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Author: Neha Singhi
Contact: +91-33-40083385
neha@nehasinghi.com
Date: January 16, 2009

A striking and commendable move by DIPP: to come out with consolidated and comprehensive FDI Regulatory Framework. Foreign Direct Investments by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and Government of India and Reserve bank of India regulate this under the FEMA 1999 and its various regulations. Keeping in view the current requirements, the Government comes up from time to time with new regulation, amends/changes in existing one through order/allied rules, Press Notes, etc. The current FDI law is spread over FCRA, FEMA, various circulars, guidelines and press notes; the DIPP has issued about 177 Press Notes, covering various aspects of FDI policy, including cross border investment, policy liberalisation, policy rationalisation and foreign technology collaborations, Industrial Policy. Hence there was a need for consolidation of the FDI policy to make it more transparent, predictable, understandable, simple and clear; thus reducing the regulatory burden and promoting foreign direct investment.

At the very onset, the press note clarifies that it does not make any change in the existing law and any matters not covered in the press note will be continued to be dealt in the manner as under the existing laws. Thus the FDI law is kept intact, and this Press note is an attempt to consolidate the various Acts, Regulations, Press Notes, Press Releases, Clarifications, etc issued and enacted over the past years.

The draft consolidated document released on 24th December 2009 is open for comments until January 31, 2010 and a final document will be released by April 1st 2010. The Government proposes to issue Press Note on FDI Regulatory Framework twice a year in April and October which would be the current regulatory framework on that date; hence incorporating and reflecting all the changes in the regulations during the intervening period of six months. The new system of continuous consolidation and updation is primarily evinced as a measure of investor and investment friendliness.

This Press Note when comes into force will have the effect of rescinding all previous Press Notes on FDI issued by DIPP, and any action taken under the rescinded Press Notes shall in so far as it is not inconsistent with this Press Note be deemed to have been taken under the corresponding provisions of this Press Note.

FDI Regulations: Brief

FDI plays a important role in the accelerated economic growth of a country, and so it does for India which is now fast integrating with the global economy. Over the past years FDI regime has been directed more and more towards liberalisation, allowing free FDI flow in India. The article makes an attempt to capture some of the salient features of the current FDI Regime in a consolidated manner as also reflected in the new draft press note.

Eligibility of Sources of foreign investment

The eligibility criteria for various sources of foreign capital in Indian companies is stated below:

Eligibility of Resident entities and Instruments

The resident entities which are eligible to receive foreign investment may be classified as follows:

Investments can be made by non-residents in the shares/convertible debentures/preference shares of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required.

Investment would be subject to the ‘Previous/existing venture/tie-up condition’. Foreign investment include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB), convertible debentures and preference shares.

Direct and Indirect Foreign Investment

Any non-resident investment in an Indian company is direct foreign investment. An Indian company would have indirect foreign investment if the Indian investing company is owned and controlled by non-residents. An Indian company is said to be ‘Owned and Controlled’ by ‘non-resident entities’, if more than 50% of the equity interest in it is beneficially owned by non-residents or if non-residents have the power to appoint a majority of its directors.

The entire investment of Indian company owned and controlled by non residents is considered indirect foreign investment (as demonstrated through Illustration 1), except where the investment is made in a wholly owned subsidiary(WOS) of the Indian company, then the downstream investment in the WOS of such Indian company would be a mirror image of the holding company(as demonstrated through Illustration 2); i.e. if non resident investment in the Indian company is 75%, then the indirect foreign investment in the WOS of Indian company would be 75%.

Any indirect foreign investment would be required to follow the same norms as a direct foreign investment such as entry route, conditionalities and sectoral caps. For the purpose of computation of indirect foreign investment, Foreign Investment in Indian company shall include all types of foreign investments i.e. FDI, investment by FIIs(holding as on March 31), NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and convertible preference shares, convertible Currency Debentures.

Remittance and Repatriation

The AD Category I bank can allow remittance of sale proceeds/remittance on winding up/Liquidation of Companies of a security (net of applicable taxes) to the seller of shares resident outside India, provided-

• the security has been held on repatriation basis
• the sale of security has been made in accordance with the prescribed guidelines and
• NOC / tax clearance certificate from the Income Tax Department has been produced

Dividends are freely repatriable without any restrictions, subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time.

