A Limited Liability Partnership (LLP) can be defined as:
“A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility of organizing their internal business structure as a partnership.”
It therefore exhibits element of both partnerships and companies. As the name suggests, partners of the LLP have limited liability which means that personal assets of the partners are not used for paying off the debts of the LLP.
In India, LLPs are regulated by Limited Liability Partnership Act, 2008 and rules made thereunder.
Though LLPs were allowed to accept FDI pursuant to A.P. (DIR Series) Circular No. 123 dated April 16, 2014 issued by Reserve Bank of India (RBI), but the same was subject to Government approval. With passage of time, when the concept of LLPs started gaining popularity then the RBI eased down the norms of accepting FDI for LLPs by making amendment in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 in 2017 and issuing Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 on March 03, 2017. Consequent amendment is also reflected in Consolidated FDI Policy 2017 as per which ‘Investment’ for the purpose of LLP shall mean capital contribution or acquisition/ transfer of profit shares.
A person resident outside India or an entity incorporated outside India, may invest, either by way of capital contribution or by way of acquisition/ transfer of profit shares of an LLP, except:
(i) A citizen of Bangladesh or Pakistan or
(ii) An entity incorporated in Bangladesh or Pakistan
(iii) A Foreign Portfolio Investor (FPI) or
(iv) A Foreign Venture Capital Investor (FVCI)
FDI is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.
(i) Single Master Form: With effect from September 01, 2018, an LLP receiving foreign investment for capital contribution and acquisition of profit shares shall submit Single Master Form (SMF) online on https://firms.rbi.org.in/ within 30 days from the date of receipt of the amount of consideration. Prior to introduction of SMF, the reporting was required to be made in Form LLP(I).
Also, the disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) shall be reported in SMF within 60 days from the date of receipt of funds, earlier such reporting was required to be made in Form LLP(II).
(ii) Annual Return on Foreign Liabilities and Assets (FLA): An LLP which has received investment by way of capital contribution should submit form FLA to the Reserve Bank on or before the 15th day of July of each year.
Payment by an investor towards capital contribution of an LLP shall be made by way of an inward remittance through banking channels or out of funds held in NRE (Non-resident external) or FCNR B (Foreign Currency Non Resident Bank) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
The disinvestment proceeds may be remitted outside India or may be credited to NRE or FCNR(B) account of the person concerned.
Conversion of an LLP having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into a company is permitted under automatic route.
Also, Conversion of a company having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into an LLP is permitted under automatic route.
Investment in an LLP either by way of capital contribution or by way of acquisition/ transfer of profit shares, should not be less than the fair price worked out as per 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 person resident in India to a person resident outside India (or vice-versa), the transfer shall be for a consideration not less than the fair price of capital contribution/ profit share of an LLP.
Downstream investment by an LLP not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India is allowed in an Indian company operating in sectors where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.
(The author of this article is a Practicing Company Secretary and can be reached at [email protected])
Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this article should be distributed or copied without express written permission of the author.