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Foreign Investment in Limited Liability Partnership in India

Introduction


Limited Liability Partnership (“LLP”) is a hybrid entity with the advantages of a company and operational flexibility of a partnership. Since the introduction of Limited Liability Partnership Act, 2008 and over a period of time, it has become a popular form of business entity in India owing to its simplified structure, minimal compliances, tax benefits etc. LLPs provides not only the benefits which are available to the companies like Separate Legal Identity, Limited Liability, Perpetual Existence etc. but also provides other exclusive benefits like No Dividend Distribution Tax (DDT), No Audit requirement for small LLPs, Lesser compliances and records maintenance etc. etc.


Foreign Investment in LLP


A clear permissible foreign investment without any government approvals is key factor while choosing a corporate entity by the entrepreneurs. Prior to 2015, FDI under automatic route was allowed only in Indian Companies. Foreign Investment in Limited Liability Partnership required prior approval of the Government. Since 2015, Government of India has amended its FDI policy and allowed foreign investment in LLP under automatic approval route subject to some conditions. 


Regulatory Framework 


  • Limited Liability Partnership Act, 2008.
  • Foreign Exchange Management Act, 1999.
  • Foreign Exchange Management (Non-debt Instruments) Rules, 2019.


Foreign Direct Investment or Foreign Investment in LLP?


It is the Foreign Investment and not Foreign Direct Investment which allowed in LLP. FDI is always meant investment in equity instrument and hence in LLPs there is no equity instruments. Let’s check the definition of both under FEMA (NDI) Rules, 2019.


Foreign Direct Investment (FDI)


As per FEMA (NDI) Rules, 2019, “FDI” or “Foreign Direct Investment” means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Hence, investment in equity instruments only amounts to FDI.


Foreign Investment (FI)


As per FEMA (NDI) Rules, 2019, “Foreign Investment” means any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP. Hence, every investment in LLP by a person resident outside India on a repatriable basis amounts to Foreign Investment. Here, investment shall mean capital contribution or acquisition or transfer of profit shares.


Repatriable v.s Non repatriable basis


As per FEMA (NDI) Rules, 2019, “Investment on repatriation basis” means an investment, sale or maturity proceeds of which are net of taxes, eligible to be repatriated out of India whereas Investment on Non-repatriation basis means an investment, sale or maturity proceeds of which are net of taxes, not eligible to be repatriated out of India. It has to be in India after sale or liquidation of investments. 


It is important to ascertain by Non-resident Indian (NRI) or Overseas Citizen of India (OCI), at the time of making investment, as to whether investment in repatriable or non repatriable basis. If it is non repatriable basis, then entire provisions of FEMA acts and rules are not applicable to such investments and such investments are treated at par with domestic investments. 


Eligible Investor 


As per Rule 6 of FEMA (NDI) Rules, 2019, a person resident outside India, other than a citizen of Bangladesh or Pakistan or an entity incorporated in Bangladesh or Pakistan, may invest either by way of capital contribution or by way of acquisition or transfer of profit shares of an LLP, in the manner and subject to the terms and conditions specified in Schedule VI (Investment in a Limited Liability Partnership)


Foreign investment under Automatic route


A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity incorporated in Pakistan or Bangladesh), not being a Foreign Portfolio Investor (FPI) or a Foreign Venture Capital Investor (FVCI), may contribute to the capital of an LLP operating in sectors or activities where foreign investment up to 100% is permitted under automatic route and there are no FDI linked performance conditions. 


So, broadly, Foreign Investment in LLPs is permitted subject to the following conditions:


  • LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and
  • there are no FDI linked performance conditions.


Conversion of Company into LLP wherein there is already FDI in Company


A company having foreign direct investment, engaged in a sector where foreign investment up to 100% is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into a LLP under the automatic route.


Conversion of LLP into Company wherein there is already FI in LLP


A LLP having foreign investment, engaged in a sector where foreign investment up to 100% is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into a company under the automatic route. 


Valuation requirements


Investment in a LLP either by way of capital contribution or by way of acquisition or transfer of profit shares, should not be less than the fair price worked out as per any valuation norm which is internationally accepted or adopted as per market practice (hereinafter referred to as “fair price of capital contribution or profit share of a LLP”) and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practising Cost Accountant or by an approved valuer from the panel maintained by the Central Government. 


