SKP Business Alert
Volume 8 Issue 13 | 14 March 2017

The Reserve Bank of India liberalises foreign direct investment in limited liability partnership 

Limited Liability Partnership (LLP), introduced as a form of business entity in India in 2008, provides advantages of a corporate status and limited liability to the company while maintaining operational flexibility of a general partnership. With regards to Foreign Direct Investment (FDI) in an LLP, the Reserve Bank of India (RBI) permitted FDI in an LLP only under the approval route, and also there was a restriction on availing External Commercial Borrowings (ECB) by the LLPs. Converting an existing company into an LLP through FDI was permitted only under the approval route.

Subsequently, in February 2015, as per the government’s revised FDI policy for LLPs, the RBI permitted FDI in LLPs (up to 100%) under the automatic route in sectors/activities where there are no FDI-linked performance conditions. However, the restrictions on availing ECB and approval route for converting an existing company into an LLP through FDI persisted, even though these conditions were liberalised in the government’s revised FDI policy.

Accordingly, the RBI, vide its notification no. Foreign Exchange Management Act (FEMA) 385/2017-RB dated 3 March 2017, has amended Schedule 9 to FEMA 20/2000-RB to incorporate these liberalisations in its regulations dealing with FDI in an LLP. The key highlights are: 
  1. A company that has received foreign investment can now be converted into an LLP under the automatic route if it is engaged in a sector where 100% FDI is permitted under the automatic route, and there are no FDI-linked performance conditions.
  2. The condition stating that only a body corporate (being a partner in an LLP) registered under the Indian Companies Act could appoint a Designated Partner (DP) in an LLP that has received FDI has been removed. This will allow body corporates (including foreign companies) to appoint a DP.
  3. The condition for an individual, appointed as a DP in an LLP that has received FDI, to satisfy the requirement of residency test under FEMA (in addition to the residency test given under Explanation to Section 7 of the LLP Act) has now been withdrawn.
  4. Earlier, there was an explicit prohibition on LLPs availing ECB. The present amendment does not explicitly mention the permissibility or prohibition on LLPs availing ECB. This can be construed to mean that the restriction on LLPs to avail ECB has been removed, subject to amendment in overall ECB policy framework.
  5. LLPs that have received FDI are required to submit a report on their annual return on foreign liabilities and assets to the RBI, on or before the 15 July of each year, as prescribed by the RBI from time to time.
SKP's comments
This is a long-awaited amendment which removes the discrepancy between the government’s FDI policy and the RBI regulations concerning FDI in LLPs. With the Indian government focusing on improving the ease of doing business in India, these amendments can help businesses considering the inherent advantages of an LLP (corporate status, limited liability, operations flexibility, etc.). These advantages combined with the fact that LLPs are not liable to pay Dividend Distribution Tax (DDT) (effective rate of 20.36%) on the distribution of profits to partners, could result in LLPs becoming a preferred choice of business entity for foreign business groups establishing a business presence in India. Also, the foreign business groups already operating in India through a company entity may consider converting the company to an LLP to reap these benefits.
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