Finally, some movement on the Limited Liability Partnership Bill

As reported across several papers, Shri Prem Chand Gupta, Minister of Corporate Affairs, in the government on Tuesday introduced the revised Limited Liability Partnership Bill, 2008 in the Rajya Sabha. The Bill provides for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto.

With the imminent opening up of the accounting and legal and other professional services sectors this Bill will play an important role in creating a level playing field for the professionals of India. The Institute of Chartered Accountants of India, has already made the necessary amendments allowing its members to partner with members of other professions. The other professional bodies are also making similar amendments to facilitate the process. This will help in creating larger multi-disciplinary firms which can service clients across domains.

Limited Liability Partnership (LLP) as proposed in the Bill, 2008 is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner. In India, this need has long been recognised for businesses which may require a framework that provides flexibility suited to requirements of service, knowledge and technology based enterprises.

Services sector is playing a major role in the national economy and there is a growing diversity in the range of services being offered. The services sector would also find this form very useful. The advantage of the LLP form would be that it will not impose detailed legal and procedural requirements intended for large widely held companies on such enterprises. In this way it will also be useful for small enterprises.

The need for LLP legislation has been recognized for a very long time. Various committees and Expert Groups have, from time to time, recommended introduction of LLP legislation in India.  In the last decade itself, Abid Hussain Committee (1997) had recommended this legislation in the context of SSIs. The Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003) and Dr. Irani Committee on New Company Law (2005) had also made recommendations for a separate  LLP Legislation.

However, it is the recent initiative of the Ministry of Corporate Affairs that has enabled this legislation to be finalized and tabled in the Parliament.

Government had earlier introduced the Limited Liability Partnership Bill, 2006 in the Rajya Sabha on 15^th December, 2006. It was later referred to the Department Related Parliamentary Standing Committee on Finance for examination and report. The Committee submitted its recommendations in its report to both Houses of Parliament on 27^th November, 2007. The present Bill, 2008 has taken in view the recommendations made by the Standing Committee and other relevant inputs.

The salient features of the LLP Bill, 2008 are as follows:

(i)         The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

(ii) The Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

(iii) While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

(iv)        LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs. Since LLP shall be in the form of a body corporate, it is also proposed that the relevant provisions of the Companies Act, 1956 may be made applicable to LLPs at any time in the future by Notification by Central Government, with such changes or modifications as appropriate.

(v) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.

(vi) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.

(vii)       While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

Prior to introducing the LLP Bill, 2008, Shri Prem Chand Gupta withdrew the earlier Limited Liability Partnership Bill, 2006.

Crystal ball gazing, where are we headed from here?

"Your next-door neighbour can likely predict what is going to happen as accurately as we can." - Steve Jobs

This accurately sums up the debate today. In India everybody has an opinion about everything but the fact is that nobody knows where we are headed and what’s in store over the next couple of years. Today, on TV, there is a story of a couple killing themselves due to a set back suffered in the market. One day the market jumps 600 points and promptly the next day there is selling pressure bringing it back to the same or lower levels. The pundits who, at the beginning of the year, were talking of the sensex hitting 25,000 (some had even started talking of 50,000) are now asking ordinary investors to ‘have faith’ and keep invested for the ‘long run’. Try explaining this to a guy who had put in his life’s savings in the stock market and his corpus is now down 70%. What a mess, and we still have no clue as to where the bottom is, as we really don’t know how many more skeletons are yet to pop up across the world. Who all are guilty for this is another story, but as Jack and Suzy Welch said, quoting Agatha Christie, in Murder on the Orient Express, I guess, everybody is guilty in one way or another.

The only saving grace of being in India is that we are nowhere near a ‘recession’ and should grow between 6-7% even this year despite the global crisis. All of us who are getting regular calls from NRIs in the west should brace up for handling a greater influx of returning Indians this year, the only catch being – are these returning Indians capable of delivering under the Indian conditions? If not, just like a number of others, they will soon be going back to the west as soon as things improve a bit.

PS. Wipro has just announced its numbers and has cautioned about the future but TCS is still gung ho!

Section 79 of the Income Tax Act definitely needs to be amended!

Was again faced with a situation where another client incurred the wrath of Section 79 and is loosing the right to carry forward substantial genuine business losses just on account of taking on a new (majority) shareholder.