In case of transfer of capital contribution or profit share from a person resident in India to a person resident outside India, the transfer shall be for a consideration not less than the fair price of capital contribution or profit share of a LLP. 


In case of transfer of capital contribution or profit share from a person resident outside India to a person resident in India, the transfer shall be for a consideration which is not more than the fair price of the capital contribution or profit share of an LLP. 


Downstream Investment 


An Indian Company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP in sectors in which 


  • 100% FDI is allowed under automatic route and 
  • there are no FDI linked performance conditions.


RBI Reporting Requirements


LLPs which are receiving Foreign Investment in the form of capital contribution shall submit a Single Master Form (SMF) within a period of 30 days from the date of receipt of funds in form LLP(I) to the regional office of the Reserve Bank of India (RBI) under whose jurisdiction the registered office of the LLP is situated, by way of online filing in the RBI’s website https://firms.rbi.org.in/firms/


Any disinvestment or transfer of capital contribution or profit share between a resident and non-resident or vice versa shall be reported to RBI within a period of 60 days from the date of transfer in form LLP(II) to the regional office of the Reserve Bank of India (RBI) under whose jurisdiction the registered office of the LLP is situated, by way of online filing in the RBI’s website https://firms.rbi.org.in/firms/ 


Conclusion


Owing to flexibility in its structure and operation, LLPs form of organization is growing fast in India, especially in services sector. Globally, LLPs are the most preferred form of doing business, but in India it is still considered as a new kind of entity with new law. But with this step of liberalization of substituting the approval route with automatic route for FDI in LLP and permitting LLPs for downstream investment, the Government of India has taken an approach to enable LLPs to roll over the corporate operating in India to tap foreign investments. This move will also encourage more partnership firms and companies to convert into LLPs due to the tax benefit and flexibility it will offer. Thus, amendment in FDI policy is a welcome move, LLPs seems to have hay-days ahead.

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Re-classification of Promoters and Promoter Group of Listed Entity

Introduction


Shareholders in a listed company are classified under two broad categories, i.e. those that belong to the promoter/promoter group and those shareholders who are members of the public with no formal relationship with the promoter/promoter group. 


According to regulation 2(00) of SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018, “promoter” shall include a person:


  • who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or
  • who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or
  • in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act. Provided that this clause shall not apply to a person who is acting merely in a professional capacity.


It is to note that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a Promoter / Promoter Group merely by holding 10% or more of the equity share capital of the issuer. However, they would be treated as Promoter / Promoter Group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.


Why there is need for re-classification?


SEBI Takeover Code and Insider Trading Regulation requires promoter to comply with various Transitional, Event Based, Annual and Pledge Disclosures with Target Company and Stock Exchanges including dealings restrictions during the period of closure of trading window. So promoters needs to comply with various regulations even if, in some cases, he is not controlling the affairs of the company or sold majority of its shares or has no direct or indirect relationship with the company. This requires re-classification from promoter to public so as to avoid compliances under various SEBI regulations applicable to promoters and promoter group. 


Current Regulatory framework for re-classification


Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 lays down conditions pursuant to which promoters/promoter group of a listed entity can be reclassified as public shareholders. Such re-classification of the status of any person as a promoter or public shall be permitted by the stock exchanges only upon receipt of an application from the listed entity along with all relevant documents subject to compliance with conditions specified in these regulation.


Pre-conditions for re-classification of promoter or promoter group


The following are the pre-condition for re-classification of promoter or promoter group. The promoters or promoter group seeking re-classification shall not: 


  1. together, hold more than 10% of the total voting rights in the listed entity;
  2. exercise control over the affairs of the listed entity directly or indirectly; 
  3. have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements; 
  4. be represented on the board of directors (including not having a nominee director) of the listed entity; 
  5. act as a key managerial person in the listed entity; 
  6. be a ‘wilful defaulter’ as per the Reserve Bank of India Guidelines; 
  7. be a fugitive economic offender. 