Author: Neha Singhi

Contact: +91-33-40083385

neha@nehasinghi.com

Date: January 15, 2010

“Citizens never support a weak company and birds do not build nests on a tree that does not bear fruits” Minister Salman Khurshid quoted Arthshastra while introducing Corporate Governance Voluntary Guidelines 2009 (CGV Guidelines). These guidelines being recommendatory in nature, focus on fairness, transparency, accountability and responsibility by Indian Incorps. CGV Guidelines are set of standard practices which may be voluntarily adopted by the public companies, and big private companies. In the present article we have tried to capture significant policies of the CGV Guidelines and their implications.

The CGV Guidelines suggest guidelines with reference to the below:

An incorporated company has perpetual succession and separate legal identity; but it needs people to run it. The key driver of a company is its management, which includes its Board of Directors (BoD) and key Managerial personnel. A company is run by its management but there are several stakeholders in a company, such stakeholders[1] whose interest is directly or indirectly affected by the performance of company. The stakeholders are dormant and the day to day functions of a company are discharged by its management. The immense powers in the hand of management come along with greater responsibilities, however regrettably constant lapses have been found on the part of management in discharge of their duties and functions. Though there are various statutes and guidelines which govern the management of the company and its functioning, but undoubtedly there are some gray areas yet. Besides advocating transparency and increased disclosures in Annual Report, company’s website, and stock exchange website if company is listed, the guidelines have brought in clarity into certain standard corporate practices such as tenure of Independent Director, remuneration etc. The suggestive guidelines are a further step to strengthen the Corporate Governance framework for Indian Incorps.

Board of Directors

The Board should consist of a balanced combination of Executive Directors and Non-Executive Directors, so as to take a proper and reasoned decision. The Directors are appointed in a company in a General meeting as per the provisions of the Act, however the policies and terms of appointment of a Director vary from company to company and from director to director. The guidelines suggest formal letters of appointment to Non-Executive Directors and Independent Directors, clearly stating the term of the appointment, fiduciary duties, liabilities and remuneration of the appointed Director. The Non-Executive Directors and Independent Directors should be recommended by nomination committee, comprising of majority of Independent Directors including its Chairman. The nomination committee should clearly set out the guidelines  for evaluating the skill, knowledge, experience and effectiveness of individual directors. The Independent Directors should provide a certificate of independence at the time of appointment and thereafter annually. Further to ensure independent approach of Independent Directors, the maximum tenure for Independent Director in a company should not be more than six years, and a period of three years should elapse before such an individual is inducted again in the same company in any capacity. No individual may be allowed to have more than three tenures as Independent Director in a company and the maximum number of pubic companies in which an individual may serve as an Non-Executive Directors/Independent Directors should be restricted to seven. Independent Directors should be allowed to have the option and freedom to meet company management periodically to enable them to study and analyze various information and data provided by the company management.

A Chairman of a company presides over the Board meetings, he has a casting vote in decisions of the Board, whereas Chief Executive Officer(CEO) is incharge of day to day functioning and the management of affairs of the company. Both the positions are senior and helps to provide a check within the top level management. However in a number of Indian companies, the position of Chairman and CEO is enjoyed by the same individual, resulting in unfettered decision making power with a single individual. Thus the guidelines suggest separation of offices of Chairman & CEO, and a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/CEO such as to promote balance of power .

Remuneration of Directors and senior managerial personnel is an arena which in most vulnerable to  conflict of interest between management and stakeholders. Though there are legal provisions set to govern managerial remuneration, there is a more discipline required through these guidelines which suggest to clearly lay down and disclose Remuneration Policy for the members of the Board and Key Executives. The companies should pay either a fixed contractual remuneration to its Non-Executive Directors, or an appropriate percent of the net profits of the company. The structure of compensation to Non-Executive Directors may have a fixed and variable component based on attendance in Board and Committee meetings. Whereas the Independent Directors should be paid adequate sitting fees(not stock options) which may depend upon the twin criteria of Net Worth and Turnover of companies. The company should form a Remuneration Committee for determining the remuneration of executive directors and executive chairman including compensation payments. The Remuneration committee should consist of at least three members, majority being non executive directors with at least one being an Independent Director. Further no director is to be involved in deciding his or her own remuneration. The committee should also determine principles, criteria and the basis of remuneration policy of the company and any deviation from such policy, should be brought to the notice of shareholders with justification/reasons.

