Partnerships may be allowed more members for bank cos

The government is all to remove the cap on the number of partners in partnership firms as well as in banking companies regulated under the Company Law.

The move will have major implications. Associations and partnership entities — mainly law, accounting and audit firms — will be able to expand in a big way. Currently, Section 11 of the Company Law restricts the number of partners in associations and partnerships to 20.

The ongoing global talks for liberalisation of market access in services, driven by the World Trade Organization (WTO), aims at opening areas like accountancy and law. Apart from enabling Indian firms to take foreign competition at home, expansion in size will help them in tapping overseas markets. The amendments to lift the ceiling on partnerships have been proposed in the new companies, bill which the government is planning to introduce in Parliament during the forthcoming budget session.

The move is also in line with the government’s plan to enact a new law for limited liability partnership (LLP) firms which will allow all services under one umbrella. The LLP bill proposes a hybrid form of business entity that has all the advantages of a partnership and a company. It will not have any cap on the number of partners.

Another possible implication is that banking companies, which are formed as partnerships or as a company but are not regulated by the Reserve Bank of India (RBI), may become a plausible business proposition in the banking sector. Although a lot of banking companies were formed as partnerships in the past, most of them got converted into co-operative banks in the past few decades. Now, most banks are either public limited companies or private limited companies and are regulated by RBI.

If the government allows banking companies registered under the Companies Act to have unlimited number of partners, they will have access to funds — the most-needed resource for the business. However, some experts point out that this form of business model had died down in the banking sector.

Though it might be theoretically possible for such banking companies to be formed under the Companies Act, their regulation would remain a grey area. Deposit-taking institutions, whose collapse could have systemic implications, are regulated by a central banking regulator which in India’s case is RBI. It is unlikely, experts said, that any entity accepting deposits from the general public can escape regulation by RBI.

The Companies Act of 1956 allows only 10 partners in a partnership bank and 20 partners for other partnerships and associations. In comparison, firms in Europe and the US are much larger with more than 100 partners in some cases.

The move to remove the restriction on partnerships is to provide a level-playing field to partnership firms when the legal and accounting services market is opened up for foreign competition from leading players from the US and Europe.