The idea of Limited Liability Partnership (LLP) was introduced in India in 2008 with the passage of the Limited Liability Partnership Act. Incorporating an LLP combines the advantages of a corporation and a partnership firm, particularly the restricted liability of a company and the flexibility of a partnership firm. Given the growing trend, several manufacturing business as LLPs were formed this year with varied objectives, one of which was the manufacturing activity at large.
Initially, a restriction on LLPs was placed as per OM No. CRC/LLP/e-Forms dated March 6, 2019. As a result, any LLP wishing to register with manufacturing and related activities as its major purposes was denied because manufacturing operations did not fall under the definition of ‘Business’ as defined under the Limited Liability Partnership Act, 2008. However, with MCA’s amendment later in 2019, there is now no restriction on registering manufacturing business as LLP.
Why did ‘Business’ under LLP Act, 2008 not include ‘Manufacturing Activities’ prior to the notification?
The reason why ‘Business’ under the LLP Act did not include manufacturing activities can be understood through the following:
Initial Scope of ‘Business’ in the LLP Act, 2008:
The LLP Act of 2008 originally defined the term “business” in Section 2(1)(e) as encompassing trade, profession, service and occupation.
Reason Behind the Exclusion of ‘Manufacturing Activities’:
The exclusion of ‘manufacturing activities’ from the purview of ‘business’ under the LLP Act before the official clarification can be understood as follows:
- Focus on Professional Services: The primary objective of introducing Limited Liability Partnerships (LLPs) was to facilitate and regulate professional services. The initial framing of the ‘business’ definition was made to fit this primary focus on professions and services.
- Avoiding Scope Ambiguity: Including manufacturing activities within the ambit of ‘business’ could have led to scope ambiguity and potentially diverted LLPs from their intended professional services domain.
- Maintaining Clear Objectives: The Ministry of Corporate Affairs (MCA) aimed to ensure that LLPs remain predominantly engaged in offering professional services, which aligns with their foundational purpose and core competencies.
Clarification through OM No. CRC/LLP/e-Forms (06.03.2019):
On March 6th, 2019, the Ministry of Corporate Affairs (MCA) issued an official clarification through the OM No. CRC/LLP/e-Forms. This clarification was prompted by the need to establish a clear demarcation between the objectives of LLPs and manufacturing activities. The MCA emphasised that LLPs were primarily designed to cater to professional services and the exclusion of manufacturing activities from the definition of ‘business’ was a strategic move to maintain this professional focus. Thus manufacturing business as LLP were restricted in this sense.
What were ICSI’s Objections to the Restrictions on Registering Manufacturing Business as LLP?
The Institute of Company Secretaries of India (ICSI) expressed its dissent over the imposed restriction and submitted a representation on April 8th, 2019. The following arguments were presented in their objection:
Inclusive Nature of “Business” Definition: ICSI highlighted that the definition of “business” holds an inclusive characteristic. It emphasised that statutory definitions can be both exhaustive and inclusive. This standpoint found support in various judicial precedents interpreting the term “includes.” The representation asserted that the definition of “business” doesn’t exclude manufacturing, production and allied activities.
Parity with International LLP Laws:
The ICSI drew attention to the broader scope of the term “business” in various international Limited Liability Partnership (LLP) legislations. It asserted that the definition includes diverse legal activities conducted for profit generation. The representation advocated for a similar interpretation in the given context.
Conversion Instructions and Manufacturing Companies:
Referring to instructions for completing the LLP e-Form-18 (Conversion of company to LLP), the ICSI noted that the only restriction pertains to “Section 8 Companies.” Manufacturing companies face no such restrictions for converting into LLPs.
Inclusion in LLP Form No. 8:
The ICSI pointed out that the Statement of Income and Expenditure in LLP Form No. 8 explicitly incorporates “Sale of goods manufactured” as part of the LLP’s turnover components. This inclusion contradicts the imposed limitation on manufacturing companies.
Impact on Active LLPs:
With a total of 13000+ active LLPs operating in the manufacturing sector, the ICSI expressed concern that this restriction casts doubt on the status of these existing LLPs. It suggested that the restriction’s implication on these entities should be reconsidered.
