On the cards: Strict Solvency and Auditing Norms for LLPs in India

LLPs have a little something to be concerned about now. The government is all set to introduce stringent solvency and auditing norms for Limited Liability Partnerships (LLPs) in India. This is concerning for them as it adds to the compliance burden for them, but at the same time, this move can bring in more transparency. All this comes amidst the need to satisfy RBI’s regulatory concerns.

The Economic Times today quoted a senior official from the Corporate Affairs ministry saying, “The RBI had made it clear to us in our several correspondences that they have their reservations about the LLP Act. We have decided to tighten some crucial rules under the purview of the current Act to win confidence of investors and regulators”. He said the changes will make LLPs more competent and easier to monitor.

LLPs are becoming increasingly popular as the new form of business structure because of the loads of benefits they enjoy. Unlike a regular partnership, an LLP partner is not responsible or liable for another partner’s negligence. This particular feature of this new form of business has made the RBI awry. The LLP Act had been introduced so that small businesses and law and audit firms could benefit from it but today many corporate houses are increasingly using the LLP law to save significant amounts of tax and side step regulatory burden.

The changes in the rules have been welcomed by the industry experts.  It is obvious that clearer and more elaborate solvency and auditing norms will make LLP a more credible business structure. This will ultimately lead to better financial structure and will lead to the growth of this form of business as banks would also have added confidence in lending to the LLP.

The government has now asked the Institute of Chartered Accountants of India (ICAI) to draw out separate accounting standards for LLPs to avoid gray areas in functioning of such firms. We’ll now have to keep an eye out for what they come out with.

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