Governed by the Limited Liability Partnership Act, 2008 (LLP Act), as notified on April 1, 2009, LLP is a corporate medium that conglomerates professional and entrepreneurial competence by providing to its members limited liability and also the flexibility to organize the structure as a partnership. To attract foreign investment, the Cabinet Committee on Economic Affairs (CCEA), agreed to foreign direct investments (FDI) in LLPs in sectors like mining, power and airports. This will be implemented in a regulated and calibrated manner, beginning with the “open sectors” where monitoring is not required.
Under the current FDI policy, foreign investment in Indian Companies is permitted under:
- the automatic route; and
- the approval route (with prior approval of the Foreign Investment Promotion Board (‘FIPB’)), depending on the sector in which FDI is being inducted.
The Government of India (GOI), has through the ‘Press Note No. 1(2011 Series), Dated 20-5-2011’ has permitted FDI in LLP firms, subject to specified conditions.
- FDI in LLPs will be allowed up to 100% in sectors/activities thatare currently eligible for 100% FDI under automatic route and which do not have any FDI-linked performance conditions and there should not be any FDI-linked performance related conditions (such as ‘Non Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’ etc.);
- An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions;
- LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008 such a body corporate should only be a company registered in India under the Companies Act, 1956 and not any other body, such as an LLP or trust;
- Foreign capital participation in the capital structure of LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. For such LLPs, the designated partner “resident in India”, as defined under the ‘Explanation’ to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of “person resident in India”, as prescribed under Section 2 (v) (i) of the Foreign Exchange Management Act, 1999. The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any;
- Any conversion of a company with FDI into an LLP will be allowed only if the company is engaged in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions and prior approval of FIPB/Government is obtained;
- Prior approval from the Foreign Investment Promotion Board (FIPB) will be required for FDI in a LLP;
Restrictions:
- LLPs with FDI will not be: allowed to operate in agricultural/plantation activity, print media or real estate business; eligible to make any downstream investments’; and permitted to avail External Commercial Borrowings (ECBs);
- Only cash contribution will be permissible for FDI in LLPs; and
- Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs.
Conclusion:
Globally, the LLPs are the preferred form of doing business by professionals. In India, LLP is a new kind of entity with a new law. Therefore the GOI is being cautious by not completely allowing FDI in LLPs. To ensure no violations of Foreign Exchange Management Act (FEMA) Rule, the RBI will also keep a tab on deals involving FDI in LLPs. However, this is also an encouraging step by the GOI, to provide foreign investors an alternate form of business other than to form a company, which would entitle them to benefit in a resourceful and flexible manner, while retaining its LLP structure. Additionally this will give a boost to the number of joint ventures in the country.
By Vidhi Agarwal, Partner and Megan Fernandez, Trainee Associate