Till 1989, before clause (b) was deleted from Section 79, there was the possibility for a genuine loss making company to take on a majority partner/ shareholder and still claim set off of losses in subsequent years so as to mitigate some of the hardship suffered earlier. The object of clause (b) was to ensure that the assessee was not deprived of the benefit of carry forward of losses unless the change in shareholding had been made with a view to avoid or reduce the tax liability. However, as the section stands to day, there is no discretionary power in the hands of the assessing officer to do anything in the matter and in all cases where there is a 51% or greater transfer of beneficial shareholding the right to carry forward and set-off previous years’ genuine losses is lost. This is downright unfair, and hard, on genuine entrepreneurs who have, firstly, lost a lot of their money in the venture and have to now doubly suffer on account of this stricture of law.

It just goes to show the lack of trust that the government has in its own administrative machinery and instead of trying to plug the loopholes for the misuse of Section 79, it has simply taken the easy way out and done away with the discretionary powers given to its officers, in the process putting all genuine business owners at loss. Looking at it in the context of the overall direct tax collection of the government, I don’t think this kind of set off would have had any material impact on the same, however, from the company’s point of view the impact is huge on each such company that is put to a genuine hardship (loss) on this account.

Circumventing the Takeover Code

Kudos to the CNBC reporter, Sajeet Manghat, who has correctly analysed the scheme adopted by RIL to effectively circumvent the SEBI Takeover Code. The transcript, from the CNBC website, is as under:

“Delivery-based selling in RIL has gone up to 57.4% from 22.3% on Wednesday and there is also an increase in delivery volumes. The main reason why the stock is under pressure is because RIL has reclassified promoter shareholding ahead of warrant conversion. RIL has nearly 14% of its equity under treasury stock and classified under promoter and PAC. The treasury stock is held under petroleum trust and eight corporate bodies. RIL has converted eight corporate bodies into its subsidiaries. Subsidiaries lose promoter status and voting rights under regulations. RIL promoters converts warrants at Rs 1402 per share and infuses Rs 15141 crore. Promoter stake has fallen to 44.8% from over 51%. Post warrant conversion, RIL promoter stake has gone up to 49%. RIL promoter voting right also goes up to 52%. Warrant conversion has infused over Rs 15,100 crore into RIL funds”.

As per Section 42 of the Companies Act a subsidiary cannot hold shares in a holding company, however, a company which is not a subsidiary at the time it purchases the shares of the holding company and becomes a subsidiary later, due to the acquisition of its shares by the holding company, is exempt form the provisions of Section 42 (sub section 3). However, such a subsidiary then looses its voting rights (which in any case is irrelevant for a promoter who is already holding a high stake). Further, the subsidiary also looses its promoter tag under the Takeover Code and thus creates space for the promoter to acquire additional shares.

Would definitely like to someday connect with Sajeet and get more of these inside stories!

Shortage of labourers plagues India's construction industry

The Wall Street Journal carried a timely story on the current shortage being faced by the India Construction and Infrasructure Industries. Till now it was the middle and senior level managerial personnel who were being wooed back and in what was labled as a 'reverse brain drain' but now we can see it happening at the bottom of the pyramid where some skills are in such short supply that the salaries have more than doubled!

What's the Secret of your Success?

An excellant summation by Micheal Hyatt. We all have heard of (and experienced) what a positive attitude can help achieve, however, in today's times I would add another trait - curiosity, as I believe that in a Knowledge economy unless you have an inquisitive nature and are constantly seeking answers or trying to look into the future you would lag behind. This is what Mr Hyatt has to say on what he considers is the single most important trait -responsiveness.

As a CEO, I get asked this a lot. And, I'm always a little embarrassed by it. For the most part, I get the question from people who are in their twenties. They want to know “the secret path to the top.”

This past weekend, I received an email from one of my readers. He started, “I have an MBA, but I must have missed the course on Fast-Tracking My Career. If you had to boil it down to one thing, Mr. Hyatt, what would you recommend to a young, aspiring person such as myself?”

I'm not sure I could boil it down to one thing. Life isn’t usually that simple. But if I really, really had to boil it down to one thing, I would say this: responsiveness.

So many people I meet are unresponsive. They don’t return their phone calls promptly. They don’t answer their emails quickly. They don’t complete their assignments on time. They promise to do something and never follow through. They have to be reminded, prodded, and nagged. This behavior creates work for everyone else and eats into their own productivity. Sadly, they seem oblivious to it.

When I was a kid, we used to play “Tag.” The objective was simple: keep from becoming “It.” If someone tagged you (touched you), you became “it” until you tagged someone else. Whoever was “it” when the game ended, lost.

Business is very similar. People “tag” us in countless ways every day. They place calls. They send emails. They mention something to us in a meeting. Suddenly, we are “it.” And, just like the game, if you stay “it” too long, you lose. The only winning strategy is to respond quickly and make someone else “it.”

