Partnership rules set for a change

NEW DELHI: The Limited Liability Partnership Act being formulated by the government will introduce a number of critical changes in the working of partnership entities in the country, including their disclosure norms and liability of partners in case of third party claims.
Being formulated on the UK model, the act will blend the tax status and organisational flexibility of a partnership with limited liability for its members. This would be done by creating a legal entity separate from its members who will in effect be equity partners. The benefits will accrue more for the small scale industry and VC funds.
It will also introduce significant provisions for audit and accounting firms, the information technology sector and other service-based industries, especially on disclosures.
The LLP Act in the UK, on which the Indian version is being modelled, got the royal assent three years back. Some of the provisions included the applicability of corporate insolvency and winding-up procedures, taxing of LLPs’ profits as partnerships to make the change tax-neutral, and incorporation by registration instead of automatic conversion.
One of the major changes which will be brought about with the enactment relates to the disclosure norms at the partnership level. Since an LLP would allow for investments in risk or venture capital (as equity) from institutional finance, where the liability of the investor would be limited to the extent of his investment, the new act will have control mechanisms for the preparation of the balance sheet, profit and loss account, audit and annual general meetings etc.
The act should come as a major shot in the arm for the SSI sector, where partners are usually stuck with financial problems due to FIs’ exit issues and also the unlimited liability that a third party claim brings on. For VC funds, this should help in emulating the US regulations, said to be a major factor behind the success in fostering ventures in Silicon valley.
The draft is being formulated by members of a joint working group with members including those from the Department of Company Affairs, small scale industries ministry and the Confederation of Indian Industry. The draft formulation process is expected to be expedited after the finance minister referred to it in his Budget speech.
According to sources engaged in the draft formulation process, initially, the debate revolved around as to whether LLPs should be a part of the Indian Partnership Act or that of the Companies Act or whether there should be a separate enactment.
In the end, it was decided to go in for a separate act, for which the law ministry has already given its assent. It has also been decided that the DCA will be entrusted with the responsibility of administration, since the partnership Act is also allocated to it under Business Allocation Rules.