companies act 2013 and llp- a comparative study

LLP and Private Company (Provisions of Companies Act 2013)

Presenta;on

For

Ellisbridge CPE Study Circle of WIRC of ICAI by

CA Divyang Majmudar Ahmedabad June 2014

1 CA Divyang Majmudar www.dpmca.com

Companies Act 2013

ü  Scheme of the Act: 470 Sec;ons, 29 Chapters, 7 schedules, 33 new

defini;ons. 23 Company Rules are no;fied. ü  In 346 of 470 clauses (74%), legal phrase ‘ As may be prescribed’ appears.

Rules enlarge or curtail scope of sec;ons. In Companies Act 1956, this phrase appears in 108 of 658 Sec;ons (16%). Accordingly, now MCA has discre;on to alter the opera;on of law without going through the Parliament.

ü  Hope that such power is not misused at the behest of few or influen;al person / corporate house/s.

ü  Such flexibility is welcoming too; so that law can be amended with emerging situa;ons.

(Source: Companies Act 2013 by Dr. T.P. Ghosh 2nd Edi;on, Page 6 and 7, Taxmann)


Today’s Discussion -‐ Coverage

èCommon Compliances/ Discipline for opera;ng a

Private Company under the provisions of Companies

Act 2013 (New COA) and compara;ve view of

provisions of LLP Act in regard to opera;ons of LLP

è  Conversion of Company into LLP-‐ Prac;cal aspects



Now In regard to:

Compliances/ Discipline in Incorpora;on of

Private Company under New COA and LLP

under LLP Act


Compliances/ Discipline in Incorpora;on of Private Company under New COA and LLP under LLP Act

5

Sr. No.

Compliance / Discipline

COA 2013 LLP Act 2008

1 Maximum Members /Partners

200 persons

No Limit

CA Divyang Majmudar www.dpmca.com


6

Sr. No.

Compliance / Discipline COA 2013 LLP Act 2008

2 Commencement of Business

Declaration u/s 11 in Form 21 Subscribers to MOA must pay for agreed to part of minimum Paid up capital (Rs.1,00,000/-)

Declaration is not required Minimum contribution can be even rupee 1/- (One). Annual Return in Form 11 (Before end of May every year) to state obligation to contribute and actual contribution made by each partner of LLP



7

Sr. No.


3 Management / Board of directors / Partners

First board meeting has to be convened within 30 days of Incorporation Periodic meeting mandatory. Next meeting must be convened before expiry of 120 days from the preceding meeting. Notice of at least 7 days. Penalty of Rs.25,000/-for default. It is proposed that provisions of section 101 to 107 and 109 regarding meetings/ proxies/ voting etc. shall not apply to Pvt Company if Articles provide so and the Act permits that.

LLP Act is silent on process and periodicity of convening of meetings of partners. Regulation 9 of First Schedule to LLP Act prescribes that decisions taken at the meeting of partners should be recorded within 30 days of taking such decisions and minute book to be kept and maintained at the registered office of the LLP.



8

Sr. No. Compliance / Discipline LLP Act 2008 Sec.23 (4) of LLP Act permits partners of LLP to agree otherwise than what is stated in First Schedule of LLP Act. Hence, vide LLP Agreement, Partners may agree that whatever is stated in First Schedule shall apply to the LLP to the extent not stated, modified, varied, amended or altered by this Agreement. Though, not mandatory by Act; its prudent and advisable to record the decisions taken by partners, even if at the informal meetings, in writing and get these confirmed by signature of all those who attended or otherwise.

3 (Continues) Management / Board of directors / Partners



9

Sr. No.


4 Annual meetings/ Periodic meetings

AGM / EOGM to be convened in terms of provisions of section 96 and 100, Notice of the meeting to be issued in terms of provisions of section 101 and 102, meetings to be quorated in terms of section 103 (depending on No. of members) etc.

