Foreign Direct Investment in Limited Liability Partnership

After 2 years of notification of the Limited Liability Partnership Act 2008, and after 5 months of issuing a discussion paper on allowing Foreign Direct Investment (FDI ) in the Limited Liability Partnership (LLP) , the Government of India , has approved the much awaited policy on FDI in Limited Liability Partnership. FDI in LLP is allowed in sectors activities where 100% FDI is allowed under the automatic route and there are no FDI-linked performance related conditions, subject to approval of government .

The LLP Act 2008, allows foreign national and foreign LLP’s to become partner in LLP but as per the Foreign Exchange Management At 1999 and regulations and rules made thereunder, foreign investment in LLP was not allowed, therefore it was necessary to prescribe a regulatory policy for allowing the FDI.

While allowing FDI in LLP, the Government of India , has taken a very precautionary approach by only allowing FDI under approval route in sectors where 100% FDI is allowed, under the automatic route and there are no FDI-linked performance related conditions, for example sectors like power, roads, information technology , manufacturing etc .

Please check the policy details below

1. LLPs with FDI will be allowed, through the Government approval route, in those sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.
   By FDI-linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc are prescribed like development of Townships, NBFC, even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.
2. LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.
3. LLPs with FDI will not be eligible to make any downstream investments, which mean LLP having FDI, cannot make further investment in LLP or companies engaged in any business, even though 100% FDI is allowed under those sectors.

The Government of India has also prescribed the following conditions relating to funding, ownership and management of LLP’s:

1. Funding of LLPs:
(a) Downstream Investment by Company: An Indian Company, having FDI, will be permitted to make downstream investment in LLPs only if both the company, as well as the LLP is operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.
(b) Investment by Cash Consideration: 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 NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. For making non cash/intangible contribution towards the capital of the LLP, permission of Government of India will be required.
(c) FII/ Foreign Venture Capital: Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs.
(d) External Commercial Borrowings: LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.)
2. Ownership and management of LLPs:
(a) Determination of Designated Partner: The LLP Act 2008, provides that atleast one designated partner shall be person resident in India.
As per explanation to section 7 of the LLP Act 2008, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.
But for the purpose of determination of the designated partners in respect of LLPs with FDI, the term “resident in India” would have the meaning, as defined for “person resident in India”, under Section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999;
As per section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999, a person resident in India means
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include -
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
(b) Body Corporate as Designated Partner: In case of LLP having FDI and a body corporate is a designated partner, than the body corporate should only be a company registered under the Companies Act and not any other body, such as an LLP or a trust.
(c) Compliance of FDI Policy: The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.
(d) Conversion into LLP: 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.

The Government of India has issued a Press Note for amending the consoldiated Foreign Investment Policy in order to allow FDI in LLP, Please Click here to view the Press Note.

Our Observations:

Allowing FDI in LLP is a welcome move of the Government of India, as it would provide foreign investors an alternate form of business other than company and would entitle them to benefit with inherent flexibility & tax efficient LLP structure. It is to be noted that LLP as opposed to company are not subject to dividend distribution tax @ 16.225%

The aforesaid move will boost the number of joint ventures in the country and specifically in infrastructure sector, where most of projects till date are executed in form of unincorporated joint venture where most.