Legislative ambiguities hinder formation of LLPs

Individuals who wish to get Limited Liability Partnership (LLP) status are having a tough time dealing with compliance issues. The LLP Act, passed in 2008, has only seen 426 registrations so far. 

Although applicants can register and download their forms from the LLP portal, the required Designated Partner Identification Number (DPIN) can only be received from the Central government in New Delhi.
 
An individual has to make an application electronically via Form 7 (available on the LLP website) to the Central government for obtaining a DPIN upon which a provisional DPIN is issued. After receiving this provisional DPIN, an application to the Central government has to be made within 60 days along with the requisite fees to obtain a regular DPIN.
 
“There are certain compliance norms which can only be completed in New Delhi. If the process is decentralised, then it would be much easier and faster (to register an LLP). Moreover, people are not aware of the newly-amended law and its implications,” said Siddhartha Shah, of Siddhartha Shah & Associates.                                                                         
 
“A chartered accountant’s firm cannot convert into an LLP unless the Institute of Chartered Accountants of India (ICAI) gives its permission. When the Chartered Accountancy Act was enacted in 1949, there was no concept of an LLP. There is no provision in that law for CAs to be a part of an LLP,” said Ameet Patel, partner, Sudit Parekh & Company.  
 
“Tax clarifications have only come recently. There are still lurking doubts about the law. There is negligible demand from individuals opting for an LLP,” adds Mr Patel.
 
“Approval of a name for an LLP is proving to be a tough task, given that the concerned registrar conducts a search of the Trademark Registry’s database in India (for allotting a name). So, if the proposed name is in existence, say, in the UK, the registrar may not allow the proposed name,” said Sharada Balaji, founder of NovoJuris Services.
 
An LLP is taxed like a general partnership firm under the Indian Partnership Act, 1932. The entity is taxed, and the income in the hands of the partners is exempt from tax. However, in a company, the income is taxed at the entity level and tax is again paid on the dividend given to shareholders.
 
“The industry was hoping that the LLP would be a pass-through entity for taxation, like many other countries. Venture capital and private equity firms would have been a happier lot had the LLP been allowed as a pass-through to taxation at the entity level,” added Ms Balaji.
 
Currently, minimum alternate tax (MAT) is not applicable to LLPs.
 
The advantage of forming an LLP is that an individual’s liability is limited to the extent of the capital contribution. Only two members are required for forming an LLP and there is no upper limit on the number of members.
 
LLP can be useful for small and medium enterprises because the cost of forming an LLP is lower, and there is no requirement for minimum capital contributions. Partners are not liable for the acts of other partners in the LLP and the entity can be easily dissolved. The maximum cost of registering an LLP is only Rs7,000.
 
Moreover, books of accounts of an LLP have to be audited only if the contribution is above Rs25 lakh or if annual turnover exceeds Rs40 lakh. However, an LLP cannot raise money from the public.

 

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ICICI Venture Fund to invest $250 million-$300 million in realty

ICICI Venture Fund Management Co Ltd (IVFMC), the investment unit of ICICI Bank Ltd, is planning to invest $250 million-$300 million over the next three years in realty, especially in the residential segment in India. At present, the company does not plan to invest in the commercial segment.

“We will be investing about $250-$300 million over the next three years, mainly in residential properties. I expect, by that time, the general market will also show signs of recovery. We will be soon raising fresh capital,” said Sanjeev Dasgupta, president for real estate, IVFMC.
 
He said, “The company plans to invest in new residential projects, even in projects which are (only) 30% complete. Developers do not have capacity to raise capital. Those projects are available today at attractive valuations.”
 
The fall in home loan rates is also a factor which is attracting investors. The venture fund is evaluating the market; it is not in a hurry to invest. “Investors are doing greater degree of diligence because a lot of things have gone wrong. They took a view on investment which involved a lot of risk and they thought they would manage it but they could not,” said Mr Dasgupta.
 
The company feels that the residential segment will see another round of small correction over the next six months as developers have increased prices at a rapid rate. “After the increase in prices, volume sales have dropped by 15%. Sales being currently witnessed are being driven by end-users and not speculative investors, contrary to what was witnessed during the boom,” said Mr Dasgupta.
“Till the first half of 2010, we are going to see few volume deals happening. We will see some degree of improvement from Q3 FY10 which again depends on many factors. As we are hearing some positive news on the economic front, we will see good growth in the real-estate segment,” he added.
 
The company is not thinking of investing in the commercial segment as most of the investors find that exiting from the asset is complicated and driven by many factors beyond their control. However, the residential segment has self-liquidating assets, so it is easier to exit and also get good returns.

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COMMENTS

Indrajeet roy

7 years ago

I need to speak or write to Mr. Sanjeev Dasgupta. Please share his mail and other contact details

Majority of companies not yet ready for business recovery, says E&Y

Professional services provider Ernst & Young (E&Y) has said that despite the current downturn, more than 60% of global businesses have no active cost reduction programs. According to an E&Y survey titled ‘Save to Prosper: from cost reduction to cost optimization’, almost 25% of the businesses surveyed do not have a plan for cost reduction programs and only 17% view continuous cost reduction as a priority.

“Our survey highlights that many businesses are dangerously complacent about cost reduction and are as a result not ready for the eventual economic recovery. Although cost-consciousness has become a top priority during the last year, the majority of company efforts so far have been on tactical and temporary measures, delivering no more than 10% cost reduction for most businesses. Sustainable cost reduction and optimisation need to become standard practice and be at the heart of any company’s business recovery agenda,” said Raju Lal, partner, E&Y.

The survey also revealed that the more fundamental, radical steps to cost reduction have yet to be fully addressed or implemented and realised. Only a third of companies are looking to achieve 20% or more cost savings over the next 12-18 months.

A total of 561 senior executives were interviewed for the survey, which covered 11 industry sectors in 11 of some of the largest economies. The results show that the most common reason for implementing cost reduction is ‘to ensure survival’, implying that once survival is achieved, cost reduction will be marginalised.

The report said that many businesses remain overtly concerned with maintaining or expanding market share at the expense of profitability. Smart cost optimisation, by contrast, may entail sacrificing customer numbers in pursuit of healthier margins and more fruitful business partnerships.

The survey also revealed some equally striking sector-specific results. For the question on whether the sectors regard cost reduction as a means to securing economic survival, 46% of insurance; 45% of telecommunications and oil and gas; 44% of real estate; 42% of power and utility and banking responded in the affirmative. By contrast, 34% of pharmaceuticals and consumer products and 33% of media and entertainment responded negatively. 

Interestingly, the consumer products and telecommunications sectors both achieved higher scores than other industries in terms of cost savings relating to goods sold. For consumer products, 31% of companies reached 11-20% savings costs; for telecommunications 32% of companies reached 11%-20% savings cost.

The report also draws attention to the opportunities offered by innovative business models such as virtual worlds and the scope for environmental measures such as renewable energy to play a role in cost reduction. Both can improve a company’s reputation and its relationship with stakeholders.

Companies that neglect these two issues may be storing up trouble for the future and missing significant cost reduction possibilities.

“Cost reduction has to be considered as a fundamental business commitment. Companies’ focus now needs to move to beneficial cost optimisation. If companies treat it as a temporary and inconvenient phase, they risk losing out to more agile rivals. By recognising the competitive nature of the new commercial landscape, managements can ensure their businesses survive and prosper,” Mr Lal concluded.

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