LLP Act is silent on this aspect. What is stated in regard to meeting of partners applies in respect of annual / periodic meetings here also.



10

Sr. No.


5 Capital Contribution and sharing of profits by Dividend

Distribution of dividend is in proportion to the capital contribution by the (equity) shareholders unless entitled for fixed dividends. Further issue of shares has to be made to the existing shareholders in proportion to their existing shareholding. (Time limit to exercise preemptive rights by existing shareholders is proposed to be reduced to 15 days instead of 30 days)

Distribution of profits can be in different pattern than capital contribution. Partners may mutually decide the pattern of contribution.



11

Sr. No.



5 (Continued)

Capital Contribution and sharing of profits by Dividend

Interest on capital is not allowed in general terms. Reduction of share capital has to be with the approval of the Court. [Sec.66] Buy back of shares has to be out of free reserves, securities premium or proceeds of securities of different class/ category. [Strictly regulated mechanism permitting limited buy back in terms of Sec. 68]

Interest can be paid on capital contribution. Reduction of Contribution of partners by LLP is not prohibited in terms of provisions of LLP Act but subject to Agreement between partners and filing of Form 3 on MCA Portal for changes in LLP Agreement. Sec. 33 (2) of LLP Act gives a right to unpaid creditor who has extended credit to the LLP on the basis of original contribution of partners of LLP. However, no prior approval of the Court or any other authority is required to reduce the contribution of partners.



12

Sr. No.



6 Distribution of Dividend / Profits

Provisions of Sec. 123 of New Act regulate the process of declaration of dividends. Provision for Depreciation before declaration of dividend is necessary. Dividend has to be paid in cash and deposited in separate bank account within 5 days of its declaration.

LLP Act considers that partners shall have twin rights / interest in profits of LLP; one is share of profit/ loss of LLP and other is to receive distributions (of profits). Any of these rights are transferable / assignable [Sec. 42 (1) of LLP Act] subject to certain reservations. Accordingly, LLP Agreement may provide for share of profit /loss amongst partners and mode and manner of distribution of profits as well. However, the LLP Act does not regulate any of these aspects.



13

Sr. No.



7 Corporate Social Responsibility (CSR)

Provisions of Sec.135 requires every Company having net-worth of 500 crores or turnover of Rs.1000 crores or net profit of Rs.5 crores or more during any financial year shall spend 2% of avg. net profits of last three financial years towards projects / programs of CSR. [Sec.135] CSR Rules laid down w.e.f. 1.4.2014.

LLP Act has no such provision.



14

Sr. No.



8 Audit and Accounts Ø  Rotation of Auditors Ø  Application of CARO Ø  Schedule VI Ø  XBRL Reporting Ø  Director’s Report Ø  Cost Audit Ø  Extensive Disclosures and

coverage of reporting by Auditors [Companies (Audit and Auditors) Rules 2014]

It is proposed that limit of 20 Companies for CA as an auditor shall not apply in so far as Pvt. Cos are concerned.

LLP Act does not provide for such compliances and discipline



15

Sr. No.



9 Directorship in Companies / Partner in LLP

Maximum 20 Companies out of which 10 can be Public Companies (even if Alternate Director as well) In a case of two directors in a private Company, one (1) Director must be ‘Resident in India’. [Sec.149 (3)]

No Limit. As many LLP as can be contributed for. One of the two Designated Partners must be ‘Resident in India’ but no such condition for ordinary partners [Sec. 7 (1)] For ordinary partner in LLP Residency in India is not applicable.



16

Sr. No.



10 Borrowings

Company cannot freely borrow money [Sec.186, 185, 74] Deposit includes receipt of any money by way of deposit or loan or in any other form (Stock Lending?) by the Company. Company may borrow Loan / accept deposit from (only) the director/s provided he makes a declaration that such money is his own money.

