Is an LLP permitted to carry out financial activity?

Ashish M. Shaji

06 Sep, 2022

An LLP or Limited Liability Partnership can carry out any business activity which is legal in India. These business activities includes trading, manufacturing, service provider, professional services, etc. However, it is worth mentioning that there are certain activities which can’t be performed without the prior approval from the authorities. In this article, we shall know whether LLP can carry out financial activity.

What is an LLP?

Limited Liability Partnership is alternative corporate business that provides benefits of limited liability to the partners. It also permits partners to organize the internal structure like a traditional partnership. It is a business entity that is registered under the Ministry of Corporate Affairs.

LLP is a body corporate, and just like a company or a corporation, it is a separate legal body. An agreement (LLP agreement) between the partners governs the rights and duties of all partners.

Permissible activities of an LLP and activities that require prior approval

 As stated at the beginning, LLP can do any business activity that is legal in India. The permissible activities which require no prior approval include trading, manufacturing, service provider, professional services, etc.

However, there are activities that are only allowed after obtaining a prior approval from authorities. These activities include finance, investment, insurance, stock exchange, merchant banker, banking, chit fund, NBFC, etc.

During registration, an LLP is required to select the industrial code according to NIC-2004, and the industrial code is chosen as per the business activities of the Limited Liability Partnership. When the industry code is selected and the business activity has been furnished to the Registrar of Companies, the LLP can’t run any other activity without a prior alteration of the LLP agreement and approval of the Registrar of Companies for it.

Can an LLP do financial activity such as banking and NBFC?

The answer to this question is that an LLP is not permitted to operate a banking business during its whole tenure because in order to run a banking company, there is a requirement of the company to be registered under the Companies Act.

In case of other financial activity, a prior approval from the Reserve Bank is needed, and in case an LLP wishes to run Non-banking financial activity then it is required to take a prior approval from the Reserve Bank before starting the business.

In case of non-banking activities, the following points should be noted:

According to section 45 I (a) of the RBI Act 1934, business of the financial institution means carrying on business of financial institution as referred to in clause (c) and includes business of non-banking financial company referred in clause (f)

As per section 45 I (e) of the said Act non-banking financial institution refers to company, corporation, or co-operative society.

As per 45 I (f) of the said Act, a Non-banking financial company means-

• A financial institution which is a company;
• A non-banking financial institution that is a company and its main business includes receiving of deposit under any scheme or arrangement or in any other way or lending in any manner; and
• Such other non-banking institution as the bank may, with prior approval of Central Government and by notification in the official gazette notify.

What are the requirements for the RBI approval?

Reserve bank of India approves companies that are registered under the Companies Act and wish to run non-banking financial activity or fall under Section 45 I (a) of the RBI Act, are required to comply with the following:

• The company should be falling under section 2(20) of the Companies Act 2013, or it should be registered under any other previous company law;
• The minimum net owned fund has to be 200 lakh rupees which means 2 crores.

It may be noted that a Nidhi Company can run its business as a non-banking financial institution/company without the prior approval from the Reserve bank of India. It can run business between its members only with few restrictions as provided under Nidhi Rules 2014^[1].

Conclusion

Getting RBI approval is crucial. According to the above-mentioned provision, it can be concluded that the Reserve bank approves non-banking financial institutional activities to the companies that are registered under the Companies Act, once certain conditions are met. Therefore as per RBI rule, an LLP can’t register itself as an NBFC for investment or financing activities.

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