22 May 2014 | Volume 6 Issue 4
Recent developments in investments in and by LLPs

Background

A Limited Liability Partnership (LLP) is a credible and useful form of entity in India for Indians as well as global investors.

After almost three years of providing approval for Foreign Direct Investment (FDI) in India through LLPs by way of Press Note 1 (2011 series), the Reserve Bank of India has now issued operational guidelines by way of a circular (A.P. (DIR Series) Circular No. 123 dated 16 April 2014)  with respect to FDI in LLPs with retrospective effect. The guidelines of the aforesaid circular shall be effective from 20 May 2011 (i.e. from the date of Press Note 1/2011).

Further, the RBI has also issued a notification (No. FEMA.299/2014-RB dated 24 March 2014 read with A.P. (DIR Series) Circular 131 dated 19 May 2014) amending the definition of the term 'Indian party' with respect to regulations for Overseas Direct Investments (ODI).
 
Key features of the circular on FDI in LLPs

Eligible investors
Any person resident outside India or an entity formed outside India is eligible to invest except for the following:
  • a citizen/entity of Pakistan and Bangladesh; or
  • a Securities and Exchange Board of India (SEBI) registered Foreign Institutional Investor (FII); Foreign Venture Capital Investor (FVCI); Qualified Foreign Investor (QFI); or
  • a Foreign Portfolio Investor registered in accordance with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (RFPI).
Eligibility of an LLP for accepting foreign investment
Foreign investment in any form whether directly or indirectly shall require Government/Foreign Investment Promotion Board (FIPB) approval.
  • An LLP, existing or new, operating in sectors/activities where 100% FDI is allowed under the automatic route of the FDI Scheme would be eligible to receive FDI.
  • FDI in LLPs shall not be allowed in sectors that are eligible for 100% FDI but are subject to FDI-linked performance conditions (for example, minimum capitalisation norms applicable to 'Non-Banking Finance Companies' or 'Development of Townships, Housing, Built-up Infrastructure and Construction-development projects', etc). 
Eligible investment
Investment by way of contribution to capital is allowed. Investment of profit share will fall under the category of reinvestment of earnings.

Pricing guidelines
Capital contribution/transfer of profit shares should be more than or equal to the fair price as worked out on the basis of any valuation norm, which is internationally accepted/adopted as per market practice. A Valuation Certificate shall be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.
 
Transfer of contribution/profit shares Pricing requirement
From Resident to Non-resident At consideration equal to or more than the fair price of capital contribution/profit share of an LLP
From Non-resident to Resident At consideration which is less than or equal to the fair price of the capital contribution/profit share of an LLP

Mode of payment 
The investment has to happen by way of (i) an inward remittance through banking channels or (ii) by debit to the NRE account of the investor maintained with an Authorised Dealer bank.

Reporting
Reporting requirements shall come into force from 16 April 2014.
 
Capital contribution by way of acquisition/profit shares
To submit the Form FDI LLP(I) within 30 days from the date of receipt of amount
(A Unique Identification Number (UIN) shall be allotted by the RBI in this regard)
 
Supporting documents to be provided:
  • Know Your Customer (KYC) Report,
  • Foreign Inward Remittance Certificate (FIRC),
  • FIPB Approval, and
  • Valuation Certificate.
Transfer of capital contribution i.e. disinvestment/profit share between resident to non-resident
To submit the Form FDI LLP (II) within 60 days from the date of receipt of consideration
Supporting documents to be provided:
  • Consent Letter duly signed by the seller and buyer
  • Capital contribution/profit share holding pattern post transfer
  • Valuation Certificate
  • Declaration from the buyer
  • No Objection/Tax Clearance Certificate from the Income Tax Authority/Chartered Accountant/Cost Accountant/Company Secretary in practice
 
LLPs that have received foreign investments in terms of FIPB approval between 20 May 2011 and 16 April 2014 are required to comply with the above reporting requirements within 30 or 60 days as applicable from the date of this circular.
 
Downstream investments 
An Indian company having foreign investments will be permitted to make downstream investments in an LLP only if both, the company as well as the LLP, are operating in a sector where 100% FDI is allowed under the automatic route and there are no FDI-linked performance related conditions.

An LLP with FDI will not be eligible to make any downstream investments into any entity in India.

Onus to comply with the above requirements shall be on the LLP accepting investment from the Indian company registered under the provisions of the Companies Act, as applicable.
SKP's Comments
This is a welcome development and provides more clarity on reporting requirements, valuation norms, indirect investment, etc. This amendment comes at a time when the new government is about to take charge and will certainly boost FDI into India. Further, an increase in FDI will help strengthen the rupee against the US dollar. Also, this ratifies past investments made in LLPs.

Presently, LLPs are not allowed to avail External Commercial Borrowings (ECB). It would be interesting to see how soon the RBI liberalises ECB guidelines, allowing LLPs to borrow in foreign currency.
Overseas investments by LLPs

Under the Foreign Exchange Management Act, 1999, a resident Indian party can invest in an overseas Joint Venture/Wholly Owned Subsidiary (JV/WOS).  Presently, overseas investment in a JV/WOS by a resident is governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.

Until now, an 'Indian party' was defined to include (i) a company incorporated under the Companies Act, 1956 (ii) a partnership firm registered under the Partnership Act, 1932 (iii) a body corporate incorporated under an Act of Parliament. Based on the above, it can be seen that LLPs were not allowed to invest overseas. Accordingly, LLPs were discriminated from companies and partnership firms. To overcome this issue, the regulations have been amended to include an LLP within the meaning of an 'Indian party' by way of notification (FEMA  299/2014-RB dated 24 March 2014 notified by RBI vide A.P. (DIR Series) Circular No. 131 dated 19 May 2014). The amendment is effective from 7 May 2014 i.e. from the date on which the notification was released in the official gazette.

Henceforth, LLPs can invest overseas under the automatic route or with approval as the case may be.
SKP's Comments 
Allowing LLPs to invest abroad by removing the distinction between companies and LLPs is a welcome move by the RBI. This will help existing LLPs to expand their business overseas. The operational and procedural guidelines for LLPs shall remain the same as per the ODI regulations. However, the RBI needs to amend the relevant forms and reporting mechanisms to accommodate details relating to LLPs.

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ABOUT THIS BUSINESS ALERT
This SKP Business Alert contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. This business alert is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and also refer to the source pronouncement/documents on which this business alert is based. It is also expressly clarified that this business alert is not a solicitation or an invitation of any sort whatsoever or a source of advertising from SKP Group or any of its entities to create any adviser-client relationship.

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