LLP may borrow money and pay interest. Caution: LLP cannot carry on its principal business as NBFC. No entity other than Company can carry on business as NBFC. Hence, LLP cannot carry on business as NBFC. In order to identify a particular company as a non-banking financial company (NBFC), RBI will consider both, the assets and the income pattern as evidenced from the last audited balance sheet of the company to decide its principal business. The company will be treated as an NBFC if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.



17

Sr. No.



10 Borrowings (Continued)

Company cannot freely borrow money [Sec.186, 185, 74] For Acceptance of Deposits, section 74 is proposed to be changed. It is proposed that a private Company may accept deposits from its shareholders (if they are 50 or less) not exceeding 25% of its net-worth or 100% of paid up capital, whichever is more.

LLP may borrow money and pay interest.



18

Sr. No.



11 Loan to Directors/ other persons

Provisions of Sec. 185 of the New Act prohibit granting of loans to director or persons connected/ related to such director. It is proposed to relax this provision for Pvt. Co which has no shareholder as body corporate and has borrowed money from bank/ FI or body corporate, which is less than Rs.50 cores or 2 times of its paid up capital; whichever is less. Provisions of section 186 (2) regulates making of loans / providing Guarantee or security by the Company to any person / body corporate.

LLP Act does not prohibit granting of loans to partners or persons connected / related to partners. but…. It must not cross the level whereby it can be classified as NBFC Activity as stated earlier



19

Sr. No.



12 Investment and Loans

Provisions of Sec. 186 regulate this aspect. Beyond Two Layer Investment, lower of 60% of net-worth+ Security Premium OR 100% of Free Reserves+ Security Premium, approval by shareholders, Disclosures, application of market rate of interest etc. are regulatory aspects. Liberties and exemptions are for businesses, which have principal object of financing loans etc.

LLP can make investments or grant loans but…. It must not cross the level whereby it can be classified as NBFC Activity as stated earlier.



20

Sr. No.



13 Powers of management ( Board / Partners)

Provisions of Sec. 180 regulate this aspect. Several restrictions have been placed in the New Act as compared to the Old Act, which necessarily requires the board to act only if shareholders have granted such authority to the board by special resolution. Its proposed to exclude Private Company having 50 or less shareholders from such restrictions.

In LLP Agreement, partners can authorize / control the designated partners to do or not to do certain businesses.



21

Sr. No.



14 Related Party Transactions

Provisions of Sec. 188 restrict transactions with related parties unless approved by shareholders in general meeting with special resolution. Its proposed to exclude Private Company from such restrictions.

LLP Act does not prohibit or restrict related party transactions In LLP Agreement, partners may mutually agree / restrict such transactions. Disclosures as per AS- 18



22

Sr. No.



15 Managerial Personnel and Key Managerial Personnel

Provisions of Sec. 196 regulate restrict transactions with related parties unless approved by special resolution passed by shareholders in general meeting. Provisions of Section 203 (3) prohibits a Whole time KMP to hold office in more than One Company, except a subsidiary Co. Its proposed to exclude Private Company from such restrictions.

LLP Act does not prohibit or restrict related party transactions In LLP Agreement, partners may mutually agree / restrict such transactions. Disclosures as per AS- 18, if applicable.



Now In regard to:

Prac;cal aspects of Conversion of Company

into LLP


Issues in conversion of Company into LLP-‐ LLP Act 2008

Ø  LLP Agreement. Ø  Conversion of Private Company into LLP-‐ Some

essen;als and procedures. Ø  Conversion – Whether a transfer in terms of

provisions of Income Tax Act? Ø  If it is a transfer; implica;ons and cost benefit

analysis. Ø  Case Study-‐ Real Estate LLP



LLP Agreement Whether it is mandatory to have the Agreement of Partnership between the partners of LLP?



LLP Agreement No. It is not necessary to have the agreement between the partners governing their mutual rights and du;es (rela;onship) and those of LLP and them – Refer Sec(on 23 and First Schedule to LLP Act. In absence of such Agreement, rela;ons of partners inter-‐se and between them and LLP shall get governed in terms of clause 1 to 14 of the First Schedule.



