Limited liability partnerships in the country may not get access to cheap overseas funds, which could discourage big firms from switching to this form of business that combine the features of companies and partnerships.
The finance ministry and the Reserve Bank of India have opposed changes in the external commercial borrowings (ECB) policy to allow overseas borrowings by LLPs, while responding to a discussion paper on this form of business put out by the department of industrial policy and planning (DIPP), the policymaking body on foreign investment.
The ECB regime should be identical to the one applicable for partnerships, the finance ministry said in response to the paper. The finance ministry is of the view that while FDI can be allowed in this form of business entities, but not overseas debt, said a government official privy to the discussions.
"It is a business structure largely aimed at professionals and small businesses, which do not require overseas debt that comes with its own risks," he said, requesting anonymity.
The current policy allows companies to raise ECBs, but sole proprietorship firms and partnerships are prohibited from accessing such debt. Though, LLPs combine features of the corporate form of business and partnerships, they are closer to partnerships. The central bank is also reluctant to open the external borrowings window more in the face of growing capital inflows. Net investment by foreign institutional investors has already reached $24.48 billion this financial year. These inflows, which exceed financing requirements of the current account deficit, have caused the rupee to appreciate.
"ECB is a cost-effective means of financing large capital expenditure and projects. Not permitting LLPs to raise ECBs can adversely impact their ability to execute large projects on a sustainable basis," said Punit Shah, executive director at consulting firm KPMG.
The restrictive regime would mean that any capital intensive activity would be difficult under an LLP structure . Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners, but do not have to meet compliances related to meetings and maintenance of huge statutory records. This makes LLPs a cost efficient way of doing business, extremely popular in many countries.
The concept has, however, failed to take off in India despite the obvious benefits it provides. So far only 2,500 LLPs have been registered in the country, most of them in business consultancy and advisory services.