Responsibilities of the Board

1. Generally the Non-executive Directors and Independent Directors do not take active part in the day-day functioning of the company and may not be aware of the technical and operational details. The companies should have a proper induction program for Directors, also providing adequate training to familiarise them with the operational aspect of the company.
2. The Board should ensure that there are systems, procedures and resources available to ensure that every Director is supplied, in a timely manner, with precise and concise information in a form and of a quality appropriate to effectively enable/discharge his duties. The Directors should be given substantial time to study the data and contribute effectively to Board discussions.
3. The Board, its Audit Committee and its executive management should collectively identify the risks impacting the company’s business and document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy; and should make disclosure in the Directors’ Report..
4. A formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
5. The Board should place systems to ensure Compliance with Laws, to safeguard shareholders’ investment and the company’s assets. It should review of the effectiveness of the company’s system of internal controls and should report to shareholders.

Audit Committee of Board

Section 292A requires every company with a paid up capital not less than five crores to have a Audit Committee to ensure compliance of internal control systems. Listing agreement has also provision for Audit Committee, which is applicable to listed companies. Now, the guidelines also suggest that the companies should have at least a three-member Audit Committee, with Independent Directors constituting the majority. The Chairman of such Committee should be an Independent Director. All the members of audit committee should have knowledge of financial management, audit or accounts. The Audit Committee should have the responsibility to -

• monitor the integrity of the financial statements of the company;
• review the company’s internal financial controls, internal audit function and risk management systems;
• make recommendations in relation to the appointment, reappointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
• review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process.
• monitor and approve all Related Party Transactions including any modification/amendment in any such transaction.

Auditors

The Statutory Auditors of a company verifies and states that the financial statements of the company reflect a true and fair view of the state of affairs of the company. The Auditor acts as a watchdog and protect the interest of the stakeholders. The CGV Guidelines suggest appointment of Auditors should be referred by the Audit Committee. Every company should obtain a certificate of independence from the auditor certifying his/its independence and arm’s length relationship with the client company.

Since the havoc created by Satyam episode in December 2008, where the leading audit firm failed to check deep irregularities in the financial statements of a giant IT company leading to fraud of billions of rupees of a publicly listed company, there has been constant attempts to make and implement a rule for rotation of Auditors. The CGV Guidelines suggest that a policy of rotation of auditors should be adopted where a Audit partner should be rotated once every three years, whereas an Audit firm may be rotated once every five years. A cooling off period of three or five years should elapse before a partner or audit firm respectively, can resume the same audit assignment.

Further to strengthen the independence and credibility of the internal audit process, an internal auditor should be appointed, not being an employee of the Company.

Secretarial Audit

Good corporate governance practices enhance companies’ value and stakeholders’ trust; hence it is essential to ensure transparent, ethical and responsible governance of the company. A company can ensure standard corporate governance practices through Secretarial Audit by an Independent Professional.

Institution of mechanism for Whistle Blowing

The term whistleblower derives from the practice of English (policemen), who would blow their whistles when they noticed the commission of a crime. The whistle would alert other law enforcement officers and the general public of danger. In corporate parlance, whistle blowing is a mechanism for employees to raises a concern about wrongdoing occurring in an organization or body of people, such as suspected fraud or violation of the company’s code of conduct or ethics policy. The guidelines suggest to set up whistle blowing mechanism to track frauds or non-violation occurring in the company. However it is also essential to have adequate safeguards against victimization of employees who avail the mechanism.

Conclusion

“Good corporate governance practices are a sine qua non for sustainable business that aims at generating long term value to all its shareholders and other stakeholders”. It is strong fundamentals and ethical behavior in a company that can help it overcome huge crisis. Compliance with good governance practices should not be regarded as regulatory requirement but rather as an opportunity and value proposition for organisations. Investors all around the world notice companies with clean governance, and this appreciation leads to higher valuation of such organisation. The CGV Guidelines is a benchmark for the corporate governance practices in the Indian Incorps, and hopefully the corporate world will make the best use of it.

