The ministry of corporate affairs (
MCA)
has barred entities carrying on manufacturing activities from adopting
the limited liability partnership (LLP) structure. Nor can a private
company involved in manufacturing be converted into an
LLP. Further, the fate of more than 10,000 existing LLPs engaged in manufacturing hangs in the balance.
Recently, a family owned entity carrying on small-scale business
operations in an industrial area of
Bengaluru found they could not
convert their private company into an LLP structure. The main reason for
their wishing to opt for the LLP structure was relatively simpler
regulatory requirements. Or for that matter, an entrepreneur engaged in
manufacture of leather dyes in Mumbai wanted to incorporate as an LLP.
But based on the recent stand by the corporate affairs ministry, he has
been advised to incorporate as a company.
The term ‘business’ as defined under section 2(1)(e) of the LLP Act
includes trade, profession, service and occupation. “Manufacturing and
allied activities have been positively excluded from this definition,”
states a March 6 notification, issued by the central registration centre
(CRC), MCA. It is this centre that incorporates LLPs. The notification
refers to the minutes of an internal review workshop conducted in
December, where it was concluded that the object of an LLP is mainly for
carrying out professional services and not manufacturing activities.
In the past, manufacturing entities were allowed to set shop as LLPs.
According to latest available official statistics as of December 2017,
there were 12,770 active LLPs engaged in manufacturing — this is around
12% of total active LLPs as of this date. Surprisingly, the MCA
notification is silent on their fate, which is leaving practising
company secretaries perplexed. Till the time of going to the press, MCA
did not respond to an email sent by TOI in this regard.
“Although the definition is inclusive in nature and is not expected to
be read in order to limit the coverage only to the activities in the
services sector, there appears to be a view at the CRC/MCA level that
LLPs cannot be engaged in manufacturing and/or allied activities,”
states PwC India partner (regulatory services) Anshul Jain. “One may
note that the Indian Partnership Act also defines a business in the same
manner. This makes the stand taken as regards LLP a bit odd,” he adds.
“My view is, if the regulator has registered LLP in the past and allowed
partnership firms to do manufacturing activity, then there is no harm
in an LLP continuing to do the manufacturing business. There is too much
of intrusion by introducing ad hoc notifications. It should be left to
the entrepreneurs to decide on the type of entity to do business,”
states Bengaluru-based practising company secretary
J Sundharesan.
“The restriction on including manufacturing activities for LLP may be
due to an apprehension that, for entities with massive manufacturing
operations having factories and heavy investments in machinery, the LLP
structure may not be suitable. However, if that was the case, this
should have been restricted at the very first stage,” states
Gopika Shah, partner at GHV & Co, a firm of practising company secretaries.
The Institute of Company Secretaries of India (ICSI) has represented
to the MCA that the objective does not seem to restrict manufacturing
entities as LLPs, nor are any such restrictions placed in countries like
Singapore and the UK. “In case there is an apprehension that
manufacturing business incorporated as LLPs would become very large and
not suitable as an LLP entity, a threshold limit on share capital or
turnover may be considered,” it suggests.
Explaining the possible intent of the notification, Jain states,
“There are certain disclosures required under the Companies Act, such as
filing of key resolutions of board meetings or special resolutions of
shareholders meetings, which doesn’t apply in case of LLPs. Concerns in
this regard could have led to this stand taken by the MCA.”
Till date, professionals say that no notices have been received by
existing LLPs engaged in manufacturing. “However, there are only two
options available to them. They can either close down the LLP and do
business in the form of an unincorporated entity like a proprietary or
partnership format, or convert the LLP into a company, which may be
troublesome for small- and mid-level LLPs,” explains Shah.