Godrej uses LLP structure for real estate SPV

Godrej Industries is seeking shareholder approval to form a special purpose vehicle to implement a real estate project along with its subsidiary Godrej Properties. Godrej Industries is the listed holding company of the Godrej group, with subsidiaries in varied businesses such as foods, consumer products, chemicals and real estate projects.

Godrej & Boyce Manufacturing Company is a privately-owned company of the group (which runs the group’s famous furniture and locks business) and is also the main shareholder of Godrej Industries. Godrej & Boyce has leased out land to Godrej Industries to house its current facilities. Of this, Godrej Industries plans to develop 36.5 acres of land (14.6 hectares) along with Godrej Properties. The three companies have signed a memorandum of understanding and will form limited liability partnerships (LLP). These LLPs will enter into lease agreements with Godrej & Boyce to develop the land. Godrej Industries will invest only Rs 1 crore for this project.

The LLPs will be set up for real estate projects. Godrej Industries will get a 40% share of the profits of the LLPs while Godrej Properties will get the rest. If the LLPs incur a loss, Godrej Properties will bear the entire burden. Godrej Properties will raise the funds required for the LLPs to implement the project. That would explain the higher share of profits, as it will fund the project as well bear all the risk.

This may well be the first instance of a large listed corporate using the LLP route to undertake a business activity. LLPs are internationally well accepted but have only recently become part of the corporate landscape in India. The main attractiveness of this structure is that, as the name indicates, limits the liability of the partners to their investment in the LLP and not beyond. It is also said to be easier to set up and operate with relaxed reporting structures unlike the traditional incorporation laws governing companies under The Companies Act, 1956.

Over the years, the government has clarified several aspects governing LLPs including taxation and conversion from LLPs to limited companies and vice versa. Latest available information from the government’s LLP site indicates that there are 2000 LLPs who have been registered, with the two main sectors being real estate and computer (perhaps meaning software companies). Since real estate companies set up special purpose vehicles for undertaking projects, involving the land owner, lessor and developer, the speed and flexibility associated with the LLP structure probably makes it attractive. Compliance requirements are low and winding it up, if needed, too should be considerably easier compared to a company.

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