Author: Neha Singhi

Contact: +91-33-40083385

neha@nehasinghi.com

Date: January 8, 2010

1. Schedule of classes
2. Capital Market instruments
3. Money market instruments
4. ICDR Guidelines

1. A dual GST structure: Central GST and State GST; tax to be paid to the Accounts of Centre and State separately
2. Input Tax Credit for Central GST only available against Central GST, and the same  rule applies to State GST; cross utilization of ITC allowed between the Centre and State only in case of interstate supply of goods
3. Centre and State to have separate legilation; each state may have its one legislation keeping basic provisions of chargeability, levy, classification unifor to the maximum extent possible
4. Thresholds proposed: State GST Annual Gross Turnover 10 lacs and Central GST 1.5 crores
5. Following Central and State Taxes are proposed to be subsumed:
   • Central Excise Duty, Additional Excise Duties
   • The Excise Duty levied under the Medicinal and Toiletries Preparation Act
   • Service Tax
   • Additional Customs Duty, commonly known as ountervailing Duty (CVD)
   • Special Additional Duty of Customs – 4% (SAD)
   • Surcharges, and
   • Cesses
   • VAT / Sales tax
   • Entertainment tax (unless it is levied by the local bodies)
   • Luxury tax
   • Taxes on lottery, betting and gambling
   • State Cesses and Surcharges in so far as they relate to supply of goods and services
   • Entry tax not in lieu of Octroi
6. Inter-state Goods and Service Tax Model: Centre would levy IGST (CGST plus SGST) on all inter-State transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
7. GST Rate Structure expected

Special rate for precious metals

Lower rate for necessary items and goods of basic importance

Standard rate for goods in general

8. Zero rating for exports
9. Both CGST and SGST will be levied on import of goods and services into the country. Full and complete set-off will be available on the GST paid on import on goods and services.

Author: Neha Singhi

Contact: +91-33-40083385

neha@nehasinghi.com

Date: November 11, 2009

Indian Regulators are sitting on the edge, recreating and revamping the legal framework for Indian Incorporations. Significant alterations have been due from long time; however owing to the rigidity of Indian legal system the process have been outstretched. But better late than never!!!! Call it for the fall of Lehman Bros in Sept 2008, recession in world economy, Satyam scam in Dec 2008, or crunch in Indian business, the Regulators are finally here making a difference to the Indian Corporate Sector by making the law healthier and easier.
India is one among the top developing countries with incredible growth history and favorable economic conditions. The Country’s Commerce & Industry is on an ever-changing spree, competing on a world-wide scale. The gigantic pool of resources, diverse options of income, enormous consumer market warrants growth potential in India. Exports in the country have increased with leaps and bounds and India is sought as one of the favorable avenue of investment by international investors. The business and number of corporate organizations have increased manifold over the years. In this dynamic era, one cannot think of sticking to age-old legal regime. A legislation which is too old will lose its relevance and jeopardize the objective for which it was enacted. India has stretched its arms to a new constitutional framework governing its body corporate to meet the requirements of changes globally.
We shall briefly discuss here, the forthcoming changes, both certain and expected, in Indian legal regime:

1. International Financial Reporting Standards

The International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) are increasingly being recognised as Global Reporting Standards. More than hundred countries, including the countries of the European Union, Australia and Russia, currently require the use of IFRSs in their countries. The implementation of IFRS would help Indian companies to speak the same accounting language as their foreign counterparts in countries like UK, Canada, Singapore and Australia.

In view of the globalisation, uniformity in accounting statements for companies all over the world had become a necessity. India proposes full convergence of Indian accounting standards with the IFRS by April 1, 2011. The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, and to provide the current financial status of the entity to its shareholders and public in general. Adopting IFRS will be a major challenge for Indian Companies, but undoubtedly will reap benefits in the long run.

2. Goods and Service Tax

The Finance Ministry has declared introduction of Goods and Services Tax (GST) by the year 2010 in India. France was the first country to introduce GST, and now more than 140 countries are already following GST taxation system. GST would replace the principal broad-based consumption taxes i.e. CENVAT and the Service Tax levied by the Centre and the VAT levied by the states. GST is basically tax on final consumption, to be levied concurrently by both levels of government. The GST will work as a centralised taxation system with collection of all the Tax going to the Central Government and then shared by the states.

Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. While the white paper of GST is yet to be released, there is a lot of speculation on the exact model to be introduced in our country.

3. Direct Tax Code

A brand new Direct Taxes Code (code) has been released that will replace the 1961 Income Tax and other direct tax laws, when adopted by the Parliament in the winter session. The code is a complete rewriting of Indian tax regime; radically improvising on the taxation structure by making it simpler and thus warranting better compliance.

The thrust of the code is to improve the efficiency and equity of taxation system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The attempt is to simplify the language to enable better comprehension and remove ambiguity to foster voluntary compliance.