Reality is that we live in an “instant world.” People want instant results. They don’t want to wait. And if they have to wait on you, their frustration and resentment grows. They begin to see you as an obstacle to getting their work done. If that happens, it will begin to impact your reputation. Pretty soon people start saying, “I can never get a timely response from him,” or “When I send her an email, I feel like it goes into a black hole,” or worse, your colleagues just roll their eyes and sigh at the mention of your name.

Yet, these are the very people who will push you up or pull you down. You cannot succeed without the support of your peers and subordinates. (Go back and re-read that sentence again.)

As I was making my way to the top, my former boss, Sam Moore, used to ask everyone I worked with, “What’s it like to work with Mike?” “How’s he really doing?” “Do you think he could take on more responsibility?” In responding to him, all they had was their experience with me. If I hadn’t been responsive to them, how do you think they would have responded to his questions? “More responsibility? Are you kidding me? He can’t handle what he has now!” It wouldn’t take too many candid responses like that to tank my career.

And yet this happens to people all the time. I can’t tell you how many meetings I have sat in where people are complaining about someone else’s work habits. “He always waits until the last minute.” “She never plans ahead.” “I can never get him to respond to my emails.” You may think that the people who are making these comments are too far down the food chain to matter. I can assure you they aren’t. They have a way of bubbling to the top where the decisions about your career are made.

The truth is, you are building your reputation—your brand—one response at a time. People are shaping their view of you by how you respond to them. If you are slow, they assume you are incompetent and over your head. If you respond quickly, they assume you are competent and on top of your work. Their perception, whether you realize it or not, will determine how fast your career advances and how high you go. You can’t afford to be unresponsive. It is a career-killer.

My basic rule is this: respond immediately unless there is a good reason to wait. Obviously, this isn’t always possible, especially since I spend so much time in meetings. Nevertheless, I rarely let messages sit longer than a day. Twenty-four hours is the outside edge. If you can’t respond now, then at least acknowledge that you have received the message: “I received your message. I don’t have time to give it the attention it deserves right now, but you can expect to hear from me before the end of the day tomorrow.”

The great thing about being responsive is that it will quickly differentiate you from your peers. People love doing business with responsive people. Nothing will advance your career faster than this.

Warren Buffet on Value

 

Price is what you Pay, Value is what you Get

                                                                                 Warren Buffet

Service Tax on providing Recruitment Services to Overseas Companies

I have been asked by some TPR associates as to what is the
correct position wrt Service Tax on Provision of Recruitment Services to companies abroad. 

In this connection I would like to, firstly, point out that Service Tax is a destination based consumption tax and it would, logically, be leviable only on services provided within the country and not be applicable on export of services.

However, as I had mentioned in one of my earlier posts, wef March 15, 2005 the Govt has introduced the Export of Services Rules, 2005 which have, subsequently, been amended from time to time. Hence, currently, the above query needs to be answered in the context of the said Rules and the amendments notified thereto.

As per Rule 3 all the taxable services have been divided into 3 parts, each part being represented by a sub-rule. Each part has a different set of criteria so as to treat the service provided therein as an “Export of Service” and hence become eligible for being treated as Exempt.

Suffice is to say that sub-rules (1) & (2) are not relevant to our query as they apply to

(1) Property based services i:e services which are related to immovable property and cover service providers such as Architects, Interior Designers, Real Estate Agents, Construction Services, Site Preparation Services, etc

(2) Performance based Services, i:e services which are performed by service providers either fully or partly outside India, the service is used in a business or for any other purpose outside India and payments are received by the service provider in convertible foreign exchange. Service providers covered under the said sub-rule are Stock Brokers, Practicing CA/CS/CWA, Security Agencies, Tour Operators, Event Managers, Travel Agents etc.

Manpower Recruitment or Supply Agency Services, along with many other services, are covered under the residual services category of sub-rule (3) of Rule 3 which is primarily for recipient based services and these services will be treated as Export of Services, if such services are used in or in relation to commerce or industry and the recipient is located outside India.

However, in case the recipient has any commercial or industrial establishment or office relating thereto in India, such services shall be treated as Export of Services only if the order for such service is made from outside India, the services are delivered outside India and used in the business of the recipient outside India as well as the payments are received, by the service provider, in convertible foreign exchange.

In case, the service provided is not used in or in relation to commerce and industry, the service provided will be treated as Export of Service only when the recipient of such service is located outside India at the time when such service is received. This would generally not be applicable to recruiters as their service would mostly be used in the business of the recipient outside India.