Pre-conditions for listed entity in which promoter or promoter group seeking re-classification


The listed entity shall:


  1. be compliant with the requirement for minimum public shareholding as required under regulation 38 of LODR regulations; 
  2. not have trading in its shares suspended by the stock exchanges; 
  3. not have any outstanding dues to the Board, the stock exchanges or the depositories. 


Step wise process for re-classification 


1. The promoters seeking re-classification shall make a request for re-classification to the listed entity which shall include rationale for seeking such re-classification and how the conditions specified above are satisfied.


2. The board of directors of the listed entity shall analyze the request and place the same before the shareholders in a general meeting for approval along with the views of the board of directors on the request. There shall be a time gap of at least 3 months but not exceeding 6 months between the date of board meeting and the shareholder’s meeting considering the request of the promoters seeking re-classification.


3. The request of the promoters seeking re-classification shall be approved in the general meeting by an ordinary resolution in which the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not vote to approve such re-classification request. 

Waiver of Shareholders approval


In the case of M/s. Alembic Pharmaceuticals Limited, Alembic sought guidance from SEBI regarding requirement of shareholder approval for reclassification of shareholding from promoter group to public category. Their submission was based on the fact that 5 out of 25 persons who were part of the promoter group were desirous of reclassification of their shareholding from promoter group to public category who were not directly or indirectly connected with any activity of Alembic as they were senior citizens leading their lives and occupations independently. Other reasons given for reclassification were that such persons never held any position of key managerial personnel and they did not have any special rights through formal or informal arrangements with Alembic or any person in the promoter group, etc. In this matter, SEBI clarified that shareholder’s approval is not required for reclassification of shareholding from promoter group to public category. In another case of M/s. Gujarat Ambuja Exports Limited, SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the similar grounds.


4. Once shareholders approves the request for re-classification, an application for re-classification is required to be made to the stock exchanges by the listed entity within 30 days from the date of approval of shareholders in general meeting.


5. Stock exchanges will approve the request based on the application submitted by the listed entities. Where entities listed on more than one stock exchange, the concerned stock exchanges shall jointly decide on the application. 

Conditions to be complied after re-classification


The promoters seeking re-classification, subsequent to re-classification as public, shall comply with the following conditions:


  • S/he shall continue to comply with the following conditions at all times from the date of such re-classification failing which, he shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable;


  • together, hold more than 10% of the total voting rights in the listed entity;
  • exercise control over the affairs of the listed entity directly or indirectly; 
  • have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements.


  • S/he shall comply with the following conditions for a period of not less than 3 years from the date of such re-classification failing which, he shall automatically be reclassified as promoter/persons belonging to promoter group, as applicable.


  • be represented on the board of directors (including not having a nominee director) of the listed entity; 
  • act as a key managerial person in the listed entity. 


Proposed amendments


SEBI on 23rd November, 2020 has issued a Consultation Paper on re-classification of Promoter/Promoter Group entities. At present SEBI has been granting relaxations from the requirements under regulation 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime.  The said paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.


Relaxing the threshold of maximum voting rights 


At present Regulation 31A (3) (b) (i) of LODR regulations provide that promoter/persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity. The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.


Reduction in time period between board and shareholders meeting


As mentioned above, Regulation 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter. However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.

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Re-classification of Promoters and Promoter Group of Listed Entity

Introduction


Shareholders in a listed company are classified under two broad categories, i.e. those that belong to the promoter/promoter group and those shareholders who are members of the public with no formal relationship with the promoter/promoter group. 


According to regulation 2(00) of SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018, “promoter” shall include a person:


  • who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or
  • who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or
  • in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act. Provided that this clause shall not apply to a person who is acting merely in a professional capacity.


It is to note that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a Promoter / Promoter Group merely by holding 10% or more of the equity share capital of the issuer. However, they would be treated as Promoter / Promoter Group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.


Why there is need for re-classification?


SEBI Takeover Code and Insider Trading Regulation requires promoter to comply with various Transitional, Event Based, Annual and Pledge Disclosures with Target Company and Stock Exchanges including dealings restrictions during the period of closure of trading window. So promoters needs to comply with various regulations even if, in some cases, he is not controlling the affairs of the company or sold majority of its shares or has no direct or indirect relationship with the company. This requires re-classification from promoter to public so as to avoid compliances under various SEBI regulations applicable to promoters and promoter group. 


