Multinationals registered as companies in India are lobbying the government to freely permit their conversion to limited liability partnerships (LLPs), now that it has announced a liberal policy on such entities.
As part of the opening up announced on November 10, foreign direct investment (FDI) through the automatic route has been allowed in LLPs.
The government made the change because it sees this as a gateway to greater investment from overseas. The new regulations also allow “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. The approval of the Foreign Investment Promotion Board ( FIPB) is also needed.
“For many existing companies that want to convert to an LLP, there is a capital gains tax exposure currently,” said Ketan Dalal, managing partner, west, PwC India.
“This conversion needs to be made specifically tax exempt to remove a major roadblock for existing companies to convert to LLP.” The argument against such a relaxation is that the process can’t be treated differently from others. “Conversion of a company to LLP should be treated as other restructuring activities like amalgamations and demergers,” said an official, explaining the rationale.
To be sure, revenue secretary Hasmukh Adhia is said to have recently 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, this (relaxation) could be looked at,” said an official with knowledge of the matter. Overseas companies that don’t plan to list would find converting to an LLP an attractive proposition.
“LLP is a preferred form of organisation in many circumstances, due to several reasons, such as lesser regulatory compliances vis a vis companies, and inordinately heavy liabilities of directors of companies and inapplicability of dividend distribution tax to LLPs,” said Dalal. 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, analysts said.
In all there are 11,616 LLPs registered in India, according to ministry of corporate affairs data. Less than 1 per cent of these were conversions from companies to LLPs by multinationals.
External commercial borrowings (ECBs) could rise if the relaxations are extended to existing multinationals, experts said. Companies in the information technology, manufacturing and consulting could also convert themselves to LLPs in this event, said people with knowledge of the matter.