(First published on Linkedin)
The NCLT, Kolkata Bench has recently approved the consolidation of eleven LLPs into a single LLP under Sections 60 to 62 of the LLP Act. On paper, the process mirrors a Companies Act merger, but in practice, there are several distinct nuances that make such mergers different:
1. Income-tax: Unlike merger of companies, merger of LLPs is not tax neutral. However, one could argue that the transferor LLP should not be subject to capital gains tax since there is no receipt or accrual of consideration in the hands of the transferor company. Even if one were to take the position of a deemed receipt, the law does not provide for a mechanism to impute FMV minus net book value as capital gains. For the transferee LLP, section 56(2)(x) should not apply, given that adequate consideration would be discharged in the form of allocation of interest in the transferee LLP.
However, the real tax trigger is at the partner level; their old interest in the transferor LLP is extinguished and replaced with a new interest in the merged LLP. As the Supreme Court held in Grace Collis, this constitutes a transfer, and the FMV of the transferee LLP interest minus the cost of acquisition of the interest in transferor LLP becomes taxable.
2. Stamp Duty: The divergence from applicability of stamp duty on merger of companies becomes starker. Many states provide concessional rates for company mergers – Gujarat, for instance, levies 1% of the FMV of shares or 1% of the immovable property, whichever is higher. LLP mergers, however, do not enjoy the same relief in Gujarat, where the applicable rate is a steep 5%.
3. Automatic Route under FEMA: The existing framework for amalgamations under FEMA explicitly addresses “companies” but makes no specific reference to LLPs. That said, in substance, since FEMA largely treats LLPs and companies alike for FEMA purposes, the logical extension of the existing provisions to LLPs should hold.
4. Procedural Issues: Section 62 of the LLP Act stipulates only ROC’s report confirming that the LLP’s affairs are not prejudicial to partners or public interest needs to be filed. There is no requirement of Regional Director approval. Yet, practice can differ. For instance, the Mumbai NCLT had recently insisted on RD reports.
5. LLP into Company Merger: An LLP cannot merge directly into a company under current law, as the LLP Act allows mergers only between LLPs and the Companies Act has no provision for inbound LLP amalgamations. In Qube Cinema Technologies, such a proposition was ultimately rejected.