Fundraising by LLPs – Illegalities and Legal Boundaries

Limited Liability Partnerships (LLPs), governed by the Limited Liability Partnership Act, 2008, were introduced in India to offer the flexibility of a partnership with the benefits of limited liability. However, in recent years, various LLPs have attempted to raise funds through mechanisms that contravene Indian law, often mimicking public fundraising models used by companies. LLPs do not have the statutory backing to issue shares or securities and are prohibited from raising funds from the public. Any such activity, including through advertisements or online platforms, may attract serious legal consequences under multiple laws.

Several unscrupulous LLPs have engaged in illegal methods of fundraising, such as inviting investments through social media advertisements, online platforms, and collective investment schemes disguised as business ventures. These practices directly violate the Companies Act, 2013, and the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act). Section 42 of the Companies Act, 2013, clearly states that private placements must not involve advertisements or solicitations to the general public. While LLPs are not even permitted to undertake private placement of securities, accepting public funds via advertisements is a graver violation, as LLPs are not covered under capital markets regulations that apply to companies.

A landmark case highlighting these concerns is SEBI v. Gaurav Varshney & Ors. (2016), where the Securities and Exchange Board of India (SEBI) cracked down on collective investment schemes masked as LLP ventures. In another instance, Alchemist Infra Realty Ltd. v. SEBI, although involving a company rather than an LLP, the court held that any public investment solicitation without SEBI’s registration and regulatory compliance constitutes an illegal activity. If similar conduct is carried out by LLPs, which are not permitted to raise public funds at all, such actions become patently unlawful and subject to prosecution under multiple laws, including the Unregulated Deposit Schemes (UDS) Act.

It is essential for LLP promoters and investors to understand that LLPs are restricted from accepting any form of deposits or investments from the public, whether directly or indirectly. The Banning of Unregulated Deposit Schemes Act, 2019 strictly prohibits any entity from accepting deposits without proper authorization, and such activities may result in imprisonment up to 10 years and hefty fines under Section 3 and Section 21 of the Act. Furthermore, Section 42(7) of the Companies Act, 2013 prohibits issuing public advertisements to raise funds—a provision that also applies by analogy to LLPs, given their structural limitations. Businesses must be vigilant in adhering to these legal boundaries, and law firms play a critical role in advising LLPs on compliant, ethical fundraising alternatives such as partner capital contributions or bank credit facilities.