Niddhi Parmar
Minimum government and maximum governance is surely a welcomed initiative. With an objective of achieving the ease of doing business in the country and to fast-tack the hindered projects, NDA government has launched various campaigns. ‘Start-up India’ and ‘Make in India’ have been the recent initiative. DIPP issued press note no. 12 dated 24th November, 2015 (shall come into effect immediately) thereby liberalising FDI in favour of 15 major sectors.
The DIPP Secretary said, “India must become a simple and easy place to do business. We do not want any businessman to enter Udyog Bhavan (the Commerce and Industry Ministry building), we do not want any businessman to enter the Finance Ministry”[2].
In this article, we have discussed the liberalisation with respect to Downstream investments in/by LLPs.
Downstream investment: Meaning
Para 3.10.2 of the FDI Policy defines the term downstream investment as follows-
‘Downstream investment’ means indirect foreign investment, by one Indian company, into another Indian company, by way of subscriptionor acquisitionin terms of Paragraph 4.1. Paragraph 4.1.3 providesthe guidelines for calculation of indirect foreign investment, withconditions specified in paragraph 4.1.3 (v).
Relevant provisions for Downstream investments formerly:
“3.2.5 FDI in Limited Liability Partnerships (LLPs)
FDI in LLPs is permitted, subject to the following conditions: xxx
(c) 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 conditions.
(d) LLPs with FDI will not be eligible to make any downstream investments.xxx”
“ 3.10.3 Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies (regardless of its ownership or control): xxxx
3.10.3.3 For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.”
“3.10.4.2 Downstream investments by Indian companies will be subject to the following conditions:
(i) Such a company is to notify SIA, DIPP and FIPB of its downstream investment in the form available at http://www.fipbindia.com within 30 days of such investment, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme);
(ii) Downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors as also a shareholders‟ agreement, if any;
(iii) Issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;
(iv) For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from the domestic market. This would, however, not preclude downstream companies, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible, subject to the provisions of paragraphs 3.10.3 and 3.10.4.1. “
Scenario post amendment
“3.2.5 FDI in Limited Liability Partnerships (LLPs)
FDI in LLPs is permitted, subject to the following conditions: xxx
(a) FDI is permitted under the automatic route in LLPs operating in sectors/ activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.
(b) An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. xxx”
“ 3.10.3 Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies (regardless of its ownership or control): xxxx
3.10.3.3 For undertaking activities which are under automatic route and without FI linked performance conditions, Indian company which does not have any operations and also does not have any downstream investments, will be permitted to have infusion of foreign investment under automatic route. However, approval of the Government will be required for such companies for infusion of foreign investment for undertaking activities which are under Government route, regardless of the amount or extent of foreign investment. Further, as and when such a company commences business(s) or makes downstream investment, it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.”
“3.10.4.2: Downstream investments by Indian companies/LLPs will be subject to the following conditions:
(i) Such a company/LLP is to notify SIA, DIPP and FIPB of its downstream investment in the form available at http://www.fipbindia.com within 30days of such investment, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures(with/without expansion programme);
(ii) Downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors as also a shareholders agreement, if any;
(iii) Issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;
(iv) For the purpose of downstream investment, the Indian companies/LLPs making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from the domestic market. This would, however, not preclude downstream companies/LLPs, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible, subject to the provisions of paragraphs 3.10.3 and 3.10.4.1.For the purpose of FDI policy, internal accruals will mean as profits transferred to reserve account after payment of taxes.
Conclusion
Prior to the press note only an Indian company having FDI was permitted to make Downstream investment in an LLP, subject to conditions that both (i.e. the company and LLP) shall be operating in a sector where 100 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. The conditions remain the same post issuance of press note, however, permissibility has changed as explained hereunder:
Internal accrual was not explained formerly. As evident from the meaning provided, accumulated profits will not be regarded as internal accrual unless transferred to reserves. Downstream investments using internal accruals will be subject to relevant sectoral caps and conditionalities. Further, such investment cannot be made in an investment company unless Government approval has been obtained. This is to be complied irrespective of the amount or extent of foreign investment.
The change has definitely rendered a reason to cheer to the LLPs.
[2]http://economictimes.indiatimes.com/news/economy/finance/government-plans-to-put-98-per-cent-sectors-for-fdi-under-automatic-route-official/articleshow/49909292.cms
(Author is associated with Vinod Kothari & Co. as Deputy Manager )