Current Regulatory framework for re-classification


Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 lays down conditions pursuant to which promoters/promoter group of a listed entity can be reclassified as public shareholders. Such re-classification of the status of any person as a promoter or public shall be permitted by the stock exchanges only upon receipt of an application from the listed entity along with all relevant documents subject to compliance with conditions specified in these regulation.


Pre-conditions for re-classification of promoter or promoter group


The following are the pre-condition for re-classification of promoter or promoter group. The promoters or promoter group seeking re-classification shall not


  1. together, hold more than 10% of the total voting rights in the listed entity;
  2. exercise control over the affairs of the listed entity directly or indirectly; 
  3. have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements; 
  4. be represented on the board of directors (including not having a nominee director) of the listed entity; 
  5. act as a key managerial person in the listed entity; 
  6. be a ‘wilful defaulter’ as per the Reserve Bank of India Guidelines; 
  7. be a fugitive economic offender. 


Pre-conditions for listed entity in which promoter or promoter group seeking re-classification


The listed entity shall:


  1. be compliant with the requirement for minimum public shareholding as required under regulation 38 of LODR regulations; 
  2. not have trading in its shares suspended by the stock exchanges; 
  3. not have any outstanding dues to the Board, the stock exchanges or the depositories. 


Step wise process for re-classification 


1. The promoters seeking re-classification shall make a request for re-classification to the listed entity which shall include rationale for seeking such re-classification and how the conditions specified above are satisfied.


2. The board of directors of the listed entity shall analyze the request and place the same before the shareholders in a general meeting for approval along with the views of the board of directors on the request. There shall be a time gap of at least 3 months but not exceeding 6 months between the date of board meeting and the shareholder’s meeting considering the request of the promoters seeking re-classification.


3. The request of the promoters seeking re-classification shall be approved in the general meeting by an ordinary resolution in which the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not vote to approve such re-classification request. 


Waiver of Shareholders approval


In the case of M/s. Alembic Pharmaceuticals Limited, Alembic sought guidance from SEBI regarding requirement of shareholder approval for reclassification of shareholding from promoter group to public category. Their submission was based on the fact that 5 out of 25 persons who were part of the promoter group were desirous of reclassification of their shareholding from promoter group to public category who were not directly or indirectly connected with any activity of Alembic as they were senior citizens leading their lives and occupations independently. Other reasons given for reclassification were that such persons never held any position of key managerial personnel and they did not have any special rights through formal or informal arrangements with Alembic or any person in the promoter group, etc. In this matter, SEBI clarified that shareholder’s approval is not required for reclassification of shareholding from promoter group to public category. In another case of M/s. Gujarat Ambuja Exports Limited, SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the similar grounds.


4. Once shareholders approves the request for re-classification, an application for re-classification is required to be made to the stock exchanges by the listed entity within 30 days from the date of approval of shareholders in general meeting.


5. Stock exchanges will approve the request based on the application submitted by the listed entities. Where entities listed on more than one stock exchange, the concerned stock exchanges shall jointly decide on the application. 


Conditions to be complied after re-classification


The promoters seeking re-classification, subsequent to re-classification as public, shall comply with the following conditions:


  • S/he shall continue to comply with the following conditions at all times from the date of such re-classification failing which, he shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable;


  • together, hold more than 10% of the total voting rights in the listed entity;
  • exercise control over the affairs of the listed entity directly or indirectly; 
  • have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements.


  • S/he shall comply with the following conditions for a period of not less than 3 years from the date of such re-classification failing which, he shall automatically be reclassified as promoter/persons belonging to promoter group, as applicable.


  • be represented on the board of directors (including not having a nominee director) of the listed entity; 
  • act as a key managerial person in the listed entity. 


Proposed amendments


SEBI on 23rd November, 2020 has issued a Consultation Paper on re-classification of Promoter/Promoter Group entities. At present SEBI has been granting relaxations from the requirements under regulation 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime.  The said paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.


Relaxing the threshold of maximum voting rights 


At present Regulation 31A (3) (b) (i) of LODR regulations provide that promoter/persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity. The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.