The code’s thrust on clarity, certainty and an effective dispute resolution is quite commendable, and should go a long way in boosting India’s image as a friendly investment destination. All the direct taxes have been brought under a single code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system. The separate concepts of ‘previous year’ and ‘assessment year’ are replaced by a unified concept of ‘financial year’. The provisions relating to capital gains taxation have been altered, such as any investment asset transferred at gain is taxable for the respective assessee, removing the concept of short-term and long-term gain; further sale of any business asset will be considered as business income and taxed accordingly, thus heavily impacting mergers and acquisitions. The Securities Transaction Tax (STT) is proposed to be abolished and the gain or loss arising out of sale of securities or units is proposed to be taxed as capital gain. The code moderates income tax rates, such as the tax rate up to an annual income of Rs 25 lakh is just 20 per cent, additional tax benefits are extended to women and senior citizens. Corporate tax rate for both foreign and Indian companies is proposed at 25%, however an additional branch profit tax of 15% on after tax income for foreign companies has been proposed. Even though the corporate tax rate is lowered, minimum alternate tax at 2% of gross assets without deducting liabilities will be a huge blow to the dream of paying less tax by corporate houses. The Direct Code is under review and the comments and critics are being made, hopefully the resulting law meets the aspirations of all, in the country.

4. Company Bill 2009

The Companies Bill 2009 was introduced by the Finance Minister in Lok Sabha on 3rd August 2009. The new bill is a clone of Company Bill 2008, with the only difference of Bill and Republic year. Even though some major episodes occurred during the transition period of the two Bills, Regulators have not modified the provisions of the earlier bill; hence ignoring the demands of changed times of corporate sector. The Bill introduced with a purpose “to consolidate and amend the law relating to companies”, has focused on structural and some procedural changes in law. A list of provisions of listing agreement has been incorporated in draft company law, irrespective of the fact that a separate statutory body, SEBI, is governing such provisions, does it invite for dual governance and conflicting approach of MCA and SEBI over these provisions? There has been only a vague attempt to simplify the language or bring more clarity in legal provisions. The most sought feature, i.e. more autonomy for corporate following more transparency, and impetus for self driven corporate governance has been missing in the draft company law….

Important provisions like Section 383A requiring appointment of Company Secretaries or compliance certificate from Whole-time Practicing Company Secretaries have been arbitrarily removed. Shorter process and single forum for approval of mergers and acquisitions is recognised, however the advantage is mainly to merger of holding and wholly owned subsidiaries or among small companies having paid up capital and turnover less than amount as specified. Law makers have missed the fact that simpler language and conceptual clarity is more required than mere structural changes and add or less of certain provisions. Indian corporate structures are unique in its own way, with majority of companies being closely held. We would certainly need more revamping of provisions and making the law more user friendly for attracting more compliance and at the same time promoting growth.

5. Revision of Takeover Code

SEBI had come out with Substantial (Acquisition of Shares and Takeover) Regulations way back in 1997, almost a decade ago. The 12-member Takeover Regulation Advisory Committee (TRAC), set up on September 4, is likely to look into the entire takeover code address issues related to norms for overseas acquisitions, creeping acquisitions, increasing the threshold for open offers, and non-compete fees. The new takeover code which is probably more reflective of thinking on revitalizing the takeover code and being more responsive to institutional investors and the sentiment around the world where large institutional investors want to have a say in how things are done.

Apart from the above legal and regulatory changes which are in pipeline, there have been few changes which have already taken place such as enactment of Limited Liability Partnership Act, 2008, coming of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Guidelines). Probably, the law makers want to tone up the legal statutes to meet the demands of time, and we are hopeful that the results are constructive, and build up India’s image as a law compliant nation. A simple and friendly law will be credible by all Indians as well as foreign countries who propose to invest in India.

Author: Neha Singhi
Contact: +91-33-40083385
neha@nehasinghi.com
Date: October 20, 2009

CONCEPT OF LLPs:
Limited Liability Partnerships can be defined as an alternative to the traditional partnerships and can most appropriately be described as a hybrid between a company and a partnership that not only provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutual agreement arrived between them. Owing to flexibility in structure and operation, LLP are very much suitable for small enterprises and venture capitalists. Also it provides a platform to professional firms of Company Secretaries, Chartered Accountants, Advocates etc. to conduct their business/professional activities under the organisation structure recognised as separate legal entity, limiting their personal liability and increasing their global competitiveness.

