The Limited Liability Partnership Act 2008 (LLP Act) was notified in April 2009 but FDI in LLPs was not permitted under the FDI policy.
In September 2010, the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India, had issued a discussion paper on permitting FDI in LLPs, surrounding aspects / issues and invited comments thereon from various stakeholders.
In the above backdrop, the Cabinet Committee on Economic Affairs, Government of India on 11 May 2011 has approved the proposal to amend the Policy on allowing FDI in LLPs in a calibrated manner beginning with Open Sectors i.e. where monitoring is not required subject to the following conditions:
i. FDI in LLPs will be allowed under the Government Approval Route in those sectors / activities where 100 percent FDI is allowed under the Automatic Route and there are no FDI-linked performance related conditions.
ii. The LLPs with FDI will not be allowed to operate in Agricultural / Plantation Activities, Print Media or Real Estate.
iii. The LLPs with FDI will not be eligible to make any Downstream Investments.
Further, FDI in LLPs will be subject to the following conditions:
(1) Funding of LLPs:
a) An Indian Company with FDI will be permitted to make Downstream Investment in LLPs, provided both, the Company and the LLPs, are in sectors where 100 percent FDI is permissible under the Automatic Route and there are no FDI¬linked performance related conditions.
b) The Foreign Capital Participation in the capital structure of the LLPs will be by way of cash consideration received either by inward remittances through normal banking channels or by debit to NRE / FCNR bank account in India of the person concerned.
c) Foreign Institutional Investors and Foreign Venture Capital Investors would not be permitted to invest in LLPs
d) LLPs will not be permitted to avail External Commercial Borrowings.
(2) Ownership and Management of LLPs
a) With respect to ‘Designated Partners’ in 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.
b) In case the LLP has a Body Corporate as a Designated Partner then the Body Corporate should only be a Company registered under the Companies Act and not any other body, such as LLP or a Trust.
(3) An Indian Company with FDI, meeting the stipulated conditions can be converted into LLP with Government / Foreign Investment Promotion Board approval
(4) The Designated Partners will be responsible for FDI conditions and compliances and liable for all penalties imposed on the LLP for their contravention.
Our Comments: – Since the liberalisation of the FDI Policy in 1991, FDI in LLPs is a significant step, and it should benefit the Indian Economy by augmenting FDI as LLPs are relatively simple and tax efficient entity form as compared to Company. India Inc. now needs to await the final policy for the finer print. One term used in the Press Release which warrants clarification is ‘FDI-linked performance related conditions’. It is expected that the policy would also clarify the factors, aspects and need for approval requirement for FDI in LLPs even for activities / sectors falling under the Automatic Route.