Reduction in time period between board and shareholders meeting


As mentioned above, Regulation 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter. However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.

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Closing of LLP – Provisions, Process and FAQs

Striking off the name of defunct Limited Liability Partnership (LLP) is the simplest way to close the LLP with no assets and no liabilities. In this method, designated partners are need to first settle the accounts of LLP by selling the assets, if any and pay off the liabilities, if any. Based on nil assets and liabilities and based on no objections from the general public, Registrar will close the LLP. It is pertinent to note that strike off is not the legal end of the LLP just like winding up. Designated partners have to file Indemnity, for security of future liabilities, while making an application for strike off. In case any future liabilities or obligations arise, designated partners are personally liable for that which is not the case of winding up. So it is always advisable to first set off all kinds of liabilities, disputes etc. in order to save oneself from future liabilities. 


Legal Provisions


Rule 37 of the Limited Liability Rules, 2009 deals with the striking off name of Defunct LLP. Defunct means those LLPs which are not functioning or not operating. Hence, it is pre-requisite that LLP must be defunct for at least 1 year before applying for closure. It provides that “where a limited liability partnership is not carrying on any business or operation for a period of one year or more, such LLP can make an application to the Registrar, with the consent of all partners of the limited liability partnership for striking off its name from the register“.


Limited Liability Partnership (Amendment) Rules, 2017 added sub-rule 1A after sub-Rule 1 of Rule 37 as follows:


The LLP shall file overdue returns in Form 8 and Form 11 up to the end of the financial year in which it ceased to carry on its business or commercial operations before filing Form 24;


Enclose along with Form 24,—


1. a statement of account disclosing nil assets and nil liabilities, certified by a Chartered Accountant in practice made up to a date not earlier than 30 days of the date of filing of Form 24;


2. an affidavit signed by the designated partners, either jointly or severally, to the effect:


i. that the Limited Liability Partnership has not commenced business or where it commenced business, it ceased to carry on such business from ………….(dd/mm/yyyy);

ii. that the limited liability partnership has no liabilities and indemnifying any liability that may arise even after striking off its name from the Register;

iii. that the Limited Liability Partnership has not opened any Bank Account and where it had opened, the said bank account has since been closed together with certificate(s) or statement from the respective bank demonstrating closure of Bank Account;

iv. that the Limited Liability Partnership has not filed any Income-tax return where it has not carried on any business since its incorporation, if applicable. 


3. a copy of the acknowledgement of the latest Income-tax return; 


4. copy of the initial limited liability partnership agreement, if entered into and not filed, along with changes thereof in cases where the Limited Liability Partnership has not commenced business or commercial operations since its incorporation. 

Documents required for closure of LLP


The following documents are required for closure of LLP –


  • Detailed Application for Closure of Limited Liability Partnership(LLP);
  • Affidavit executed either individually or jointly by all the Partners;
  • Consent of all the partners;
  • Statement of accounts showing Nil assets and liabilities certified by Chartered Accountant in practice not older than 30 days from the date of filing of an application;
  • A copy of acknowledgement of latest Income Tax Return; 
  • Initial LLP Agreement along with all supplementary agreements, if any.


Process of closure of LLP or Strike off of an LLP


  • Close the Bank Account of the LLP;
  • Sell the assets, if any and pay off the liabilities, if any;
  • Take the written consent of all partners for strike off;
  • Drafting of all the requisite documents for closure of LLP;
  • Filing of form 24 with the Registrar.


Once, the E-form 24 is filled by the LLP to concerned jurisdictional Registrar, it has to wait for approval from the Registrar as to whether all documents attached in forms are proper or not. Registrar may ask for any additional documents for his satisfaction. Once, Registrar is satisfied, he shall send name of the LLP for publication in official gazette asking to raise objections from general public. If no objection is received, Registrar will strike off the name of LLP from its register.


Some FAQs with regard to Strike off


1. Which date one should reckon for cessation of business?


The date of cessation of commercial operation is the date from which the Limited Liability Partnership ceased to carry on its revenue generating business and the transactions such as receipt of money from debtors or payment of money to creditors, subsequent to such cessation will not form part of revenue generating business.


