Corporate Affairs Min may amend LLP Act to tighten noose on shell firms

The Ministry of Corporate Affairs (MCA) is planning to tighten the norms for companies seeking to convert into limited liability partnerships (LLPs). The move is meant to keep a check on shell companies.  
For this purpose, the ministry is likely to amend the LLP Act. It will set up of a committee to recommend changes in the Act, said people in the know.

Conversion of companies into LLPs picked up pace in the past three years because of easy rules, giving rise to an apprehension that these may be shell companies. The number of firms that got converted to LLPs has doubled to 6,000 since demonetisation.

A senior ministry official said: “The rate at which companies are converting into LLPs is unusual. After the crackdown on shell companies, the number of converts to LLPs has doubled. They might be trying to beat the law.”

The ministry is also trying to streamline the law to ensure that only small firms are converted into LLPs, as was envisioned at the time of framing the LLP Act.

LLP is a business arrangement whereby the liability held by each of the partners is limited by law.

The LLP business vehicle is a legal entity having its existence independent from its partners, where their rights and duties are determined in terms of the agreement between them.

Experts say the law is less stringent for LLPs, given that they do not have to intimate the government on directors, and need not necessarily file annual returns.

“Initially, the LLP Act was passed to bring proprietorship firms in the unorganised sector to the organised sector. However, there is no restriction on companies enrolling as LLPs. It is time that only such companies exist as LLPs,” said Pavan Vijay, who was in the committee that brought in the LLP Act.

The Limited Liability Partnership Act, 2008, was enacted by Parliament to introduce and legally sanction the concept of LLPs in India.  

Government officials say that many thousand companies have changed their structure to become LLPs after the Centre’s initial drive against shell companies. The estimate is that the conversion has doubled since the drive began.

The Centre had observed that in many of these firms, there was an unusual inflow and outflow of funds.

In the first phase, close to 225,000 companies and 300,000 directors faced the axe. There was also a second list of 225,000 entities classified as shell companies.

It is possible that of the 1.1 million firms registered with the Registrar of Companies, only 500,000 are fully operative. Apart from shell firms, ‘vanishing’ companies are also on the ministry’s radar. As many as 400 of them are not traceable, despite being listed on the bourses. In the first batch of shell companies itself, the PAN for many companies was not traceable. There are tax evasion cases registered against many of these companies.