SSIs: why not ask for limited liability partnership?
R. Gopalakrishnan
One of the many ideas that have been mentioned off and on in respect of the small scale industry sector (SSI) over the years but never pursued seriously is the enactment of a law introducing limited liability partnerships as obtains in many countries.
This is strange, considering that the most serious problem faced by small industries is said to be inadequate finance, especially availability of working capital, from banks. The theme of inadequate financing of SSIs has been flogged to such an extent that sickness in the SSI sector and underfunding have become synonymous in the perception of several people and recommendations have been made by many committees for improving the flow of credit to the sector.
How come, then, that the option of limited liability partnerships, which, at least in theory, holds a promise of meeting the investment needs of the small entrepreneur without being substantially out of sync with the business culture and environment that he/she has been accustomed to for decades, has not been examined seriously?
The limited liability partnership (LLP) system combines the advantage of the traditional corporate (viz, company) structure and the entrepreneur-centric proprietary/partnership structure. The LLP will help more "marriages between brains and bank balances" take place within the small enterprise/business sector, just as is supposed to happen every time a company in the organised corporate sector issues capital to the public in the form of equity shares or debentures. The LLC, however, will tap funds not from the public but from a section of inactive co-partners of an enterprise whose liability to repay debts of the business will be limited to their investment and who will be entitled to a share in the profits of the business. The more active "general" partners managing the business will, however, be faced with unlimited personal liability to the creditors of the enterprise.
The US is one country where the concept of limited liability partnership, originally thought of in connection with small ventures and businesses, has been stretched in such a manner that it has become a tool of even big ventures and companies coming together for specific objectives.
While the limited partnership business will give a greater level of comfort to banks and other lenders to small businesses, it at the same time will avoid the enormous amount of documentation and strict procedure that corporate entities have to observe. In India, the system of the Hindu undivided family (HUF) has been used as a specific type of entity recognised in law and eligible to certain tax sops.
However, the LLP will be much wider in its scope and appeal and can be used by first generation businessmen and entrepreneurs across communities.
There has been a campaign of sorts to persuade SSIs to convert themselves into companies (under the Companies Act), so that their projects/business plans could become more "bankable" and their balance-sheets could gain acceptance and credibility with banks and financial institutions. This campaign has obviously not succeeded. Perhaps, the limited partnership system is a more realistic and attractive option that would encourage entrepreneurs, in need of funds for modernisation and expansion, to adopt from their present position of either proprietary undertakings or partnerships.
Action on limited liability partnership brooks no delay, because the process of introduction of a new law like this will involve a lot of time and effort, besides discussions and consultations at various levels -- of lawyers, financiers and industrialists. This issue should not fall prey to the sense of paralysis that seems to have seized the SSI sector in the wake of the changes in the economic environment in the past decade and indifference and possibly even resistance to innovative steps needed to meet new challenges.
SSIs : A review
