Startups Get Compliance, Credit Boosts From Amendments To Factoring, LLP Acts

This Monsoon Session in the Indian parliament, as opposition leaders are busy demanding a Supreme Court-monitored investigation over the WhatsApp-Pegasus row, the central government has swiftly enacted a slew of fresh bills and amendments including the Limited Liability Partnership (Amendment) Bill, 2021 and Factoring Act (Amendment) Bill — that are expected to make life a bit easier for startups and MSMEs on multiple levels.

While the cabinet has now approved the Limited Liability Partnership (Amendment) Act, 2021 that decriminalises 12 offences under the Limited Liability Act, 2008, the Factoring Act (Amendment) has also been passed by both houses of the parliament.

How The Limited Liability Partnership (Amendment) Bill, 2021 Impacts Startups

“LLPs are becoming popular among startups. An amendment is being proposed to the LLP Act for the first time,” said finance minister Nirmala Sitharaman

As part of the Limited Liability Partnership (Amendment) Act, 2021, 12 offences have been decriminalised and have been shifted to an internal adjudication mechanism to help unclog criminal courts from routine cases.

Further, the amendment also tweaks the definition of LLPs. The turnover size will also be changed from INR 40 Lakhs to INR 50 Cr. The threshold for partner’s contribution has been revised from existing INR 25 Lakhs to INR 5 Cr.

This will ease the compliance norms for startups that are looking to set up their companies as LLPs. Commenting on the amendment, Sijo Kuruvilla George, executive director of Alliance of Digital India Foundation said, “The amendment will make LLPs an even more attractive vehicle and Indian a more sought-after destination. The move will help simplify the life of founders and exude confidence in the government’s intent towards bringing ease of doing business.”

The amendment reduces the total number of penal provisions in the LLP Act to 22, the number of compoundable offences to seven, the number of non-compoundable offences to three, and the number of defaults to 12.

Sitharaman stated that in the past, there have been a lot of amendments to the Companies Act that decriminalised certain offences. However, since 2009, there has not been any amendment to LLPs in this regard. It is hoped that the changes will create a level playing field for LLPs. “We are bridging this gap. And making LLPs far more attractive and easy to handle so that many of the startups today, which prefer the LLP model, can also feel equally given the ease of business opportunities,” the FM said.

Govt Tweaks Factoring Act, Empowers RBI To Command Factoring Business

On July 19 this year, the central government also passed the Factoring Act (Amendment) Bill in Rajya Sabha. This seeks to widen the scope of entities which can engage in factoring businesses, which refers to a business where a factor (that can be a bank, NBFC or any other company registered under the Companies Act) acquires the receivables of another entity (referred as assignor) for an amount.

Welcoming the move, Arun Poojari, cofounder, Cashinvoice said that the passage of the Factoring Regulation (Amendment) Act 2021 will now open a window of opportunity for credit-starved MSMEs. “The act can potentially increase the number of NBFCs offering factoring services to over 9,500 from just seven currently. Allowing NBFCs to do factoring will tap into a vast pool of credit that’s currently unavailable under factoring. Unlike traditional invoice financing Factoring puts more weightage on quality of receivables which means widespread access to Factoring will hugely benefit especially the MSME suppliers of the corporate buyers.”

He added that the changes in definitions for ‘receivables’ as well as what constitutes a ‘factoring business’ will make it a lot easier for financing companies to undertake factoring business.

This will eventually lead to a boost to the economy by providing an efficient working capital cycle for MSMEs. Also, changes in central online security interest registration requirements reduces the burden felt by the factoring entities by extending the window for compliance.

Most importantly, the act has empowered the Reserve Bank Of India to make further amendments which will ensure that the regulator will have flexibility to carry out changes as per the evolving needs of factoring businesses. The amendment endows powers to the RBI to give directions and to collect information from factors. This includes barring a factor from factoring business too.