Foreign Direct Investment in Limited Liability partnerships (FDI in LLPs)
Limited Liability Partnership are the best way other than companies where the
investment made can be withdrawn by the Designated Partners/ Investors which
had been invested by them as Capital Contribution or by way of withdrawal of
Profits.
Since, in companies the capital contribution can be withdrawn by way of bye back
of shares or by way reduction of capital which requires huge compliance work and
which is time consuming. Hence, the trend of LLP Incorporation is increasing day
by day. And hence, it is suitable for foreign investors also to invest by way of FDI
and to re-patriate its money at any time without following huge burdon of
compliances.
However, Since their inception, LLPs in India have been riddled with
obtaining prior government approval for receiving FDI and facing blanket
restrictions on downstream investments.
However, on November 24, 2015, in
line with the Indian Government’s “ease of doing business in India”
campaign, the Department of Industrial Policy and Promotion (“DIPP”)
issued Press Note 12 of 2015 to relax FDI investments
Moreover, The LLP Act 2008 allowed foreign nationals and foreign LLPs
(Limited Liability Partnerships) to become a partner in LLP but as per the Foreign
Exchange Management Act and regulations and rules, foreign investment in LLP
was not allowed, therefore it was necessary to prescribe a regulatory policy for
allowing Foreign Direct Investment (FDI).
Which had been notified by the
Reserve Bank of India vide Notification No. FEMA.385/2017-RB dated
03.03.2017.
Now there a no. of questions regarding FDI in LLP like:
-Who can invest in LLPs.
-How the investments can be made in LLPs
-What reporting requirements are there to be made to RBI
We have tried to compile the above questions in brief which shall be helpful for
clearing the doubts of investors in LLPs.
Who can Invest in LLPs:
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”.
So from above, we can say that 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.
However, 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.
So we can conclude the above as follows:
LLPS NOT ELIGIBLE FOR ACCEPTING FDI:
LLP engaged in the following sectors/activities shall not be eligible to accept FDI:
1. Sectors eligible to accept 100% FDI under automatic route but which are
subject to FDI-linked performance related conditions (for example minimum
capitalization norms applicable to ‘Non-Banking Finance Companies’ or
‘Development of Townships, Housing, Built-up infrastructure and
Construction-development projects’, etc.)
2. Sectors eligible to accept less than 100% FDI under automatic route;
3. Sectors eligible to accept FDI under Government Approval route
4. Agricultural/plantation activity and print media
5. Sectors not eligible to accept FDI at all which are as follows:
(i) Business of chit fund, or
(ii) Nidhi company, or
(iii) Agricultural or plantation activities, or
(iv) Real estate business, or construction of farm houses, or
(v) Trading in Transferable Development Rights (TDRs).
(vi) Lottery Business including Government /private lottery, online lotteries, etc.
(vii) Gambling and Betting including casinos etc.
(viii) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or
of tobacco substitutes
(ix) Activities / sectors not open to private sector investment e.g. Atomic Energy
and Railway Transport (other than Mass Rapid Transport Systems).
NOTE: Issue/transfer/pricing/valuation of shares shall be in accordance with
applicable SEBI/RBI guidelines.
HOW THE INVESTMENTS CAN BE MADE IN LLPS
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.
Payment by an investor towards capital contribution in LLPs shall be made:
(i) by way of inward remittance through banking channels; or
(ii) 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 TO RESERVE BANK OF INDIA
1. 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.
2. 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.
3. 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).
VARIOUS RESTRICTIONS WITH RESPECT TO FDI INVESTMENT IN
LLPS:
Despite the allowance of FDI, the LLP structures in India still face some
restrictions.
1. Foreign Capital participation in LLPs is allowed only by way of cash
considerations, received by inward remittance, through normal banking channels,
or by debit to NRE/FCNR account (maintained with an authorized
dealer/authorized bank) of the person concerned.
2. Prior governmental permission is required to make non-cash/intangible
contribution towards the capital of an LLP.
3. The government has also not permitted Foreign Institutional Investors (FIIs) and
Foreign Venture Capital Investors (FVCIs) to invest in LLPs.
4. LLPs are also not permitted to avail External Commercial Borrowings (ECBs).
Conclusion: We can conclude from the above, that although there are some
restrictions and shortcomings in FDI in LLPs, but still it is a growing sector for the
investors to invest since it gives them the free hand to withdraw the money and to
re-patriate the same into their country which is otherwise not possible in
Proprietorships and Partnerships.
Disclaimer: The author is based at Jalandhar and is a practicing company
Secretary deal in Secretarial and FDI Matters and also a Certified CSR
Professional who deals in matters pertaining to Corporate Social
Responsibility.
The information contained in this write up, as provided by the
author, is to provide a general guidance to the intended user. The information
should not be used as a substitute for specific consultations. Authors recommend
that professional advice is sought before taking any action on specific issues.
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