As per recent RBI notification no. RBI/2012-13/526/DNBS.PD/CC.No. 328/03.02.002/2012-13 dated June 11, 2013, it is clarified that NBFCs not to Partner in Limited Liability Partnership(LLP). NBFCs were advised vide CC No. 214/03.02.002/2010-11 dated March 30, 2011 that they are prohibited from contributing capital to any partnership firm or to be partners in partnership firms. In cases of existing partnerships, NBFCs were advised to seek early retirement from the partnership firms.

In this connection certain clarifications are being made as given below;

a.Partnership firms mentioned above will also include Limited Liability Partnerships (LLPs).

b.Further, the aforesaid prohibition will also be applicable with respect to Association of persons; these being similar in nature to partnership firms.

Non-Banking Financial Companies which had already contributed to the capital of a LLP/Association of persons or was a partner of a LLP/Association of persons are advised to seek early retirement from the LLP/Association of persons.

To give effect to above, RBI has also amended following Directions with effect from 30 March 2011 viz.:

1.Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007; and

2. Non-Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.

The main reasons of putting all these restrictions on NBFCs by Reserve Bank of India are (a). To lessen the degree of risks involved in NBFCs associating themselves with partnership firms, (b). To avoid the three main limitations of partnership firms which is not in case of private or public limited company and (c.) safeguarding the interest of investors who have invested in NBFCs:

1. Partnership is not a legal entity, 2. The property of a firm is   owned by the partners and they can dispose it at any time, 3.  A partnership may be dissolved by any partner at any time.

 NBFCs registered with RBI have made large investments in, and have contributed capital to, partnership firms.

“Unlike a public or a private limited company, a partner can call it quits any time from a partnership firm. So, if an NBFC has invested in such a firm and the latter fails, then it could have an adverse ripple effect on the former, its depositors and creditors (banks). So, the RBI’s move prohibiting NBFCs from contributing capital to any partnership firm or being a partner in a partnership firm is justified,” said Mr D. R Dogra, Managing Director, CARE Ratings.

Diversion of funds invested by NBFCs in partnership firms into sensitive sectors such as capital markets and commercial real-estate could be causing concern to the regulator, he added.

Now analysing the above notifications, some practical hurdles will arise  for which more clarification is still needed:

1. The prohibition to become partner in a Limited Liability Partnership (LLP) which is formed under The Limited Liability Partnership Act, 2009 seems to be unwarranted as Partners in a LLP have limited liability and LLP is a legal entity so there are no chances of partners taking out all the money.
2. If NBFCs is non deposit taking it has no investors’ interest to protect at large, so there is no benefit in banning non deposit taking NBFCs from becoming partner in Partnership firms.
3. If partnership firm has only two partners including one NBFC Partner, and NBFC retires from it as per RBI directive, then whole partnership has to be reconstituted affecting the entire business of the Partnership Firms/LLPs.
4. Further in cases of existing partnerships, if NBFCs seek early retirement from the partnership firms, they have to bear uncertain tax burdens and commercial risks which may not be planned before hand.

(References: Businessline, RBI notifications, Deloitte reports, other online publications)