LLP Agreement to state about applica;on of the First Schedule of Limited Liability Partnership Act

2008: ‘Regula'ons contained in the First Schedule to the Limited Liability Partnership Act 2008 shall apply to this Limited Liability Partnership to the extent these are not stated, modified, varied, amended or altered by this Agreement.’



LLP Agreement Ø  LLP Agreement can be made prior to the

registra;on of LLP or conversion of Company into LLP.

Ø  If so made, make sure to ra;fy the said Agreement; post incorpora;on / registra;on / conversion. (Refer to Sec(on 23 (2) and (3) of LLP Act)

Ø  It is advisable to make LLP as party to Ra;fica;on Agreement as the agreement governs the rela;ons between the partners and the LLP also.


Issues in conversion of Company and Partnership into LLP

LLP Agreement to define: ‘Conversion coming into effect’ means that all the business, undertakings, proper'es and liabili'es, obliga'ons of whatsoever nature, type and kind, wheresoever situate, on the going concern basis; together with all their assets and liabili'es without any limita'on and shall mean and include: (i)  Tangible movable or immovable property including that situate at ____________

(more par'cularly described in Schedule ‘A’ hereto) and intangible property including ac'onable claims, interests, rights, privileges, licenses, permits, quotas, approvals, registra'ons, incen'ves, tax deferrals, benefits, concessions, grants, if any, as well the whole undertaking and business as a going concern, belonging to or vested in and liabili'es in respect of any debt or obliga'on incurred or any contract entered into, by, to, with, or on behalf of the Company shall pass to, vest in for all the estate, assets, rights, 'tle and interest and authori'es of the LLP and become the liabili'es and obliga'ons of the LLP respec'vely, having regard to the obliga'ons imposed on the LLP by these presents and shall be taken at its respec've value as stated in the books of the Company including the capital represented by total assets less total outside liabili'es on and from the date of the conversion of the Company into LLP by opera'on of Law in terms of the provisions of the LLP Act and in par'cular Sec'on 56, 58 and Third Schedule thereof.

( Con(nued in next slide)



(Con;nued from previous slide) LLP Agreement to define:

(ii) Without prejudice to (i) above, in respect of such of the assets and proper'es of the Company as are movable in nature or incorporeal property or are otherwise capable of being handed over by manual delivery or by endorsement and /or delivery, the same shall be considered as so passed on, handed over, delivered or endorsed; as the case may be, so as to become the assets and proper'es of the LLP as an integral part of the Business, Undertaking without any act, deed, instrument or conveyance for the same.



(Con;nued from previous slide) LLP Agreement to recite:

Assets to vest in LLP on its Conversion ‘On Conversion coming into effect all the proper'es and assets of whatsoever nature without any limita'ons whether movable or immovable including all tangible, intangible, real or corporeal and rights, privileges, licenses permissions, approvals, concessions, claims, status and other benefits of the business or undertaking; related to, owned by or vested in the Company shall pass to and vest in the LLP for all the estate and interest of the LLP without further assurance, act or deed.’



LLP Agreement May confer Vo;ng Power to partners:

Ø  One Vote for each Partner; Ø  In propor;on to Capital Contribu;on ra;o; Ø  In propor;on to Profit sharing ra;o; Ø  Discre;onary vo;ng power to designated partners

in certain special magers; Ø  May be Veto Power? LLP Act does not prohibit

this.



