Sunday, July 19, 2015

Limited Liability Partnership no good for banks

Last six months have been harrowing for a few SMEs who registered as Limited Liability Partnerships with the hope that they would sail more comfortably in their financials with equity and debt in good balance. But all of them faced the wall when they approached the financing banks for working capital loan. They advised these entrepreneurs to convert into private limited companies or partnership companies where the liability is not limited.

You can find the edited version of the article in the Hindu Business Line of 17th July.

One firm engaged in promoting processing companies registered their Development Finance Company a s LLP and when they approached the RBI for recognition as NBFC, the RBI said that they do not recognize the business form. No wonder that the financing banks too are showing the door to the SMEs. Another firm engaged in skill building and financial literacy also did not find favour with the financing banks.

The number of LLP registrations as on 28th May 2012 (this is the latest data on the website of the MCA) is around 10000 enterprises with the western region accounting for the maximum slice at around 44% with southern region taking the next major slice of 24%. The other two regions take the balance.

World over very many servicing firms, law firms, accountancy firms, consultancy firms of great repute like the Ernst & Young, Deloitte and Touche, Pepper Hamilton and even some investor companies have embraced the LLP form of business. They are all doing business in India and having dealings and consultancies with the financial institutions.

After the MSME Development Act came into being in 2006, I was one of those who argued in several forums and through several columns for LLPs to be recognized as licensed business form and for setting up the SME bourses. Both materialized but with little progress.

How does LLP facilitate? How does it secure the interests of the lender and borrower alike?
LLP shall be a body corporate and a legal entity separate from its partners. This form of business organization is flourishing in UK, USA, Australia, Singapore and some gulf countries as well.
Limited Liability Partnership Act, 2008 when introduced brought lot of hope to the SME sector riding mostly on Debt till then. This new body incorporate was supposed to facilitate equity flow to the sector. Seven years down the line, this form of business seems to have not found favour with the intended group of clientele.

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. It is a separate legal entity liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. The firm’s liability to the creditors does not extinguish.
While a joint stock company has its governance structure regulated under Companies Act 2013, in the LLP internal governance is dictated by a contractual agreement between the partners. There is no divide between the management and ownership. LLP has more flexibility compared to the company. The compliance requirements though fewer than the private or public limited companies, they go as per the prescriptions of the LLP Act and the Union Ministry of Corporate Affairs regulates it. An individual body corporate can also be a partner in LLP.

Every LLP shall have at least two “Designated Partners” mandatorily. “Designated Partners” shall also be accountable for regulatory and legal compliances, besides their liability as ‘partners, per-se”. Every Designated Partner would be required to obtain a “Designated Partner’s Identification Number” (DPIN) from the MCA.

Partner’s contribution may consist of both tangible and/or intangible property and any other benefit to the LLP. Every partner of an LLP would be, for the purpose of the business of the LLP, an agent of the LLP but not of the other partners. The liabilities of the LLP shall be met out of the properties of the LLP.

A “Statement of Accounts and Solvency” in prescribed form shall be filed by every LLP with the Registrar every year. The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009. It is strange that banks see undue risk in these businesses that have well built regulatory architecture.

The fact that the Ministry’s website contains only data of registrations till 2012 indicates either its lack of seriousness in this form of enterprises or that there were no registrations at all later. At a time when inclusive growth is talked about and Make in India  making headlines everywhere it is perhaps time to look at our structures and ensure that they get due status in the business map of India.