Panel for leeway for LLPs to raise long-term debt

Currently, LLPs can only contract loans or raise money through capital contribution.

The company law committee (CLC) set up by the ministry of corporate affairs has suggested allowing LLPs to issue debt securities, a step that would open doors for such entities to raise loans from Alternate Investment Funds (AIFs) and would improve investment opportunities for “capital deficient” sectors like real estate and infrastructure.

The CLC, which was set up in September 2019, also recommended creation of a new class of limited liability partnerships (LLPs) — small LLP — to promote the ease of doing business, especially in the MSME sector.

On allowing LLPs to issue non-convertible debentures (NCDs), the panel said AIFs can invest in LLPs only through capital contribution, which is in nature of a pure equity interest. The inability of LLPs to issue NCDs, at par with companies, poses as a major impediment in their business operations, especially in sectors like real estate and infrastructure, which are capital deficient. It therefore emphasised allowing LLPs to issue NCDs to make them “more lucrative” for the debt market.

Currently, LLPs can only contract loans or raise money through capital contribution.

AMRG & Associates CEO Gaurav Mohan said, “This new insertion will allow AIFs to invest in real estate and infrastructure special purpose vehicles (SPVs), which are invariably structured into LLPs due to the ease of administration. These NCDs can only be issued by LLPs to entities regulated by the RBI or Sebi to safeguard against the misuse of these instruments.”

On the rationale behind creating small LLPs, the CLC said this is to create a class of LLP which is subject to lesser compliance requirements, lesser fee or additional fee, so as to reduce the cost of compliance and further to subject such class of LLPs to lesser penalties in the event of a default as has been done in the case of firms under the Companies Act, 2013.

Nangia & Co partner Nischal Arora said the panel has defined a small LLP as a limited liability partnership in which contribution of partners does not exceed `25 lakh and turnover does not exceed Rs 40 lakh.

“This encourages small entrepreneurs to conduct their businesses through a legally set up entity instead of running them as proprietorship/ unregistered partnership. The government would also hope that this move will encourage the large unorganised sector into its fold,” he added.

Overall, the high-level panel recommended decriminalisation of 12 compoundable offences and omission of one penal provision in the LLP Act. It did not suggest any change in the serious non-compoundable offences. The committee submitted its report last week.

The 11-member committee, chaired by MCA secretary Rajesh Verma, includes Uday Kotak, Shardul Shroff and Ajay Bahl, among others. It was set up to offer suggestions to decriminalise certain compoundable offences in the LLP Act, 2008, and promote ease of doing business.