MNCs lobby government for smooth LLPs conversion

16 Nov 2015 Evaluate

With the government’s announcement to allow foreign direct investment (FDI) through the automatic route in limited liability partnerships (LLPs), the Multinationals registered as companies in India are lobbying the government to freely permit their conversion to LLPs. The External commercial borrowings (ECBs) could rise if the relaxations are extended to existing multinationals. Besides, the new regulations have also allowed 'downstream investments' in LLPs operating in India by their parents.

Any company with an annual turnover of more than Rs 60 lakh in India can convert itself into an LLP but this process is fraught with complications as well as tax implications. Besides, the approval of the Foreign Investment Promotion Board (FIPB) is also needed. The government has made the changes because it sees that this is a way to greater investment from overseas.

Recently, revenue secretary Hasmukh Adhia has met executives and consultants to get a view on conversion to LLPs. If the majority of the economic interest (50 per cent) in an organisation remains the same for next five years, the relaxation could be looked at. According to ministry of corporate affairs data, in all there are 11,616 LLPs registered in India, in which less than 1 per cent were conversions from companies to LLPs by multinationals. Views were being raised that the conversion needs to be made specifically tax exempt to remove a major roadblock for existing companies to convert to LLP, while the Conversion of a company to LLP should be treated as other restructuring activities like amalgamations and demergers. However, the argument against such a relaxation is that the process can't be treated differently from others.

In many circumstances, LLP is a preferred form of organisation, mainly due to lesser regulatory compliances vis a vis companies, and inordinately heavy liabilities of directors of companies and inapplicability of dividend distribution tax to LLPs. LLPs are exempted from this along with other levies such as minimum alternate tax or MAT. Many Indian companies could also look at a possible conversion if the rules were to be relaxed.

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