2. Whether up to date annual filing is required for closure of LLP?


As per LLP Amendment Rules, 2017, annual filing forms like form 8 and 11 is required to be filled up to the date of financial year in which LLP ceased to carry on business or operation. For e.g: LLP ceased the business on 31st August, 2018 then form 8 and 11 needs to filled for F.Y upto 2018-19. 


3. What if Initial LLP Agreement is not filled?


As per LLP Amendment Rules, 2017, initial agreement is not filled and LLP is inoperative since incorporation then application for strike off is allowed if LLP Agreement is filled at the time of strike off but if LLP has commenced business and LLP Agreement is not filled then LLP must file LLP Agreement in form 3 before filing application for strike off. 


4. What if Income Tax return is not filled?


As per LLP Amendment Rules, 2017, Income tax return is required to be filled up to the date of financial year in which LLP ceased to carry on its business or operation. If LLP is not commenced business since incorporation then filing of IT return is not required and LLP can directly apply for strike off. 

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Celebrity Trademarks in India

Introduction


The Intellectual Property Laws in India do not define the term ‘celebrity’. Celebrities can be defined as people who enjoy public recognition by a large share of a certain group of people. Attributes like attractiveness, extraordinary lifestyle or special skills are observed in celebrities generally. Since they are famous and having significant influence among the people, they are asked to lend their name for promoting a wide range of products and services. The use of the celebrity’s name captures the public’s attention and creates interest in the products and services. 


Emergence of Celebrity Trademark in India


With the incessant celebrity worship that is prevalent in India, there has been a growing practice of using the name of a celebrity for unscrupulous businesses. The reason behind such dishonest practices is that usage of a celebrity name increases visibility of the goods or services as well as creates an impression in the minds of customers that the said celebrity has endorsed these goods or services. Many companies are using celebrity names without their consent to promote their products. 


Actress Kajol Twitter Controversy of 2010


In 2010, a twitter handle named “kajolnysa” twitted derogatory remarks against the one political party. Many news channels reported this story depicting that tweet believing that it was posted by actress herself due to name of twitter handle. Having seen news, Kajol clarified that she does not have any account with twitter. So, the someone created a fake ID and behaving as if Kajol has made those statements. After this incident, Kajol has made a number of applications to trademark authority in her name in various business categories so as to check the misuse of her name. 


Sanjeev Kapoor story


On one day, Sanjeev Kapoor – a famous chef show a boy in a traffic signal selling recipe books called Khazana of Chinese Recipes with Kapoor’s picture on the cover. At that time he had written only one book, which was called Khazana of Indian Recipes. The book cover and his picture were the same. His face was used to sell something that was not his creature. He was shocked. In case he decides to protest against the people misusing the name, he could have been asked as what right he have over name ‘Sanjeev Kapoor’ as there are many people whose names can be Sanjeev Kapoor. So, to protect the right, one also need to have the legal ownership. Thereafter, he has filled many trademark applications of his name so as to protect his names from misuse. 


This unjustifiable practice has created awareness amongst celebrities regarding their rights, in particular assessing their IP rights. To prevent misuse of celebrity names, it is advisable to register the celebrity’s name as a trade-mark. It also prohibits use for commercial purposes, including films, TV, advertisements. Celebrities in India like Shah Rukh Khan, Ajay Devgan, Kajol, Sunny Leone etc. also registered their names as trademarks. Getting a trademark registration allows celebrities to prevent others from using their name for dishonest commercial purposes. It provides them with a mechanism to preserve the financial integrity of their name as well as provide their estate with better means to protect the economic value of the celebrity’s name after death. 


Consequences of an unauthorized use of name or image of Celebrity


An unauthorized use of a celebrity’s name or image to a product amounts to an act of passing off, unfair competition, misrepresentation and can cause damage to their reputation. It can also amount to a breach of confidence or a violation of privacy. The unauthorized use of the attributes of a celebrity can adversely impact both their economic as well as non-economic interests. While economic interests are capable of being adequately compensated in monetary terms, non-economic interests such as the violation of privacy, damage to reputation, mental distress may not be entirely capable of satisfaction in terms of money. Such affected rights are personality rights which are not mere financial rights but rather a personal intellectual property right which is not inheritable or assignable.