INTERNATIONAL SCENARIO OF LLPs:
Internationally, LLPs are a very popular form of business but slightly vary from country to country. I .In United States , Limited partnerships emerged in the early 1990s; while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by 1996, when LLPs were added to the Uniform Partnership Act (UPA) . Each individual state has its own law governing their formation. Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants and architects.

In the United Kingdom, The Limited Liability Partnership is a recent innovation of UK law, and has been introduced by the Limited Liability Partnerships Act 2000. The Act became law on 1st April 2001. In a LLP, all partners have limited liability, similar to that of the shareholders of a corporation. The partners have the right to manage the business directly and and they bind the firm by their actions. From the taxation perspective also LLPs are favourable since many countries have a different level of tax liability on partnership and LLP firms as compared to a corporation. Under UK law, the LLP is a “fiscal transparency, means that it is not subject to taxation and the only the members are liable to taxation.

INTRODUCTION OF LLPs IN INDIA:
The unlimited liability of partners has so far been the primary reason for which Partnership Firm of professionals, have not grown in size to successfully meet the challenges posed by international competition,WTO,GATT etc. Much as an alternative to the traditional partnerships, Limited Liability Partnership structure was given a recognition through Limited Liability Partnership Act, 2008 . Limited Liability Partnership Bill, 2006 was introduced in Rajya Sabha on 15th December 2006 by Minister of Companies Affairs. The LLP Bill, 2006 introduced was broadly based on the UK and Singapore LLP Acts. The Bill was later referred to Department Related Parliamentary Standing Committee on Finance for examination and report. Keeping in view the recommendations made by the Standing Committee and other relevant inputs, the Government finalized the LLP Bill, 2008. On 21st October, 2008, the revised Bill was again introduced in Rajya Sabha and it finally got passed on 24th October 2008. Later, the Bill was passed by Lok Sabha on 12th December, 2008, and received President’s assent on 7th January 2009, and thus Limited Liability Partnership Act, 2008 came into force.

The main provisions or the highlights of the Act are as follows:

1. Any two or more persons,by subscribing there names to the incorporating document and after filing it with Registrar can form a LLP.
2. The LLP shall be a body corporate and shall have a separate entity different from its members.
3. The LLP shall have a perpetual succession means that the corporation or organization would continue to exist despite of death, bankruptcy, insanity, change in membership or an exit of a partner.
4. While the LLP has a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. No partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
5. Indian Partnership Act,1932 shall not be applicable to the LLP and unlike traditional partnerships where maximum number of partners cannot exceed 20, there shall be no such upper limit in case of LLP.
6. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law.
7. The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008. The act provides flexibility to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of Schedule I of LLP Act.
8. An audited Annual Accounts are required to be maintained by every LLP reflecting a true n fair view of its state of affairs. In addition to this a statement of accounts and solvency shall also be filed by every LLP with the Registrar every year.
9. The Central Government has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose.
10. A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act.
11. The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court.
12. The law would confer powers on the Central Government to apply such provisions of the Companies Act, 1956 to provide, inter-alia, for mergers, amalgamations, winding up and dissolution of LLPs, as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses.

BRIEF PROCESS OF INCORPORATING A LLP IN INDIA

• Minimum two of the partners have to obtain a Designated Partner Identification Number by applying in Form 7 on the LLP website. A physical set of documents along with valid proof are sent to the Department for validation.
• Name Availability Form 1 has to be filed by two designated partners.
• Once name availability is confirmed then, Incorporation Form 2 has to be filed stating the details of the partners. A proof of the registered office has to be attached with the form.
• Information with regard to LLP Agreement has to be filed with in one month of Incorporation in Form 3
• Consent of partner to become a partner/designated partner has to be filed in Form 4 within one month of incorporation.

** this picture is an extract from the LLP website (http://www.llp.gov.in/)

RESPONSE TOWARDS LLPs BY THE INDIAN MARKET:
The rules in respect of registration and operational aspects under the LLP Act, 2008 viz. LLP Rules, 2009, were issued on 1st April, 2009. The rules in respect of conversion of a partnership firm, a private company and an unlisted public company into LLPs were made effective w.e.f. 31st May, 2009. The Government also launched a website namely www.llp.gov.in on 1st April,2009 for registration and governance of LLPs.

This introduction of LLPs in Indian Market was taken hand to hand and consequently a bullish response was seen. The first LLP got registered on 2nd April,2009,the very next day of the issue of rules regarding LLPs and as by the current data , till 5th October 2009,the registered number of LLPs has increased up to 248.