Current Position: No Restriction on Registering Manufacturing Business as LLP
Finally, after ICSI made its representation to the MCA, the restriction on registering manufacturing business as LLP was removed. The same can be better understood through the following:
Initial Omission of Manufacturing Activities:
The initial position of the Limited Liability Partnership (LLP) Act had a distinct absence of manufacturing activities within the purview of ‘business’. This discrepancy had consequential concerns, prompting representations and events that led to the eventual inclusion of manufacturing activities under the umbrella of ‘business’ within the LLP Act.
ICSI’s Involvement and Representation:
The Institute of Company Secretaries of India (ICSI) played a central role in addressing this limitation. On April 8th, 2019, ICSI submitted a comprehensive representation in response to the restrictive practice of not including manufacturing activities as part of the definition of ‘business’ under the Limited Liability Partnership Act, 2008. ICSI’s representation emphasised on a growing issue: the problem faced by manufacturing enterprises in incorporating as LLPs due to the inconsistency between manufacturing and the prescribed definition of ‘business’.
In its representation as stated in the section before, ICSI delineated that the prevailing interpretation of ‘business’ under the LLP Act excluded manufacturing activities, which consequently hindered manufacturing businesses as LLPs. Moreover, the conversion of private and unlisted companies into LLPs faced similar restrictions due to this definition-based exclusion. ICSI’s criticism highlighted the evolving dynamics of businesses and the need for the legal framework to reflect current commercial realities.
Media Scrutiny and MCA’s Response:
The strong criticism of MCA’s stance, propelled by media scrutiny and ICSI’s representation, made for proper corrective action on part of the MCA. MCA’s acknowledgment of the concerns surrounding the omission of manufacturing activities resulted in finally invoking the OM No. CRC/LLP/e-Forms dated March 6th, 2019. This official memorandum, effective from April 17th, 2019, marked a decisive moment, as it addressed the restrictive practice and formally allowed LLP registration for manufacturing and allied activities.
Finally, Inclusion of Manufacturing Activities in LLPs:
MCA’s move to allow manufacturing and allied activities within the scope of ‘business’ under the LLP Act brought a major shift. This progressive step has aligned the legal framework with the diverse landscape of modern enterprises. It has brought an environment where manufacturing businesses can now seek the benefits of LLP incorporation, and register manufacturing business as LLP, reflecting the adaptability of regulations to dynamic market demands. Ultimately, the inclusion of manufacturing activities not only expanded the opportunities for businesses but also showcased the responsiveness of regulatory authorities to constructive feedback and evolving industry trends.
MCA’s Decision to Withdraw Restriction on Manufacturing Units for LLP Registration
The restriction on registering manufacturing units as LLPs faced opposition from the Institute of Company Secretaries of India (ICSI), leading ICSI to raise the matter with the Ministry of Corporate Affairs (MCA).
Due to ICSI’s strong criticism, MCA revoked the restriction on forming LLPs for manufacturing and allied activities, as stated in OM No. CRC/LLP/e-Forms dated 06.03.2019 and thus there is no more restriction on registering manufacturing business as LLP.
Final Thoughts
The evolution of the Limited Liability Partnerships (LLPs) in India and particularly the inclusion of manufacturing activities, marks a significant shift. Initially omitted from the definition of ‘business’ under the LLP Act, manufacturing activities have now found place due to the positive role played by the Institute of Company Secretaries of India (ICSI) and thus, there is no restriction on registering manufacturing business as LLP any more. ICSI’s objection to the exclusion of manufacturing activities, coupled with media scrutiny, prompted the Ministry of Corporate Affairs (MCA) to reconsider. The MCA’s decision to revoke the restriction, as indicated in OM No. CRC/LLP/e-Forms dated 06.03.2019, proves regulatory responsiveness.
This shift highlights the adaptability of regulations and the importance of collaboration between regulators and industry representatives. The change not only provides manufacturing businesses with LLP opportunities but also highlights the dynamic nature of India’s business ecosystem.
For more information on registering manufacturing business as LLP, connect with our experts at StartupFino.
