Foreign Direct Investment in Limited Liability Partnerships

Limited Liability Partnership [hereinafter, LLP] has been recognized as a premium vehicle for business administration of service providers on account of its perpetual succession, restricted liability and efficient structure. The principal Act, i.e., the Limited Liability Partnership Act, 2008 [hereinafter, LLP Act], whose primary object is to enable professional expertise and entrepreneurial initiative, was widely anticipated and has been applauded for its liberal and flexible approach. Thus, it is not surprising that LLPs have been empowered to obtain foreign direct investment [hereinafter, FDI], at par with companies and in accordance with the limits imposed in the FDI Policy, subject to the approval of Foreign Investment Promotion Board [hereinafter, FIPB]. However, vide Press Note No. 12 dated November 24, 2015,[1] amending the FDI Policy 2015, the Government of India has granted LLPs the right to obtain FDI through automatic route, in sectors/activities where 100% FDI is allowed and no-FDI linked performance condition has been stipulated.

Salient Features of LLPs

As the name suggests, LLPs are structure which allow partnership structure with limited liability of partners and differentiates between the two entities (i.e., the LLP and the partners). A body corporate, with perpetual succession and designated Partners responsible for statutory compliance distinguishes an LLP from a traditional partnership. However, provisions of agency and holding out apply mutatis mutandis.

Firms, private companies and unlisted public companies may be converted into a LLP upon registering such incorporation documents and certificates,[2] as stipulated under the Act. A firm may apply to convert into a LLP in accordance with the Second Schedule, if and only if the partners of the LLP into which the firm is to be converted, comprise, all the partners of the firm and no one else.[3] A private company[4] and an unlisted public company[5] may apply to convert into a LLP in accordance with this Schedule, if and only if –

  1. There is no security interest in its assets subsisting or in force at the time of application; and,
  2. The partners of the LLP to which it converts comprise all the shareholders of the company and no one else.

Further, such LLP shall inform the Registrar of Firms/Companies, as the case may be, about the conversion and such details about the LLP as may be required. Such conversion vests the property of the company or the firm in the LLP and the company/firm shall be dissolved and removed from the records of the Registrar of Firms/Companies, as the case may be. The LLP Agreement has to be filed with the Registrar of Companies within 30 days of the registration of LLP.

History of Foreign Investment in LLPs

The Government of India, vide Press Note No. 1 dated May 20, 2011,[6] amended the Circular 1 of 2011-Consolidated FDI Policy to introduce LLPs as another avenue for FDI in India. However, the said allowance was encumbered with the following conditions:

  1. FDI was to be obtained only through government approval and only in sectors/activities where 100% FDI is allowed through automatic route and there are no FDI-linked performance related conditions;[7]
  2. Not allowed in LLPs operating in agricultural/plantation activity, print media or real estate business;
  3. In case of downstream investment by an Indian Company, having FDI, both the company and the LLP must be in sectors where 100% FDI is allowed through automatic route and there are no FDI-linked performance related conditions;
  4. No downstream investments shall be made by an LLPs receiving FDI;
  5. Foreign Capital participation in capital structure LLP will be allowed by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer[hereinafter AD]/authorized bank;
  6. No External Commercial Borrowings [hereinafter ECB] shall be availed by the LLPs;
  7. No Foreign Institutional Investors [hereinafter FII] or Foreign Venture Capital Investors [hereinafter FVCIs] shall be allowed to invest in LLPs;
  8. A body corporate, who appoints a nominee as a designated partner in the LLP with FDI, must be company registered in India under the Companies Act, 1956.
  9. An LLP with FDI must have at least two designated partners who are individuals and at least one of them shall be a resident in India, who must have resided in India for a period of not less than 182 days during the immediately preceding one year, and does not include a person who has gone out of India or who stays outside India, in either case for or on taking up employment outside India or for carrying on outside India a business or vocation outside India or for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;[8] and,
  10. The resident designated partner will be responsible for compliance with all conditions stipulated under the FDI Policy and also liable for all penalties imposed on the LLP for their contravention, if any.