TAXATION ISSUES:
The Union Budget 2009 announced on July 6, 2009 the road map for the taxation of the LLPs in India. The new provisions introduced in relation to the taxation of LLP do not treat the LLP as a transparent entity but treat the same at par with the general partnerships under the Indian Partnership Act, 1932. Accordingly, the profits and losses of the LLP would not pass
through in the hands of the partners but would be assessable in the hands of the LLP. The definition of “firm”, “partner” and “partnership” under section 2(23) of the Income Tax Act, 1961 (‘IT Act’) have also been extended to include LLP, a partner in a LLP and LLP respectively within their scope. Accordingly, all the provisions relating to the partnership firm apply mutatis mutandis to LLPs.

LLPs have also been excluded from the provisions of section of 44AD of the Income Tax Act, which provide for an option of the income of the general partnerships to be taxed at a presumptive rate of 8%. A new section 167C has been introduced in the IT Act, which makes every partner of a LLP jointly and severally liable for the taxes to be paid by the LLP for the period during which he is a partner, unless the non-recovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part.

Some of the key highlights of tax on LLPs are as follows:

• LLPs will be treated as Partnership Firms for the purpose of Income Tax w.e.f. assessment year 2010-11 .
• No surcharge will be levied on income tax.
• Profit will be taxed in the hands of the LLP and not in the hands of the partners.
• Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP.
• Remuneration to partners will be taxed as “Income from Business & Profession”.
• No capital gain on conversion of partnership firms into LLP.
• Designated Partners will be liable to sign and file the Income Tax return.

Thus all the aforesaid factors make LLP an attractive mode of business so far as the tax cost is concerned.

GLOBAL COMPARISON:
Comparison of legal regime of Indian LLP with United States and United Kingdom LLP:

CONCLUSION:
LLPs have been in rising trend in various other countries such as UK, USA, Australia, Singapore, China, Japan, Germany etc. In this form of business entity, the individual partners are relieved from joint liability of partners in a partnership firm and there liability does not extend to their personal assets. Indian service industry is expanding its horizons, there are a large number of Indian professionals exporting services all over the world. The recognition of LLPs will make them more competitive in International world, and augment the growth of service industry in India. Professionals like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates and others may form multi-disciplinary LLPs to meet the limit their liabilities and grow in the changing economic environment. This hybrid structure of LLP facilitates entrepreneurs, service providers and professionals to constitute, organize and operate in a most efficient and effective manner so as to face the competition in the global market. Indeed the LLP structure will sooner become the most common form of organisation among professionals, and contribute to Corporate World at large.

Author: Anjali Hemrajani

For Neha Singhi & Company
Contact: +91-33-40083385
anjali@nehasinghi.com
Date: October 2009

Step I. Obtain provisional DIN
The applicant is required to fill-up and submit form DIN-1 online for obtaining provisional DIN. Form DIN-1 is available under ‘Apply for DIN’ tab on the left hand side panel under DIN’ link on the homepage of MCA portal.

Step II. Pay Din application fee
The applicant is required to login to the MCA portal and click on ‘Pay Miscellaneous fee’ link available under the ‘Services’ tab. Select ‘DIN application fee’ option and enter the provisional DIN. Applicant can make the payment of fee by using any of three modes of payment available on MCA portal. Form DIN-1 will be processed only after the DIN application fee is paid.

Step III. Dispatch DIN application to MCA DIN Cel
The applicant is required to take a print-out of Form DIN-1 (containing provisional DIN generated online). Fill the service Request Number (SRN) of the fee paid. Sign the DIN application form manually and paste a good resolution photograph in the space earmarked. Attach the photocopies of the ‘Proof of Identity’ (Attach additional proof, if ‘Father’s name and ‘Date of Birth’ is not indicated in the ‘Proof of Identity’) and the ‘Proof of Residence’ with DIN application form and tick the relevant checkbox against the document name. Get the photograph and the attached supporting documents attested from an approved authority as specified in form DIN-1. The certifying authority must mention its particulars such as Name, COP No. etc, and affix its seal/ stamp.

Complete set of documents is required to be sent to MCA DIN Cell at Noida, by post, courier or hand delivery, as per convenience, within 60 days from the date of generation of provisional DIN online.

