India Plans LLP Act Changes to Boost Domestic Audit Firms

August 10, 2024

India’s government is considering changes to the Limited Liability Partnership (LLP) Act and related rules to strengthen domestic accounting firms. The goal is to make it easier for these firms to merge and grow larger, potentially creating big domestic audit companies that can compete with the Big Four global firms.

What is the Limited Liability Partnership (LLP) Act?

The Limited Liability Partnership (LLP) Act was introduced in India in 2008 (and in the UK in 2000). It allows businesses to have the flexibility of a partnership while also providing limited liability protection for a corporation. This means that the partners’ personal assets are protected from the business’s debts. LLPs must file annual returns and follow certain regulations, ensuring transparency and accountability. Members of an LLP can be involved in management without risking their liability protection. LLPs are popular among professionals like lawyers and accountants.

Government’s Initiative

The Ministry of Corporate Affairs (MCA) is planning to include these proposed changes in its 100-day action plan. Amendments to the LLP law and the Companies Act may be introduced in the upcoming winter session of Parliament in December.

ICAI’s Role

The Institute of Chartered Accountants of India (ICAI) is working with the MCA to update its rules. The goal is to make it easier for accounting firms to merge, allowing them to become large enough to serve big companies.

New Merger Guidelines

Extended Separation Period: After merging, accounting firms can choose to stay separate for up to 10 years (an increase from the previous limit of five years).

Name Retention: If the firms separate later, they can keep their original names without paying a fee to reserve those names.

Importance of Scale in Audit Firms

With India’s economy growing rapidly, there is a rising demand for accounting and auditing services. Larger domestic firms would be better equipped to handle this demand and could also attract international clients. The new rules also allow one LLP to join another for collaborative work while keeping their separate identities. This setup is similar to a “live-in relationship,” where firms can test their compatibility before deciding on a full merger.

Facts About the Institute of Chartered Accountants of India (ICAI)

The Institute of Chartered Accountants of India (ICAI) was founded in 1949.
It is the second-largest accounting body in the world.
ICAI’s emblem features a balance scale and a lamp, representing knowledge.
ICAI conducts the Chartered Accountant (CA) exam, one of the toughest in India.
It has over 300,000 members and more than 800,000 students.
ICAI operates under the Ministry of Corporate Affairs.
ICAI promotes good accounting practices in India and works with global accounting groups.

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