New Delhi: The ministry of corporate affairs, through the issue of two circulars, has allowed chartered accountants (CAs) to form limited liability partnership firms, or LLPs.
The circulars have removed the ambiguity around the terms “partnerships” and “body corporates”, which would otherwise have required amendments to the Companies Act, 1956, and the Chartered Accountants Act, 1949.
An LLP is a business structure that combines the limited liability benefits of a company with the flexibility of a partnership.
India allowed LLPs to be set up in 2008 and, as of 30 May, had 4,989 of them.
“The idea is to allow CAs to form LLPs without waiting for (the legislative) amendments,” said a senior ministry official, who did not want to be identified.
CAs currently function as partnership firms where they cannot have more than 20 partners.
“Besides having more than 20 partners, CAs will be able to enjoy the benefits (associated with) LLPs,” said this official.
Meant to be especially beneficial to professionals such as company secretaries, cost accountants, lawyers and venture capitalists, besides CAs, LLPs have had limited appeal due to regulatory hurdles such as their treatment as “body corporates” (companies) and the lack of clarity on tax issues, among other things.
“Under the Companies Act, an auditor cannot function as a body corporate, but only as a partnership firm,” said G. Ramaswamy, president of the Institute of Chartered Accountants of India (Icai). “The ministry’s circular has clarified (that) an LLP, which is a body corporate by definition, will allow auditors to function as LLPs, which is a big relief.”
The ministry has clarified that CA LLPs will be treated as body corporates for the limited purpose of section 226 (3) (a) under the Companies Act, according to a circular issued by the ministry last week.
An earlier circular by the ministry had clarified that an LLP is a partnership and its members are partners. This applies not just to CAs, but also company secretaries and cost accountants, therefore widening the scope for these professionals to form LLPs even before the respective acts governing them allow this.
More needs to be done, said Harinderjit Singh, partner at Price Waterhouse, an audit firm affiliated to PricewaterhouseCoopers, while welcoming the ministry’s move.
“Professional bodies should expedite the changing of their rules and regulations to usher (in) the concept of LLP in the interest of their members,” said Singh.
He added that there needs to be a focus on the concept of multidisciplinary practice (MDP) to make LLPs attractive and efficient vehicles for various types of professionals.
Amendments to three Acts governing Icai, the Institute of Company Secretaries of India and the Institute of Costs and Works Accountants of India will allow them to form such MDP LLPs, which will help them offer multiple services under one roof.
“This will help these professionals work together, yet be responsible to their own institutions,” said the ministry official cited above. “For this, I guess, professionals will have to wait for amended rules.”