Investment Activities By The Limited Liability Partnership

The Limited Liability Partnership Act, 2008 (LLP Act) has truly transformed how businesses operate in India, offering the best of both worlds by combining the benefits of companies and partnership firms. One fantastic feature of the LLP Act is its broad definition of “business”.

According to section 2(e) of the LLP Act, “Business” covers every trade, profession, service, and occupation, except for those activities the Central Government specifically excludes through notifications. This expansive definition shows off just how flexible and adaptable the Limited Liability Partnership (LLP) structure is, making it a great fit for all sorts of business activities.

But hey, setting up an LLP comes with its own set of rules, especially for certain sectors. If you’re in banking, insurance, venture capital, mutual funds, stock exchanges, asset management, architecture, merchant banking, securitization and reconstruction, chit funds, or non-banking financial activities, you gotta get that in-principle approval from the relevant regulatory authority.

Investment activities fall under non-banking financial activities, so if an LLP wants to jump into the investment game, it needs the thumbs up from the Reserve Bank of India (RBI).

 

RBI’s Stance on LLPs Engaging in Investment Business Activities

The RBI, the big boss of financial and banking operations in India, keeps a close eye on non-banking financial activities to make sure they play by the rules and keep the financial system rock solid.

When it comes to setting up entities with a main gig in investment, India has some pretty tight regulations, all under the watchful eye of the RBI.

This is super important for Limited Liability Partnerships (LLPs) looking to jump into the investment game. The RBI’s guidelines, along with the Reserve Bank Act, 1934, lay down the law on who can get in and what they need to do to stay legit in the world of non-banking financial activities, including investment business.

 

Key Provisions of the Reserve Bank Act, 1934

Defining: Business of Non-Banking Financial Institution:

Section 45-I (a) of the RBI Act, 1934

“Business of a Non-Banking Financial Institution” means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);

 

Defining: Non-Banking Institution and Financial Institution

Section 45-I (e) of the RBI Act, 1934

Non-Banking Institution has been defined as a “Company, Corporation, or Co-Operative Society”

Section 45-I (c) of the RBI Act, 1934

Financial Institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely: — The financing, whether by way of making loans or advances or otherwise, of any activity other than its own; The acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of a like nature; *The definition is very exhaustive so we have kept it limited to our topic

 

Defining: “Non-Banking Financial Company’’  

Section 45-I (f) of the RBI Act, 1934

‘‘Non-Banking Financial Company’’ Means– (i)     A financial institution which is a company; (ii)    A non-banking institution which is a company, and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii)   Such other non-banking institution or class of such institutions, as the bank may, with the previous   approval of the central government and by notification in the official gazette, specify;

 

Mandates by the RBI

Section 45-IA of the RBI Act, 1934

This section mandates that no non-banking financial company shall commence or carry on business without: Obtaining a certificate of registration from the RBI. Maintaining a net owned fund of at least twenty-five lakh rupees or as specified by the RBI, up to two hundred lakh rupees.

 

Implications for LLPs

Given the definitions and requirements stipulated by the Reserve Bank Act, it becomes clear that the RBI’s regulatory framework is tailored to companies as defined under the Companies Act, 2013. This specific requirement means that only entities registered as companies under the Companies Act, 2013, are eligible for registration with the RBI to conduct non-banking financial activities, including investment businesses. Here are some of the reasons as to why the LLPs are in-eligible for carrying on the business of Investment Activities:

• Legal Structure: LLPs, while flexible and beneficial for many business activities, are distinct from companies in their legal structure and registration under the LLP Act, 2008.
• Regulatory Compliance: The RBI’s regulatory provisions explicitly require the registration of non-banking financial companies (NBFCs) to be entities formed under the Companies Act. This ensures that such entities adhere to the rigorous compliance, reporting, and governance standards applicable to companies.
• Notification and Specificity: The RBI, through its notifications and the provisions of the Reserve Bank Act, explicitly delineates the types of entities that can engage in non-banking financial activities. LLPs do not meet these criteria due to their differing legal status and operational framework.

 

Conclusion

In summary, while the LLP Act, 2008, provides a robust framework for various business activities, it falls short when it comes to non-banking financial activities, specifically investment businesses. The RBI’s regulations necessitate that only companies registered under the Companies Act, 2013, are eligible for registration and approval to operate as NBFCs. Therefore, LLPs cannot be registered as NBFCs for the purpose of carrying out investment activities. This clear demarcation ensures that the financial sector remains regulated and compliant with the highest standards set forth by the RBI, maintaining the stability and integrity of the financial system.