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Foreign Direct Investment (FDI) in Limited Liability Partnership Firms

The Cabinet Committee on Economic Affairs (hereinafter “CCEA”) on May 11, 2011 approved the proposal to amend the policy on allowing FDI in LLPs in India with an understanding that such approval shall benefit Indian economy by “attracting greater FDI, creating employment and bringing in international best practices and latest technologies in the country ” writes Niloy Pyne.
Limited Liability Partnership: A Primer
A “Limited Liability Partnership” (hereinafter “LLP”) is a new hybrid entity which merges the characteristics of a body corporate with that of a partnership firm. Legally, a “Limited Liability Partnership” shall connote a partnership firm where liability of the partners are limited to the extent of their contribution in the firm , formed and registered under the Limited Liability Partnership Act, 2008.

FDI in LLPs in India

Prior to the aforementioned approval for amendment, there was no separate treatment for FDI in LLPs under the relevant policies and foreign investors apart from non-resident Indians persons of Indian origin and are required to obtain prior approval of the Reserve Bank of India to invest in partnership firms as per the terms of the relevant RBI Guidelines. Subsequently, the “Circular 1 of 2011- Consolidated FDI Policy” laying down the existing FDI policy was amended vide Press Note No. 1 (2011 Series) in terms of the aforementioned press release. Under the aforementioned press note, the Government of India decided to permit FDI in LLPs subject to conditions specified in such press note.
The Regulatory Framework for FDI in LLPs

Under the aforementioned press note, FDI in LLPs will be allowed through the approval route, that is after procuring approval from Foreign Investment Promotion Board (“FIPB”), only for LLPs operating in sectors where 100% FDI is allowed through automatic route and there are no FDI Linked performance related conditions. Additionally, LLPs which receive Foreign Direct Investment will not be allowed to operate in agricultural or plantation activity, print media or real estate business and will also not be eligible to make any downstream investments. There are additional restrictions on downstream investment by an Indian company having FDI in LLPs. Such downstream investment in LLPs by Indian companies having FDI is permissible only if such Indian company and such LLPs both operate in sectors where 100% FDI through automatic route is allowed and there are no FDI linked performance related conditions.

In view of the fact that conversion of a company with FDI into LLP shall be permitted only if all conditions regarding FDI in LLPs under the press note are satisfied, the condition that LLPs shall not be eligible to make any downstream investments can be construed to operate as an embargo on conversion of existing joint venture companies (“JVCs”) and wholly owned subsidiaries (“WoS”) of foreign companies having downstream investments. However, another possible construction of the provision could also mean that there shall be no embargo on existing JVCs and WoS of foreign companies having downstream investments to convert into LLPs and shall not be eligible to make prospective downstream investments.

Further, Foreign capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to Non-resident external account (“NRE”) of the person concerned maintained with an authorized dealer or an authorized bank. However, Foreign Institutional Investors (“FII”s) and Foreign Venture Capital Investors (“FVCI”s) will not be permitted to invest in LLPs. LLPs will also not be permitted to raise funds through the External Commercial Borrowings route (“ECB”).

A LLP with FDI can also have a body corporate that as a designated partner provided such a body corporate is a company registered in India under the Companies Act, 1956 and not any other body corporate, such as an LLP or a trust. The designated partner “resident in India” of LLPs, as defined under the ‘Explanation’ to section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of a "person resident in India", as prescribed under section 2(v)(i) (A) and (B) 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. As already stated earlier, conversion of a company with FDI into an LLP will be allowed only if the above stipulations are met and with the prior approval of FIPB or the Government.

Conclusion

While it is unlikely that LLPs will immediately see a wave of FDI inflow with the implementation of the present regulatory scheme in view of the constrained regulatory environment for such FDI inflow, the present framework marks inception of what could be a more liberal regulatory environment facilitating FDI in LLPs depending upon the initial experience with the present framework.

Niloy pyne is a Partner with Amarchand Mangaldas Suresh A. Shroff & Co.
 
REFERENCES
  1. See Press Release by Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion on “Approval for FDI in Limited Liability Partnership firms” dated May 11, 2011 available at http://www.dipp.nic.in/ipr-feedback/FDI_LLP_Approval_11May2011.pdf.

  2. See Section 32, Limited Liability Partnership Act, 2008.

  3. See Section 2 (n), Limited Liability Partnership Act, 2008.

  4. Press Note No. 1 (2011 Series), ¶ 2.0 (B) (inserting new paragraph 3.3.5 (a) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  5. Id. (inserting new paragraph 3.3.5 (c) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  6. Id. (inserting new paragraph 3.3.5 (c) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  7. Id. (inserting new paragraph 3.3.5 (e) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  8. Id. (inserting new paragraph 3.3.5 (f) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  9. Id. (inserting new paragraph 3.3.5 (g) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  10. Id. (inserting new paragraph 3.3.5 (h) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).

  11. Id. (inserting new paragraph 3.3.5 (i) and (j) replacing paragraph 3.3.5 of Circular 1 of 2011- Consolidated FDI Policy).
 
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