FDI in LLP

There are many questions which arise in our mind in relation to FDI in LLP such as:

-Who are the Eligible Investors?

-What are the Eligible Investments?

-Are all LLPs eligible for FDI?

-How the investors will transfer the funds in the LLP and how the valuation will be done?

-Last but not least, Reporting requirements in LLP etc.

Above mentioned questions arise daily in the minds of professionals who deals with the foreign clients. We have prepared a brief note which may answer all the above mentioned questions and may also help the professionals while dealing with the foreign clients.

RBI vide Notification No. FEMA.385/2017-RB dated March 03, 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 to substitute sub-regulation 9 of regulation 5:

“A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity in Pakistan or Bangladesh), not being a Foreign Portfolio Investor or Foreign Institutional Investor or Foreign Venture Capital Investor registered in accordance with SEBI guidelines, may contribute foreign capital either by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP under Foreign Direct Investment, subject to the terms and conditions as specified in Schedule 9”.

Eligible Investors

A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity in Pakistan or Bangladesh), may contribute foreign capital either by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP.

However, Foreign Portfolio Investor or Foreign Institutional Investor or Foreign Venture Capital Investor registered in accordance with SEBI guidelines are not eligible to contribute foreign capital in the LLP.

Eligible investment

Contribution to the capital of an LLP would be an eligible investment under the scheme.

Note: Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.

Eligibility of a LLP

FDI in LLPs is permitted, subject to the following conditions:

• 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. For ascertaining such sectors, reference shall be made to Annex B to Schedule 1 of these Regulations.
• An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions.
• FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.

A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.

Pricing

• FDI in a LLP either by way of capital contribution or by way of acquisition / transfer of profit shares, would have to be more than or equal to the fair price as worked out with any valuation norm which is internationally accepted / adopted as per market practice (hereinafter referred to as “fair price of capital contribution / profit share of an LLP”) and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.
• In case of transfer of capital contribution / profit share from a resident to a non-resident, the transfer shall be for a consideration equal to or more than the fair price of capital contribution / profit share of an LLP. Further, in case of transfer of capital contribution / profit share from a non-resident to resident, the transfer shall be for a consideration which is less than or equal to the fair price of the capital contribution / profit share of an LLP.

Mode of payment

Payment by an investor towards capital contribution in LLPs shall be made:

• by way of inward remittance through banking channels; or
• by debit to NRE / FCNR(B) account of the person concerned, maintained with an AD Category – I bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Reporting

• Annual Return on Foreign Liabilities and Assets: LLP which has received investment by way of capital contribution in the previous year(s) including the current year, shall submit form FLA to the Reserve Bank on or before the 15^th day of July of each year.
• Form FDI- LLP (I): A Limited Liability Partnerships (LLPs) receiving amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment-LLP (I) within 30 days from the date of receipt of the amount of consideration. The form shall be accompanied by: (a) copy/ies of the FIRC/s evidencing the receipt of the remittance. (b) KYC report in respect of the foreign investor in the format specified in.
• Form FDI- LLP (II): The LLPs shall report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) within 60 days from the date of receipt of funds in Form Foreign Direct Investment-LLP(II).