Nov 10, 2008

Limited Liability Parternship to come to India !

India may introduce the Limited Liability Partnership (LLP) in 2009. LLPs function exactly like partnerships except that the liability of the partners in an LLP is limited to the contribution of the partner. A discussion on the LLP bill can be found here and the actual bill can be found on the Ministry of Company Affairs' Wesite.

What I find very interseting is the implications the LLP bill will have for the portfolio management/hedge fund industry. Currently, portfolio managers in India are regulated by SEBI and face numerous restrictions/regulations on their strategies and operations. Some regulations are resonable and protect the investors while some are completely bizzare (take for example the regulation touting a ban on pooled accounts).

The question is - will SEBI object outright to the use of LLPs as a vehicle to pool and channel private investments? If not, then the LLP opens a whole new world of opportunities for HNI  investors and hedge fund managers interested in leverage, shorting the market, convertible arbitrage, long-short strategiesand other unconventional investment strategies. 

Presently, the only way an investor can gain access to strategies other than buy-and-hold are through research analysts at brokerage houses. However, there is an obvious conflict of interst present there which is removed in the case of an asset manager who's revenue depends on client profits (and not on portfolio churning).

LLPs will allow asset managers to start offering sophisticated portfolio strategies to individuals/corportates/institutions who desire them while limiting liability from losses and from SEBIs interference. This will benefit the investment profession as well as investors. 

SEBI's role should be similar to the Financial Services Authority, UK, or the Securities Exchange Commission (SEC), USA, which prohibit hedge funds from marketing their services to the general public.  SEBI spread awareness to investors of the risks and that hedge funds running as LLPs are not restricted in their investment practices by SEBI. Invetors who want to take the additional risk should be allowed to take it.

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an after-thought---

Since the proposed LLP strucuture allows for foreign partners, theoretically a NRI/foreign investor can take a partnership stake in the LLP investment vehicle. This direct route may allow the foreign investor to side-step the numerous SEBI guidelines. It will be interseting to watch how this aspect of the LLP will play out..

4 comments:

  1. Hi Varun,

    Was a little confused on how LLP would benefit funds - could you elaborate on this??

    The article on Bear Sterns collapse in Bloomberg was interesting.

    Regards,
    Janardhan
    bjan.rao@gmail.com (johnbelpu@blogspot.com)

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  2. Hello Janardhan,

    The LLP structure will benefit hedge funds (as opposed to mutual funds or portfolio managers registered with SEBI). Currently, under SEBI guidelines, there is no way for an asset manager to run a short-bias fund, leveraged fund etc..
    For example, if an investor believed in Jan 2008 that the markets will collapse the only professional advise he had access to were brokerage research analysts. There is a conflict of interest there since brokerages earn revenues from higher client trading volumes rather than the client making money. An asset management firm, on the other hand, prospers only if the clients prosper. There are several other strategies which cannot be made available in India under the current regulatory structure (however India focussed funds based outside of India can offer these).

    With the LLP structure, fund managers can float a LLP for each strategy and the clients can become partners and the fund manager can be paid his fees directly by the LLP depending on the scheme's performance. The limitation here is that this structure will probably not be feasible for a large number of clients (and for small investors).

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  3. Varun - Are you aware of any update on the feasibility of setting up LLP structure for small time asset managers?

    J

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  4. Joseph- setting up a LLP is quite feasible for small time asset managers. There are two problems that need to be worked around - a) LLP objective stated such that RoC doesn't ask for RBI NOC b) clients being unaware of how such a structure works. You can also raise debt and pay out the returns generated by the LLP using the debt capital - this can be incorporated into the debt covenants.

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