Friday, October 24, 2008

India Enacts a Limited Liability Partnership Bill and Soon a New Company Law in the Wake of a Likely Regulatory Turnaround in the Financial Sector

The Indian Upper House of Parliament has enacted a much studied Limited Liability Partnership Bill (Bill No. CXI of 2006) 2008. The Bill, introduced in 2oo6 in the Rajya Sabha (Parliament of India) was referred to a parliamentary standing committee, whose report was issued last year. As it was recently reported:
Professionals like chartered accountants, consultants and lawyers will be able to run their businesses in India in sync with global practices through a new and flexible form of ownership when a bill in this regard gets Parliamentary approval. The Limited Liability Partnership Bill 2008 was today passed by the Rajya Sabha after a brief discussion.“It is not true that the new form of ownership will help only the foreign professionals. Our professionals will be able to have their businesses globally,” Corporate Affairs Minister Prem Chand Gupta said replying to the debate.
PTI, Bill For Flexibility in Running Partmnerships Passed in RS,, Oct. 24, 2008. The Bill is part of a long term effort by the Indian state to continue to revise its ancient corporations (entities) laws from out of the more than half century old post colonial model inherited from its former British masters.
The Companies Act, 1956, has been amended as many as 24 times since 1956. The major amendment to the Companies Act, 1956, was made after considering the recommendations of the Sachar Committee by enacting the Companies Amendment Act, 1988. The next major amendment was made by the Companies Amendment Act, 2002, consequent to the report of the high powered Eradi Committee. Looking at the proliferation and diversity of amendments which have been made to the Act, an attempt to recodify the law appears inevitable.
Indian Finance Ministry, Concept Paper, 2004. But, as noted in the Independent Expert Committee, Report on Company Law (constituted in 2004 and headed by JJ Irani, a director, of Tata Sons, one of the largest concerns in India), "While piecemeal reform continued through amendments, it has not yet been possible to bring about comprehensive, new legislation to replace the existing Act." Id., at Background, Para. 4. At last, in October, Parliament is set to approve an extensive revision to the Indian Companies Act half a decade in the making.
India’s government on Thursday introduced the Companies Bill, 2008, a legislation that, if approved, will define and regulate the way companies are structured and do business, and replace a 52-year-old law that currently performs these functions. Work on the Bill, which makes it easier to start and close firms and protects the interests of shareholders and investors, started four years ago.The Bill, which seeks to make firms and their promoters more accountable by making them responsible for their own behaviour and actions, will affect around 700,000 firms and significantly more individuals.
Sangeta Singh, Companies Act One Step From Reality,, October 23, 2008. More on this in a later post. The proposed changes are both basic and necessary to bring Indian law closer to conformity with the regulatory environment in which much inbound investment operates outside of India: permitting single shareholder entities, class action suits by shareholders, easing financing rules, bringing insolvency rules in conformity with U.N. Commission on Trade Law (UNCITRAL) insolvency principles, requiring a substantial minority of board members to be independent, and tightening insider trading rules.

And thus the Limited Liability Partnership Bill in a wider context, which is meant to "help promoters form a new type of entity, falling between a so-called body corporate and a partnership, but enjoying the benefits of both." Id. The principal purpose of this new form or organization is to provide an entity vehicle for professional organizations--law firms and medical groups, for example--without the necessity of full compliance with provisions of the Companies Act of 1956. As it was recently reported, "'This will allow law firms to expand as we will be able to have more than 20 partners and, at the same time, not be bound by the complications of the Companies Act,' said Lalit Bhasin, a partner in the law firm of Bhasin and Co." Sengeeta Singh, Limited Liability Partnership Bill Introduced in Parliament,, Oct. 22, 2008. Of greatest importance is the Bill's provision for both limited liability to partners and for a pass through mechanism so that LLP partners can choose to be taxed at the partner level.
“While a body corporate attracts a tax of more than 40% including corporate tax, surcharge, education cess and dividend distribution tax, a partnership firm’s liability is up to 33% because it does not have to give dividend distribution tax. Under the pass- through, the partners will be taxed as individuals and therefore get basic exemption, which currently is at Rs110,000, and therefore is even more beneficial than a partnership firm,” explained a senior official at the ministry of corporate affairs.
Sangeeta Singh, New Bill May Offer Flexible Tax Structure to Professionals, COS,, February 10, 2008.

More importantly, it will bring India closer to harmonization with global business structuring rules. Guarav Taneja of Ernst and Young in India was quoted as suggesting that "in cases of cross-border transactions, it will help if the firm is taxed. “This will help the firms take benefit of bilateral tax treaties between India and other countries because the LLP firm will be a legal tax entity,” said Taneja." Sangeeta Singh, New Bill May Offer Flexible Tax Structure to Professionals, COS,, February 10, 2008. Beyond the utility to professional partnerships, the form will be useful for limited purpose joint ventures, especially with foreign partners. The greatest benefit in this regard is expected to be the relative ease of winding up the entity without triggering the most biting features of Indian tax law. And it will help forms take better advantage of favorable tax provisions of bilateral tax treaties. Id.

The Bill, as ultimately passed, was broader than originally conceived. There is something in it for everybody. Still, despite its promise, additional legislation will be required before the full benefits of the Bill can be realized. "However, to become fully operational, certain consequential laws like those relating to income tax would also have to be changed, Gupta conceded.He said while the Naresh Chandra Committee had suggested the limited liability partnerships for professionals alone, the government has gone much beyond and included even small-scale firms in the ambit of the new ownership structure." PTI, Bill For Flexibility in Running Partnerships Passed in RS,, Oct. 24, 2008.

All of this is good news for India. Though, of course, the value of these changes may be lost as India, like other almost developed states, will be caught in the vortex of the global collapse of the financial markets (or rather its painful reorientation and ultimate consolidation on a global basis). Flexibility, simplicity, conformity to converging transnational norms of entity organization and regulation are all good things in the context of global markets. For a state large enough, and powerful enough, to absorb inbound investment without losing control of its internal regulatory control, this is all to the good. But it might well work at cross purposes with the focus on reforms of the financial sector.
The PM, Ravi said, pointed out the present crisis was a result of the failure of regulatory mechanisms on financial institutions, a failure of risk management as well as a failure of market discipline mechanisms. He conceded that the world had benefited from globalization, but called for a global restructuring of financial markets and specifically, an accountability of the bad assets that had been accumulated. French president Nicolas Sarkozy and German chancellor Angela Merkel said there was great need to look at the role of the credit rating agencies in a way that a crisis like this never occurred again.
Jyoti Malhotra, At Asem, PM Calls for Infrastructure Investment in Third World,, Oct. 25, 2008. It seems that while corporate governance is going in one direction, the proposed regulation of the financial sector will be taking another.

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