Volume 3, Issue 1

9th June, 2011

Business Alert
FDI in Limited Liability Partnership firms

In the increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited liability is, to say the least, risky and unattractive. This led to the enactment of the Limited Liability Partnership (LLP) Act, which became effective from March 31, 2009. With the passage of this Act, a new hybrid entity, an LLP, incorporating the features of a body corporate and a partnership, can now be formed for the purpose of undertaking business in India.

Recently the Government gave a nod to changes in Foreign Direct Investment (FDI) policy, allowing FDI in LLPs. This alert summarizes this welcome announcement.

FDI Policy for LLPs

The Government had in the past issued a Discussion Paper inviting comments from stakeholders on aspects such as:

  1. Whether FDI should be allowed only in LLPs engaged in activities falling under automatic route
  2. Should only cash contribution be allowed
  3. Allowability of downstream investment,
  4. Raising ECBs

The Cabinet Committee on Economic Affairs (CCEA) has finally approved the FDI policy for LLP’s. The FDI in LLPs will be implemented in a calibrated manner, beginning with the ‘open’ sectors where monitoring is not required.

Salient features of the approved policy, as contained in the Government press release, are as follows:

  • FDI in LLPs to be allowed up to 100% in sectors/activities that are currently eligible for 100% FDI under automatic route and which do not have any FDI-linked performance conditions.
  • LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.
  • Prior approval from the Foreign Investment Promotion Board (FIPB) will be required for FDI in a LLP.
  • Downstream investment by LLPs with FDI will not be allowed. However, an Indian company with foreign investments can make downstream investment into a LLP with prior FIPB approval, provided both the Indian Company and the LLP are engaged in activities eligible for 100% FDI under automatic route and which do not have any FDI-linked performance conditions.
  • Only cash contribution will be permissible for FDI in LLPs.
  • Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs. Further LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.).
  • If designated partner is a body corporate, it can only be an Indian Company (not trust or other entity form).

Key implications and aspects requiring clarity

  • Since FDI in LLP’s will not be permitted in activities that have FDI-linked performance conditions, would sectors which have conditions attached for FDI, such as construction development, not be able to conduct business as LLPs with FDI?
  • Whether this restriction would also cover a sector like wholesale trading, where one of the conditions under operational guidelines is that wholesale trading to group companies should not exceed 25% of the total turnover of the wholesale venture?
  • Are the minimum capitalization norms prescribed for FDI in Non-banking Financial Companies (NBFCs), a “performance” condition, thereby restricting FDI in LLPs engaged in the 18 permissible NBFC activities?
  • The press release containing the policy announcement does not mention any pricing norms for FDI in LLPs. In case of a company, the prevailing policy and FEMA regulations stipulate that the issue price of shares issued to a foreign investor, should not be lower than the fair value determined in accordance with DCF valuation methodology, in case of an unlisted company, and valuation in terms of SEBI (ICDR) Regulations, for listed companies.
  • In case of companies, the prevailing FDI policy regime permits FDI by way of in-kind contributions (i.e. contribution of capital equipment, capitalization of pre-incorporation expenses) with prior approval of the FIPB. However, for LLPs the Government proposes to restrict FDI only by way of cash contributions to the capital.
  • Foreign Capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to Non-resident Entity (NRE) or Foreign Currency Non-resident (FCNR) account of the person concerned, maintained with an authorized dealer/authorized bank. There is no clarity on whether capital contribution through Non-resident Ordinary (NRO )account can be done.

Approval of Foreign Investments in LLP is a welcome step by the CCEA. However without clarifications on these points, there remain tremendous doubts on its actual functioning.

For further queries e-mail - manoj.gidwani@skpgroup.com