Processing of DIN application
DIN application is received by MCA DIN Cell. DIN application form and attached supporting documents are scrutinized and if found in order, the provisional DIN is approved and activated in the system. If there is any defect in the DIN application, the provisional DIN is rejected. It takes about a week’s time to complete this process. DIN approval/ rejection letter is generated and sent by post to the applicant. The status of application can also be tracked from the ‘DIN Approval status’ tab in the DIN corner.

What is DIN2 or DIN3?
Applicable only for directors appointed upto 30 th June, 2007 and where the Form 32 had been filed before the date. DIN2-Intimation of DIN by the Directors to the Company; DIN3-Intimation of DIN by Company to ROC.

Post-approval changes in particulars of DIN-1
If there is any change in the particulars submitted in form DIN-1, File form DIN-4 for intimating the changes in the particulars within 30 days. For instance in the event of change of address of a director, he/ she is required to intimate this change by submitting Form DIN-4 along with the required attested documents with MCA DIN Cell.

Process for applicants who are (i) Indian citizens residing abroad; (ii) foreign nationals residing in India; and (iii) foreign nationals residing outside India
While general conditions would be applicable in these categories also, the certification of attached documents and the photograph may be done by a notary in the home country of the applicant or the Managing Director/ CEO of the Company on which he is a Director or the Company Secretary in full time employment of the Company. Further, in the case of a Foreign National, certified copy of the valid passport should be enclosed.

Before you fill-in application for DIN, please remember following common causes of REJECTIONS

• Applicant’s name and father’s name mentioned in abbreviated form. – The Name should be expanded even if the ID proof contains the name in abbreviated form.
• Mismatch in the Name and Father’s Name in DIN form with the ID (Identity) proof enclosed. – Any mismatch in Name, including spelling mistake, may lead to rejection of application. Minor spelling deviations in the father’s name may be accepted, if such deviations do not materially impact the name.
• Prefixes like Mr. / Ms. / Kumari / Shri etc. used in the applicant’s name.
• Residence proofs like: Bank Statements, Electricity Bill, Telephone Bill, Utility bills etc. submitted are older than 2 months of submitting the application for verification OR such documents are in the name of some other person, for example father or spouse.
• The supporting documents are not duly attested i.e. Name, Designation, Membership/ Practicing certificate number etc. are not clearly indicated. – If the seal/ stamp does not contain membership/ practicing certificate number, same may be recorded by hand.
• Passport / Driving License / Identity proofs etc attached are expired. – Only such documents which are currently valid should be attached.

Source: “www.mca.gov.in” The checklist is an extract from MCA website.

In case of listed company

• Send copies of notices of General Meeting issued to shareholders to the Stock Exchange
• Six copies of ammendment made in Memorandum of Association as soon as the same is adopted in the General Meeting, one being a certified copy.
• Proceedings of General Meetings
• A time period of at least one year should have elapsed from the last name change
• 50% of the total revenue in the preceeding year should have been accounted for the new activity suggested by the new name
• new name along with old name should be disclosed through the EDIFAR website for a continuous period of 1 year

1. Specific Board resolution in support of the proposal indicating specific paras of Part II of Schedule VI and the financial year in respect of which exemption is sought.
2. Copies of approvals under Section 211 obtained, if any, during the last three financial years.

The following information should invariably be furnished with the application in the fields forming part of the eForm:

• The financial year for which exemption is sought.
• Precise reasons/justification for seeking exemption.
• If the company had been complying with the requirements in the past, reasons as to how the company has been complying in the past.
• It should be indicated as to whether the company is maintaining proper purchase/ sales/ stock registers so as to furnish true and fair view of its state of affairs in compliance of Sections 209/211 read with Schedule VI to the Act.
• Details of total turnover and exports made by the company during the financial year in respect of which exemption is sought.

Applications seeking exemption under Section 212 of the Companies Act should be accompanied by :

1. Specific Board resolution in support of the proposal mentioning inter-alia the names of subsidiaries and their financial year in reference.
2. Copies of approvals under Section 212 obtained, if any, during the last three financial years.

The following information should invariably be furnished with the application in the fields forming part of the eForm:

• The financial year for which exemption is sought. This year should also be the year mentioned in the accompanying board resolution.
• Precise reasons/justification for seeking exemption.
• Names of subsidiaries in respect of which exemption is sought.
• Dates on which the companies became subsidiaries of the applicant company.
• The financial years of the holding and subsidiary companies under reference.

The companies may have to furnish any other additional information as may be asked for by the Department.

Source: “www.mca.gov.in” The checklist is a direct extract from MCA website.