LLPs may get till June to reform governance2 min read . Updated: 22 Feb 2021, 06:17 AM IST
Parliament has okayed the corporate affairs ministry’s amendments to the limited liability partnership law
Limited liability partnerships (LLPs) in India will get two to three months to disclose ownership and improve governance after a set of proposed changes to the LLP Act are notified, a person aware of the development said.
The corporate affairs ministry has already got Parliament’s approval for the amendments to the LLP law, the person said on condition of anonymity, adding the ministry wants to give time till May-June for their implementation, given the extent of changes.
Also Read | How to make India’s bad bank workable
The LLP Act amendment aims to make the key governance principles currently applicable to directors on companies—a legal form subject to higher governance standards—applicable to the so-called designated partners of LLPs with suitable adaptations, the person cited above explained.
One key change would be restricting the number of LLPs in which one can be a designated partner. Right now, there is no such limit. In the case of companies, there is a limit of 20 directorships one can hold, the person said. Unlike apartner in an LLP, who is only required to bring in money, designated partners are responsible for its management and compliance like directors on company boards.
“The other big change is lifting the corporate veil on LLPs. They will have to disclose the beneficial owner—the ultimate natural person behind layers of LLPs. The opaqueness of ownership will not continue. This does not add compliance burden but addresses some governance gaps noticed in this legal form of doing business," the person cited above said.
Because of the flexibility allowed in the way an LLP can be structured and the benefit of limited liability—partners’ personal wealth is not at risk if the firm fails—it is a popular business vehicle for consultancies and micro, small and medium enterprises.
According to Divakar Vijayasarathy, founder and managing partner of DVS Advisors LLP, the changes will have a positive impact on the functioning and operational efficiency of LLPs, as powers of key commercial and management decisions vest with the designated partner.
“The anticipated window of 2-3 months for a person to resign as a designated partner in LLPs beyond 20 would be feasible considering the simplified procedural compliances involved and the fact that a person might not be a designated partner in these many LLPs keeping in mind the role and responsibilities of a designated partner. The person can still continue to be a normal partner of an LLP as the restriction is only on the designated partner," said Vijayasarathy. He also said the reporting of beneficial ownership will ensure transparency.
The ministry will now issue a notification introducing the changes. According to the person cited earlier, under Section 67 of the LLP Act, the government must place the draft notification in Parliament and get it cleared by both Houses. It can be given effect after a month, subject to the changes suggested by Parliament. The ministry has now received Parliamentary nod for the notification, but will give time for LLPs gear up for the change, the first person quoted above explained.
The other changes expected are in the area of disqualification of designated partners, government’s power to seek information, inspect books and conduct inquiry.
The ministry wants to make these entities more transparent and be subject to greater oversight. It is also in the process of making LLPs more conducive to today’s business requirements. Accordingly, the LLP Act is getting decriminalized. Twelve LLP Act violations, which are procedural or technical in nature, will be decriminalized and two other violations will be omitted from the law.