Provisions in the Indian Trademark Act


There is no specific provision in Trademarks Act 1999 which allows or disallows registration of names. However, there are many celebrities who got registered their names so it can be assumed that registration of personal names are allowed. 


As per Section 2(zb) of the Act, “trade mark” means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colors. The definition makes it clear that a trademark cannot be registered in isolation. It is registered to protect the brand value of a person. Therefore if a celebrity is desirous of registering his/her name it should be with respect to a particular class of goods or services. 


The idea behind registering the person’s name as a trademark in a class is to prevent misuse of the name in the trade of any item within that class. This not only allows the individual to protect his name and image from being associated arbitrarily with a plethora of products, but also ensures that he is paid every time he lends his name to a product. It also allows the individual to prevent the use of his name in company names.


Trademark Protection based on use and not merely on Registration


It is important to note here that in India, we protect brand name based on actual use and not based on merely registration. The trademark law provides protection only when the mark is being actually used on goods or services and not merely to protect the brand value of a person, thereby meaning that the protection is limited to the goods or services that the said mark is applied for. So, if the registered trademark remains unused for a period of five consecutive years, then the mark may be removed from the trademark register on the application of any aggrieved party. 


There are many companies and even celebrities that applied for protection in almost all the 45 classes so as to protect the names from usage in respect to any goods or services. So, it means such names can’t be used by any one in any goods or services? The answer is No. The Trademark law in India expressly prohibits such type of defensive registration except in case of well-known trademarks like TATA, Mahindra & Mahindra, Honda. A mark registered in all classes can still be opposed, cancelled or removed from the register on grounds of non-use, so the right is not free from any kind of legal impediments. 


Conclusion


The trend of celebrities in India seeking protecting under the trademark law has seemingly increased and they seem to be taking a cue from celebrities across the globe. However, the trend in India seems to be inclined towards defensive registration aiming to protect the reputation of the celebrity rather than to use it on actual goods or services which is contrary to the practice followed elsewhere. Unless and until, someone oppose the names of the celebrities registered in a particular class, because of non-usage of trademark in respect of goods or services for which it applied for, such names enjoys the trademark protection. 

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One Person Company – Incorporation, Nomination and Conversion

Introduction


Traditionally, minimum 2 members were required to register a Company in India and due to this many small businesses in India were functioning as sole proprietor only. There are various disadvantages of running a sole proprietor business major being unlimited liability. In India, introduction of OPC was given in the Dr J.J Irani Committee report dated May 31, 2005. It was introduced off-late in India to allow single member businesses popularly known as ‘sole proprietor’ to be registered as ‘One Person Company’ (OPC). 


One person company (OPC) means a company formed with only one person as a member, unlike the traditional manner of having at least two members to form a company. OPC is totally owned by one person. The same member can become director of the company and manage the company. OPC may have more than one director also for smooth and efficient management. 


Benefits of an OPC


Most of the benefits available to the Private Companies are also available to the OPC like Limited Liability, Separate Legal Entity, Separate property, Transferability of shares, Credibility, Perpetual succession etc. In addition to the above benefits, there are other benefits also like OPC not need to conduct board meetings if there is only one director and general meetings.


Latest Announcements in budget with regard to OPC


According to the Companies Act, 2013, if the paid-up share capital limit of the OPC exceeds ?50 lakh or turnover exceeds ?2 crore, then the company shall lose its status as an OPC and shall be required to compulsorily convert to either to a private company or public company within 6 months. The budget has changed this requirement and now OPCs will be allowed to grow without any restriction on paid up capital and turnover, allowing conversion into any other type of company at any time. Budget also reduces the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days, and allow also non-resident Indians to incorporate OPCs in India. All these provisions will come into force w.e.f 1st April, 2021.


Formation of One Person Company 


A company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company by subscribing his name to a memorandum and complying with the requirements of this Act in respect of registration.


Who can form a One Person Company?


Only a natural person who is an Indian citizen and whether resident in India or otherwise shall be eligible to incorporate a One Person Company. A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a One Person Company. So, a natural person can form only 1 OPC and simultaneously can be nominee of 1 OPC. 