From the above the following situations emerge:

a) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which does not have any commercial or industrial establishment or office relating thereto in India and such services are used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax.

b) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which has an office or establishment in India but the order for commissioning such service is from outside India and such services are delivered outside India and also used in or in relation to commerce or industry by the recipient as well as the payments are received, by the service provider, in convertible foreign exchange – then the said service is exempt and can be provided without payment of Service Tax.

c) Where the Recruiter, in India, provides services to a Recipient (client) located outside India but such services are not used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax only in cases where the recipient is located outside India at the time when the service is received by it as well as the payments are received, by the service provider, in convertible foreign exchange.

In my opinion what is of great significance is that in the requirement of para (a) above there is no mention of monies being received in convertible foreign exchange and in para (b) there is an additional requirement of having to prove that the service was ‘delivered’ outside India.

As far as the para (a) requirement is concerned I am of the opinion that all Recruiters should play it safe and only treat those invoices as exempt from Service Tax where, even though they meet all the other conditions, the monies are actually going to be received in convertible foreign exchange.

As regards the requirement of proving ‘delivered’ under para (b) above, I guess, in case all the other requirements are met, then the Department needs to take a practical view in the matter and treat all such cases as exempt from Service Tax.

I look forward to all comments, queries and inputs.

Are global layoffs likely to benefit techies in India

As I have pointed out in my earlier post, Offshoring is good for America, and even Jack Welch has stated that Outsourcing Is Forever - Jack & Suzy Welch, thus this story, in the Econimic Times, which has a slightly different take, is worth a look. In the end, I Think,  it will come down to how effectively the Indian side handles the PR wrt this issue.

Global pink slips in the tech industry may end up benefiting India. As big-wigs like Intel, Sony, CA, IBM and Sun Microsystems announce the return of retrenchment, Indian HR honchos foresee a spurt in demand for low-cost, high-skilled destinations like India in the near future.
The chip-maker-in-distress, Intel, on Wednesday announced that it will reduce its global work-force by 10,500 by mid-07. But this is unlikely to have a huge impact on its India operations, which incidentally, is its largest development centre outside the US. The company refused to put any India numbers on the table, but indications are that investment commitments of over a billion dollars will stay, so the local layoffs may not be high. However, indications are that there could be a cap on hiring.

Indeed, with cost-cutting a major priority, Intel may outsource more to India, say market sources. “India could stand to gain from these global layoffs. Due to talent availability at cheaper costs in the Asia Pacific, Central America and East European regions, business processes are being restructured and shifted to these locations," says Pradeep Udhas, KPMG executive director and CEO, KPMG Resource Centre.

For instance, IBM, which announced axing of 13,000 jobs in Europe and the US, followed it up with plans to treble its investments in India over the next three years by pumping in $6bn towards its operations here.

Rakesh Malik, practice leader-global sourcing (India), Hewitt Associates, said: “With global competition fuelling restructuring efforts to attain greater efficiencies at low costs, firms are exploring different geographies outside the US.” A talent crunch in some markets further triggers the search for newer alternatives, he added.

Terming layoffs announced by Intel as a ‘correction’, Nasscom president Kiran Karnik said: “The industry goes through a business cycle. It is a temporary phase where the company is attempting to strike a balance between manpower and demand. As the business moves towards an upcycle, I am sure they will add people.”

Experts, however, point out that India Inc, through industry associations like Nasscom, needs to intensify efforts to manage its PR globally in order to deal effectively with the sensitive issue of job losses in countries such as the US.

AESC Member Search Firms Form Alliance

One has been talking (and writing) about the evolution of new
business models for the past year or so primarily because of my
exposure to similar trends in the CA profession, where due to the
exponential growth seen by clients it is increasingly becoming
untenable for smaller boutique firms to effectively service their
client's needs (sometimes on account of their lack of geographical
reach/size and at times due to paucity of management/domain
bandwidth). In view of the same, the said professional service firms are adopting new and innovative strategies to overcome their size/expertise limitation and one of the models being increasingly adopted is the formation of an "Alliance of Firms" which operates under one brand globally but firm retains its independent identity too.

I had shared my experience in this regard with some TPRs and some of them had shown preliminary interest in the said model. In the meantime I have come across this "press release" and I would solicit the views and interest of all the members on whether they too feel there is potential in creating such an alliance and what could be the key stumbling blocks/ road blocks in actually creating an alliance of this nature. I am sure others would have had some experiences (or would have heard some war stories) in this regard and it would benefit everybody in case they shared these with the other readers.

As Peter F Drucker pointed out:

"Business once grew by one of two ways: grass roots up, or by
acquisition. Today businesses grow through alliances - all kinds of
dangerous alliance, joint ventures, and customer partnering, which by the way, very few people understand."

Although Mr Drucker is no longer with us in this world, his words of wisdom continue to provide deep insight into this continuously
evolving business paradigm.

Looking forward to all inputs.