This Press Note was later reproduced verbatim in the Consolidated FDI Policy of 2013.[9] This Reserve Bank of India [hereinafter RBI] vide A.P. (DIR Series) Circular No. 123 and incorporated in the Master Circular on Foreign Investment in India,[10] has promulgated a scheme for acquisition/transfer by a person resident outside India, following up on the Press Note[11] and the Consolidated FDI Policy of 2011 and 2013 respectively, wherein the following eligible investors have been identified:

  1. A citizen/entity of Pakistan and Bangladesh, or
  2. A SEBI registered FII, or
  3. A SEBI registered FVCI, or
  4. A SEBI registered Qualified Foreign Investor (QFI), or
  5. A Foreign Portfolio Investor registered in accordance with Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 [hereinafter, RFPI].

It must be noted that FIIs and FVCIs, who were previously disallowed under the Consolidated FDI Policy,[12] were allowed by the RBI to invest in LLPs. Other conditions under the Press Note, however, remained the same.

A more recent and liberalized amendment was published by the RBI vide Press Note No. 12,[13] which has been discussed in greater detail in the following section.

Reformed Policy

The Department of Industrial Policy & Promotion [hereinafter DIPP] released Press Note No. 12[14] whereby the LLPs have been allowed to obtain FDI under the automatic route in sectors/activities where 100% FDI is allowed and there are no FDI-linked performance conditions. Moreover, downstream investment by Indian companies and LLPs with FDI, in other Indian companies and LLPs has been allowed under the automatic route.

The following conditions have been specified in case of downstream investment by Indian companies/LLPs –

  1. Such a company/LLP is to notify SIA, DIPP and FIPB of its downstream investment in the form available at http://www.fipbindia.com within 30 days of such investment, even if capital instruments have been allotted along with the modality of investment in new/existing ventures (with/without expansion programme);
  2. Downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors as also a shareholders agreement, if any;
  3. Issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;
  4. Indian companies/LLPs making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from the domestic market, not precluding downstream companies/LLPs, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible subject to provisions of the Policy with regards to Indian companies engaged only in the activity of investing in other Indian companies[15] and downstream investment by an Indian companies not owned and/or controlled by resident/entities.[16]

Conclusion

With the unprecedented impetus on service based entrepreneurship and reinforced value of innovation and efficiency, allowing FDI in LLP has been instrumental for growth of businesses domestically. Therefore, allowing LLPs to obtain FDI through automatic route will go long way in promoting LLPs as a traditional form of business structure, rather than as a singular mode meant for unorthodox businesses.

However, what still remains of concern is the rift between the FDI Policy and the RBI Circular and as past experience suggests, is expected to remain for prolonged duration. The Press Note released in 2011, which ensued in the Consolidated FDI Policies of 2012 and 2013, was notified by the RBI only in 2014. Meanwhile, practice developed a framework for LLPs which sought to obtain FDI with the prior approval of the FIPB. Post 2015, due to the Press Note No. 12, no such approval is required and thus, no practice or procedure may be derived from either the RBI or the FIPB. Thus, LLPs will have to wait for the official promulgation by the RBI for further clarity on the issue but the fact of FDI through automatic route shall remain an undisputed fact.

[1] Press Note No. 12 (2015 Series), dated November 24, 2015, ¶3; Amended FDI Policy, ¶3.2.5

[2] Section 11, LLP Act, 2008.

[3] Para 3 of the Second Schedule, LLP Act, 2008

[4] Para 2(2) of the Third Schedule, LLP Act, 2008.

[5] Para 3 of the Fourth Schedule, LLP Act, 2008.

[6] Press Note No. 1(2011 Series), dated May 20, 2011.

[7] Such as NBFCs or Development of Townships, Housing, Built-up infrastructure and Construction-development projects, etc.

[8] Section 2(v)(i), Foreign Exchange Management Act, 1999.

[9] Consolidated FDI Policy Circular 1 of 2013, ated April 5, 2013, ¶3.2.5.

[10] Master Circular No. 15/2014-15, dated July 1, 2014.

[11] Supra note 3.

[12] Supra note 3; supra note 6.

[13] Supra note 2.

[14] 2015 Series, dated November 24, 2015.

[15] Consolidated FDI Policy of 2015, effective from May 12, 2015, ¶3.10.3.

[16]Id, ¶3.10.4.1.

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About DeepikaYadav

DeepikaYadav

III Year Student, National Law Institute University, Bhopal

Corporate Law Referencer

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