After targeting over 200,000 shell firms, govt is trying to weed out LLPs

After striking over 200,000 ‘shell’ firms off the records, the government is now trying to weed out limited liability partnerships (LLPs). The Ministry of Corporate Affairs has sent notices to 7,775 LLPs for not filing annual returns for at least two consecutive years, according to officials. 

At the same time, registrars of companies (RoCs) across the country are striking off LLPs in their respective jurisdiction for not conducting any business. More than 1,700 LLPs have been struck off by the RoC Mumbai and 1,100 by the RoC Delhi in recent months. Other RoCs, such as Pune, Kerala, Coimbatore, Chhattisgarh and Chennai, are also cancelling the names of ‘inoperative’ LLPs.

An LLP is a company in which partners are not always responsible for each other’s actions.

RoCs have also not been issuing the director identification number (DIN) since January 2018. DIN is necessary for registering a company or LLP in accordance with the Companies Act 2013. The concept of DIN was introduced with the insertion of Sections 266A to 266G in the Companies (Amendment) Act 2006. The government has also amended the LLP rules to insist that partners in an LLP obtain a designated partner identification number (DPIN) before their appointment. DPIN is similar to DIN. 

Experts say this could impact foreign direct investment (FDI) flows in the country as there are many foreign parties that wish to open LLPs in India.

Bharat Anand, partner at Khaitan and Co, said, “Enforcement actions have to be consistent and they need to target wrongdoers. If some LLPs are showing signs of breaking the law, they should alone be targeted. Changing the rules due to lack of resources for enforcement is not right.”

What's an LLP
 

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It, therefore, can exhibit elements of partnerships and corporations. In an LLP, no partner is responsible or liable for another’s misconduct or negligence.

Experts suggest that LLPs are the preferred option for those who want to do business as laws are less stringent for them. The data indicates that many small- and medium-scale companies have converted into LLPs. Over 50,000 private companies were converted into LLPs between April and November 2017. The government, meanwhile, continues to weed out shell companies, suspected of helping bigger corporates launder money. Here also, it is tracking those companies that have not filed their annual returns for two or more consecutive years. Such companies have been served notices and are being struck off. Apart from the first list of 226,000 companies, 225,000 more have been sent notices.

In the first list, as many as 300,000 directors were disqualified, of which the condonation of delay scheme helped restore 30,000. These 30,000 were not directors in any shell company. It is quite possible that out of the 1.1 million companies registered with the RoC, only around 500,000 would be fully operative as the exercise to weed out 'dabba' companies continues. Apart from shell companies, vanishing companies are also on the ministry's radar. There are as many as 400 companies that are not traceable on the bourses despite being listed.

Over the years 

2008: The LLP Bill passed by Parliament 

2009:  First LLP incorporated 

Apr-Nov 2017: Over 50,000 private companies converted into LLPs | Many small and medium players consider LLP a preferred route to do business