliance requirements such as meetings and maintenance of statutory records.

LLP is a legal entity separate from its partners. It can own assets in its name, sue and be sued. LLPs are taxed on the lines of general partnership firms.

Source: Indian Express Finance

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