For the purposes of this rule, the term "resident in India" means a person who has stayed in India for a period of not less than one hundred and twenty days (With effect from 01st April, 2021)during the immediately preceding financial year. 


Can foreigners incorporate a One Person Company?


No. Only Indian citizens and resident Indians can form an OPC. If person is resident in India for 120 days or more in a previous year, he is eligible to incorporate an OPC. 


If foreigners are resident Indian then they are allowed to incorporate an OPC?


No. Rule 3(1) of the Companies (Incorporation) Rules, 2014, states that only a natural person who is an Indian citizen and whether resident in India or otherwise can incorporate an OPC. It means both the conditions must be fulfilled i.e first is Indian citizen and second is resident Indian. For residency criteria, days are lowered from existing 182 days to 120 days. 


Nomination by the Member


The subscriber to the memorandum of a One Person Company shall nominate a person, after obtaining prior written consent of such person, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of that One Person Company. The name of the nominee shall be mentioned in the memorandum of One Person Company and such nomination in Form No.lNC-3 shall be filled in Form SPICe and with the Registrar at the time of incorporation of the company along with its memorandum and articles.


Withdrawal of Nomination


The person nominated by the member of a One Person Company may, withdraw his consent by giving a notice in writing to such sole member and to the One Person Company.


Appointment of new nominee


In case an existing nominee withdraws his/her consent, the sole member shall nominate another person as nominee within 15 days of the receipt of the notice of withdrawal. The company shall within 30 days of receipt of the notice of withdrawal of consent file with the Registrar, a notice of such withdrawal of consent and the intimation of the name of another person nominated by the sole member in Form No INC.4 and the written consent of such another person so nominated in Form No.INC.3.


Death or incapacity of a member


Where the sole member of OPC ceases to be the member in the event of death or incapacity to contract and his nominee becomes the member of such OPC, such new member shall nominate within 15 days of becoming member, a person who shall in the event of his death or his incapacity to contract become the member of such company, and the company shall file with the Registrar an intimation of such cessation and nomination in Form No INC.4 within 30 days of the change in membership and with the prior written consent of the person so nominated in Form No.INC.3.


Conversion of Private Company into OPC


There are many private companies in India which are controlled by single person only but due to the requirement of having minimum 2 members, such companies are functioning as a Private Companies. Earlier, due to capital and turnover restrictions for an OPC, such companies were never think to convert themselves in an OPC. Such Private companies are need to comply with so many compliances like Conducting Board Meetings and General Meetings, Maintaining statutory registers so on and so forth but now such companies can convert themselves in an OPC and take the benefits available to an OPC. 

Process for Conversion of Private Company into One Person Company


1. Convene Board Meeting 


  • To get approval of Board of Directors for Conversion of Private Company into One Person Company (OPC);
  • To Fix date, time and place for holding General meeting (GM) to get approval of shareholders, by way of Special Resolution;
  • To approve notice of GM along with Agenda and Explanatory Statement to be annexed to the notice of General Meeting.


2. Convene General Meeting and pass the Special Resolution and approve alteration in MOA and AOA

      

3. File e-form MGT-14 with the following attachments


  • Certified True copy of Special Resolution alongwith explanatory statement?
  • Altered memorandum of association?
  • Altered Articles of association.


4. File Application for Conversion in e-form INC-6 with the following attachments


  • Altered Memorandum of Association
  • Altered Articles of Association
  • Copy of duly attested latest audited financial statement
  • Copy of board resolution authorizing giving notice
  • Affidavit confirming that all the members of the company have given their consent for conversion
  • Copy of minutes, list of members and list of creditors.
  • Copy of NOC of secured creditors.
  • Consent of the nominee in Form INC-3
  • Copy of PAN card of the nominee and member
  • Proof of identity of the nominee and member
  • Residential proof of the nominee and member


The latest amendments introduced in the budget of 2021 will incentivize the incorporation of One Person Companies in India. It will also incentivize the conversion of Private Companies into an OPC due to withdrawal of capital and turnover restrictions. However, there are limitation of OPC too like they can’t issue shares to other members or outsiders. Hence, those entrepreneurs who are dependent on self-finance can choose to opt for an OPC.

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