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Bangalore/New Delhi/Mumbai: The corporate affairs ministry proposes to amend the vintage Indian Trusts Act of 1882 after private equity and real estate funds complained of the uncertainty over trusts investing in limited liability partnerships (Llps).

Most domestic funds are structured as trusts that act on behalf of its trustees. It may not be possible for such funds to be partners in an Llp, and businesses that look at raising capital from such funds have to resort to alternate structures such as investing through private limited companies.

The gazette notification on real estate investment trusts (REITs) and infrastructure investment trusts issued by the Securities and Exchange Board of India (Sebi) on Friday that allows such trusts to invest in Llps only reiterates the fact the amendment needs to take place soon, said analysts.

While the capital markets regulator has allowed REITs to partner in Llps, the Limited Liability Partnership Act of 2008 doesn’t allow a trust to become a partner.

“The corporate affairs ministry has initiated a proposal to amend the trusts Act at the insistence of the department of economic affairs," a government official aware of the development said on condition of anonymity. “The government is likely to insert a clause that will make it legitimate for trusts to invest in Llps."

“With REITs becoming a reality soon, there was a lot of pressure on the department of economic affairs to make this amendment," said a property developer who didn’t want to be named.

Some of the newer real estate funds are finding it tough to do transactions and are hopeful that clarity will emerge soon during a time when there is demand for capital from the sector.

The Llp route has tax advantages and far lower compliance norms compared with private limited companies. An Llp, which can be a corporate body or an individual, gets an exemption on dividend distribution tax (DDT) and minimum alternate tax. DDT, for instance, could wipe off as much as 18-20% from profits.

The alternate investment fund (AIF) guidelines released by Sebi in May 2012 for PE, hedge, venture capital and real estate funds said that PE funds are registered as trusts in India as it is the most tax-efficient model for them to follow. Before AIF, in the earlier regime, trusts weren’t allowed to invest in Llps.

However, the lack of clarity on the matter of trusts investing in Llps emerged more strongly since 2013, when a number of funds, having raised capital, were looking out for investment opportunities and met with the legal hurdle, said an executive from a large trustee firm, requesting not to be named.

“We had met the ministry of corporate affairs about a month back to clarify if private equity funds, majority of them registered as trusts, can become a partner in Llp. The matter is pending with the law ministry," he said.

“After the AIF regulations came in, many people thought it will be convenient to invest in Llps. But with the lack of clarity, many are forced to invest in the private limited company structure," said Anuranjan Mohnot, chief executive, Amplus Capital Advisors Pvt. Ltd, a relatively new real estate fund.

“We anticipated we could participate with developers in their projects which are in Llps. We also re-registered our first fund from the earlier VC (venture capital) regulations to the new and progressive AIF regulations so that we could invest in Llps, that offer operational and other efficiencies," he said.

While businesses that required PE funding were typically carried out through the private limited company model, lately the Llp model has started gaining favour, especially in sectors like real estate, until they met with this hurdle, according to Gautam Mehra, executive director, PWC India, a consultancy.

Khushru Jijina, managing director of Piramal Fund Management, said his company will be careful in adopting such structures for its investments. While investments in Llps may not be easier in any way, it is advantageous for the promoters to incorporate Llps as they have lower compliance requirements and more efficient tax structures, he said.

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