Background – Cabinet Committee on Economic Affairs of the Government of India have decided to permit Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) which are formed under the Limited Liability Partnership Act, 2008 [LLP Act]. Presently, FDI is allowed in Indian companies. It is allowed in a firm or a proprietary concern, subject to certain conditions. FDI in a trust is also allowed with prior Government approval, provided it is a Venture Capital Fund (VCF) registered with Securities and Exchange Board of India [SEBI]. LLP Act permits setting up of hybrid entity, which has the features of a body corporate and a partnership for the purpose of undertaking business in India.

Policy announcements

FDI in LLP

To begin with, FDI in LLPs will be implemented with the open sectors. Following conditions are specified for FDI in LLP:

1. LLPs with FDI will be allowed in those sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions. Such FDI in LLP will be through the Government approval route.

2. LLPs with FDI will not be eligible to make any downstream investments.

3. LLPs with FDI will not be allowed to operate in agricultural / plantation activity, print media or real estate business.

    Funding of LLPs

    1. An Indian company having FDI, will be permitted to make downstream investment in LLPs 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.
    2. Foreign Capital participation in the LLPs shall be only be in cash 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.
    3. Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs.
    4. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.)

    Ownership and management of LLPs

    1. For the purpose of determination of the Designated Partners [DP] 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) of the Foreign Exchange Management Act, 1999.
    2. In case the LLP has a body corporate as a designated partner, 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.

    Conversion of Company with FDI into LLP

    Existing company with FDI can be converted into LLP with the prior approval of FIPB / Government.

    DPs will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.

    Conclusion

    The proposal would provide an additional alternative for structuring FDI in India in sectors which are open to 100% FDI on automatic basis.

    Source: Press Release dated 11 May 2011 issued by Cabinet Committee on Economic Affairs, Government of India.

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