LLP Agreement Take care of certain provisions in the First Schedule (Akin to Table A of the Companies Act 1956) 1.  All partners are en;tled to share equally in the capital, profits

and losses; 2.  Every partner may take part in the management of the LLP; 3.  No partner is en;tled for any remunera;on; 4.  Each partner shall have one vote for the issues / mager related

to LLP, which has to be passed through a resolu;on approved by majority partners;

5.  Decisions concerning LLP must be recorded in the minutes within 30 days of taking such decisions;

6.  If a partner is carrying on compe;ng business without consent of the LLP, he must account for and pay for the profits of such business to the LLP;



Conversion of Private Limited into LLP-‐ Some essen;als to be taken care of:-‐ Ø  Shareholding Pagern; contribu;on to Capital and Profit sharing ra;o could be different. If

required; re-‐align the shareholding pagern. But take care of sec(on 56 (vii) Receipt of movable property i.e. Shares exceeding Rs.25000/-‐ without considera;on or less than its fair value Ref. Rule 11 U and 11 UA

Ø  Firstly named shareholder to become partner; joint shareholder to become beneficial partner. Tax impact – Ref to sec(on 10 (2A) rws 2 (23)(ii) and (iii) of I TAX. This issue has become controversial as a circular from MCA does not permit a partner to hold the shares in trust for the other.

Ø  If shareholder is ostensible owner and holding shares in trust for the beneficial owner of

shares; ensure that compliance u/s 187 C of Companies Act 1956 (‘COA’)is made. This issue has become controversial as a circular from MCA does not permit a partner to hold the shares in trust for the other.

Ø  Ensure that last annual return in terms of provisions of COA and Tax Return in terms of I Tax Act have been filed.



LLP Agreement Its advisable to empower designated partners for Appointment of Auditors in LLP Agreement:

“Any two of the Designated Partners are authorised to appoint / reappoint the Auditors of the LLP, if required. Such appointment may be of the first auditors or on causal vacancy or on resigna'on or removal of the Auditors. “



LLP Agreement Procedure for removal of Auditors can be determined in terms of LLP Agreement in terms of Rule 24 (18) (b):

“LLP may cause the removal of the Auditor/s before expiry of his term. LLP may issue a no'ce to such Auditor/s of its inten'on to do so and seek his representa'on of reasonable length in wri'ng. Such representa'on should be made by such Auditor/s to the LLP within two weeks from the date of receipt of such no'ce. Upon considering the said representa'on, if any, tendered by the said Auditor/s, if majority the Designated Partners are having consensus for his removal, said Auditor/s shall be removed and he shall be informed about the decision of the Designated Partners by the LLP within seven days from the date thereof.” In absence of the above, consent of all the partners shall be required to remove the Auditors.



Conversion of Private Limited into LLP-‐ Some essen;als to be taken care of:-‐ Ø  Obtain the consent of all unsecured

creditors in wri;ng for conversion; Ø  If security interest of creditors exist on the

assets of Company, Applica;on for Conversion is not permissible.



Conversion of Private Limited into LLP-‐ Some essen;als to be taken care of. Form the date of conversion, the Company stands dissolved. Ø  What happens to the Accounts of the current financial year ;ll the

date of conversion? On conversion Company ceases to exist; Ø  Whether accounts of the Company are required to be audited by

CA? Ø  Who shall approve these accounts for the auditors to agest? Ø  Whether shareholders need to approve the accounts? Ø  Whether Tax Audit is required to be done? Ø  Who shall sign the Income tax return? In what capacity? Whether it

is to be signed by the partner of the LLP or by Ex-‐director of the Company?

Ø  What happens to opera;ons of the LLP immediately preceding the conversion? Bank Account? VAT registra;on? PAN?



Law is silent on these issues! LLP Agreement Should take care of Transit period Define Transit period in LLP Agreement ‘Transit Period’ means the period cons'tu'ng the date on which the Company is converted to and registered as LLP and the last of the dates on which the rights, powers, privileges, licenses, approval, permission, consents, registra'ons, authorisa'ons of any kind, type and nature whatsoever without any limita'ons of the Company to carry on the business under the provisions of any other law in force, vest or stand transferred in the LLP.



LLP Agreement to authorize Designated Partner/s to act, perform or do things during Transit period

‘Designated Partners of the LLP shall have powers, privileges and obliga'on to authen'cate, a\est or sign financial statements, statutory returns, forms or make submissions or to do all such acts deeds and things as may be required under any law for the 'me being in force including for the conversion to come into effect, 'll the date of the registra'on / conversion of LLP or during the Transit Period, in the Representa've capacity for the Company which shall be deemed as dissolved from the said date in terms of the provisions of the LLP Act.’



Conversion of Private Limited into LLP Procedures

§  Agreement of LLP (Op;onal). §  Filing of Form No. 1, 2, 3 and 18 in terms of

LLP Rules with the Registrar of LLP. §  Filing of Form No. 14 in terms of LLP Rules

with the ROC in;ma;ng the dissolu;on of Company on its conversion.



Provisions of Income Tax Act 1961 Ø  ‘Firm’ means Partnership Firm and LLP and meaning of word

‘Partner’ includes partner of LLP too. [Ref Sec 2 (23)] Ø  Share of a person in the total income of the Firm which is

separately assessed as such is not to be included in the total income of the Partner of that Firm.[Sec;on 10 (2A)]

Ø  Interest of the Partner in the LLP is transferable either wholly or partly . Interest means right of the partner in the share of profits / Losses of the LLP and to receive the distribu;ons in accordance with the LLP Agreement. [Sec;on 42 (1) of LLP Act]

Ø  Whether assignee of the share of the profits / distribu(ons can claim exemp(on u/s 10 (2A) of IT Act?

Ø  Income which is taxed once in the hands of the LLP; whether can be taxed again in the hands of the assignee? Basic Principle of Taxa(on, whether can be ignored?



Provisions of Income Tax Act 1961 Whether conversion of Company into LLP is a transfer?

Ø  In the context of the mager, transfer as defined in terms of sec;on 2(47) (i) and (ii) is to be analyzed.

Ø  One has to see that it’s a conversion; where so far an en;ty which used to get governed under the provisions of Companies Act, is now gets governed under the provisions of LLP Act.

Ø  When conversion takes place, Company ceases to exist (dissolves) and LLP comes into being. This is simultaneous ac;on and not one aoer the other. There are no two hands (between two living beings i.e. “inter vivos’’) in the transac;on. Therefore, it can not be regarded as transfer. [ Sec;on 5 of TP Act]




Ø  Transac;on is not ‘relinquishment ’ of the asset as well; for the reason that there is no withdrawal from, abandoning, ceasing to hold or surrendering of the asset; it’s a transac;on where the form of the en;ty changes in so far as its governance under the statute is concerned. Moreover, the ques;on that who relinquishes what and in whose favour remain unanswered.

Ø  On the same principles, such transac;on can not be regarded as ‘Ex;nguishment of any rights’ in the capital assets.




Sec;on 47 (xiiib) expressly considers that Transac;on (conversion) which falls within the framework of sub clause (a) to (f) shall not be considered as ‘Transfer’, where; (i)  All assets and liabili;es of the Company become assets and liabili;es of the

LLP; (ii)  All the shareholders of the Company become partners of the LLP and their

shareholding pagern in the Company matches that of the capital contribu;on ra;o and profit sharing ra;o in the LLP;

(iii)  No considera;on in any form or manner; other than by way of share in profit and capital contribu;on is received by the shareholders of the Company;

(iv)  No dilu;on in profit sharing ra;o up to 50 % for the period of 5 years; (v)  Company under conversion should not have total sales, turnover or gross

receipts exceeding Rs.60 lacs in any of the three preceding previous years; (vi)  Balance of accumulated profits on the date of conversion should be

maintained for the period of three years aoer the conversion.



Provisions of Income Tax Act 1961 Whether conversion of Company into LLP is a

transfer? For the ;me being assume that conversion of Company into LLP is ‘Transfer’ in terms of provisions of Income Tax Act and one of the condi;ons prescribed in Sec;on 47 (xiiib) vide sub clause (a) to (f) are not complies with; Then what? (con(nued in next slide)



(con(nued from previous slide) Assume that conversion is a transfer. Consequences / Effects

1.  Cost of acquisi;on of capital assets of the Company shall be deemed to be the cost

of acquisi;on of the LLP. Sec;on 49 (iii) (e) would apply as it is transfer referred to

in sec;on 47 (XIIIb).

2.  Transac;on of conversion, if involves an ‘undertaking’ as defined in terms of

Explana;on 1 to sec;on 2 (19AA), may become a ‘Slump sale’ as defined in terms

of sec;on 2 (42 C).

3.  Check whether the ‘Slump Sale’ is long term. Provisions of sec;on 50 B i.e.

computa;on of capital gains in case of slump sale would apply.

(con(nued in next slide)




4. If it is long term or short term, considera;on for conversion shall be equal to the share

capital of the Company. Capital contribu;on of partners in the LLP would be equal to the

share capital of the shareholders of the Company. Therefore, no considera;on for

conversion is being passed on by LLP to the shareholders / Company for alleged transfer of

‘Undertaking’. Therefore, there is no capital gain.

5. However, provisions of sec;on 50 may apply if book value of depreciable assets is

greater than WDV.

6. If there is immovable property involved in the conversion, sec;on 50 C; in so far as

difference between the ‘Jantri Value’ of immovable property and book value thereof is

concerned, shall apply.




7. In the event, there is incidence of capital gains; quantum thereof is to be compared with

the saving of dividend distribu;on tax, which the LLP would be saving in foreseeable future.

8. With effect from 1-‐4-‐2012 i.e. AY 2012-‐13, LLP is subject mager of AMT of 18.5% in terms

of provisions of sec;on 115 (JC) of the Income Tax.

9. Incidence of capital gain at 20% is a one ;me cost; whereas the levy of dividend

distribu;on tax @16.22% u/s 115 -‐ O is recurring and on year to year basis.

While comparing the tax effects of LLP and Private Company; impact of sec(on 115 (JC) is

neutral between the two.



50

Year 1 2 3 4 5 TotalTaxable0Income0 100 120 150 180 200 750Income0Tax0@31% 31 37 47 56 62 233Profit0after0tax 69 83 104 124 138 [email protected]%

11 13 17 20 22 84

Divisible0Profit0amongst0Shareholders

58 69 87 104 116 434

Divisible0Profit0amongst0partners0of0LLP

69 83 104 124 138 518

Discounting0(NPV)0DDT0@9%

Decision0making0from0Tax0angle0for0conversion0of0Company0into0LLP0

₨063

If0impact0of0capital0gains0is0less0than0or0equal0to0Rs.63/U;0it0could0be0viable0to0opt0for0conversion0of0Co.0into0LLP.


Case Study

Real Estate LLP Partner’s Contribu;on; Type of Partners; Powers, Rights, du;es and

obliga;ons

Ø  Partner’s contribu;on can be fixed and variable. But is mandatory to contribute; if not monitory, then valua;on of contribu;on made to support the same.

Ø  In real estate LLP; there could be equity partners; working partner/s wherein equity partner would contribute in fixed and variable mode where as working partner shall contribute only in fixed mode. Profit sharing ra;o would carve out a predetermined por;on of profits / greater share in favour of working partner.

Ø  Working Partner could be an LLP as well. (to be con(nued in next slide)


Case Study

(Con(nued from previous slide) Real Estate LLP

Partner’s Contribu;on; Type of Partners; Powers, Rights, du;es and obliga;ons

Ø  Financing Partner is responsible for providing funds for construc;on project; working partner is responsible for planning and performance thereof; its role is of facilitator of the job. For which its not being remunerated by way of salary or interest or the like. Except share in profits no partner gets anything.

Ø  No service tax to be charged or paid for the jobs carried out by working partner. Ø  Working partner is responsible for compliance of the laws regula;ng the

construc;on job and shall indemnify the financing partners. Ø  FDI is permissible if the project is complying with the guidelines; otherwise NRI’s

can be partner of the real estate LLP; subject to an averment in the affidavit that he / she shall not repatriate the profits outside India. But LLP is supposed to take approval of FIPB even for the permissible business ac;vi;es and unless no;fied by RBI, inflow of funds can not be brought in.



Conversion of Partnership into LLP

Ø  Principles governing the conversion of Company would also govern that of Partnership.

Ø  However, instead of Third Schedule of LLP Act, Second Schedule to LLP Act would apply.

Ø  There are few procedural differences, but not very material on principle. However, in conversion of Partnership into LLP, even if there are secured creditors to the firm, conversion is permissible.



Prac;cal Issues Non banking Financing business can not be commenced or carried on in LLP. Registrar of LLP would call for the approval of RBI. And

RBI does not permit this.



FDI in LLP

ü  Press Note No. 1 (2011 series) dated May 20, 2011 issued by Department of Industrial Policy & Promo;on (DIPP), Ministry of Commerce & Industry, Government of India and paragraph 3.2.5 of the Consolidated FDI Policy Circular 1of 2013 dated April 5, 2013 issued by DIPP, has considered the FDI in LLP.

ü  Consequently, RBI has issued circular bearing reference N0. RBI/

2013-‐14/566 A.P. (DIR Series) Circular No. 123 dated April 16, 2014. (Part of this circular has come into opera;on with retrospec;ve effect.)



FDI in LLP ü  Any FDI in a LLP shall require prior Government/FIPB approval.

ü  following sectors/ac;vi;es shall not be eligible to accept FDI: a) Sectors eligible to accept 100% FDI under automa;c route but are subject to FDI-‐

linked performance related condi;ons (for example minimum capitalisa;on norms applicable to 'Non-‐Banking Finance Companies' or 'Development of Townships, Housing, Built-‐up infrastructure and Construc;on-‐development projects', etc.); or

b) Sectors eligible to accept less than 100% FDI under automa;c route; or c) Sectors eligible to accept FDI under Government Approval route; or d) Agricultural/planta;on ac;vity and print media; or

e) Sectors not eligible to accept FDI i.e. any sector which is prohibited under the extant FDI policy (Annex-‐A to Schedule 1 to No;fica;on No. FEMA. 20/ 2000-‐RB dated 3rd May 2000) as well as sectors/ac;vi;es prohibited in terms of Regula;on 4(b) to No;fica;on No. FEMA. 1 / 2000-‐RB dated 3rd May 2000, as amended from ;me to ;me.


Issues in conversion of Company into LLP

Conversion of LLP into Company

ü  Provisions of Part IX (Sec;on 565 to 581) of Companies Act 1956 considers the registra;on of joint Stock Company as Company to be governed under the provisions of said Act. These sec;ons are no more in effect as on date.

ü  Provisions of Chapter XXI-‐ Part I (Sec;on 366 to 371) of Companies Act 2013 considers conversion of LLP as Company incorporated as Company under the said Act. These sec;ons are in opera;on.

ü  Ves;ng of Assets of LLP into Company by Statutory Provision and there is no

transfer of proper;es and assets ‘inter vivos’ (between the livings). Past precedents would apply pari materia.


Issues in conversion of Company into LLP

Joint Ventures Abroad by LLP

RBI has no;fied that LLP can be considered as ‘Indian Party’ in Joint Ventures abroad and allowed LLP to carry out financial commitments to / on behalf of joint ventures or WOS of Indian Co’s abroad. RBI/2013-‐14/595 A.P. (DIR Series) Circular No.131 DATED 14/5/2014


companies act 2013 and llp- a comparative study

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