Foreign direct investment in LLP

SHORT SUMMARY:

VIA [1] Notification No. FEMA.385/2017-RB dated 3rd March, 2017 Reserve Bank of India ("RBI") has notified the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017. The same has been published in the official gazette. As a result of this Second amendment sub-regulation 9 of regulation 5 and Schedule 9 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 substituted.

In this Flash editorial, the auditor begins by referring the powers of RBI for amendment in Regulation, 2000. The main thrust of the article, however, is upon the provisions / regulations of Foreign Direct Investment in Limited Liability Partnership ("LLP") by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP.

This is article no. 216 of the series of editorials written by the author on corporate laws {including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

RBI has made amendment in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. The power of amendment is vested with RBI in clause (b) of sub-section (3) of Section 6 of Foreign Exchange Management Act, 1999 (42 of 1999)

"Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following:- 

(b) transfer or issue of any security by a person resident outside India;" and  Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999)

"47- Power to make regulations."

The Scheme shall be called Foreign Direct Investment (FDI-LLP) in Limited Liability Partnerships (LLP) formed and registered under the Limited Liability Partnership Act, 2008.

Conditions for Contribution in LLP:

Permitted Sectors: FDI is permitted under the automatic route in LLPs operating in [2]sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions.

Conditions of LLP Act: FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.

Compulsory Reporting’s:

All LLPs which have received Foreign Direct Investment in the previous year(s) including the current year shall submit to the Reserve Bank of India, on or before the 15th day of July of each year, a report titled 'Annual Return on Foreign Liabilities and Assets' as specified by the Reserve Bank from time to time.

Reporting of foreign investment in LLPs and disinvestment/transfer of capital contribution or profit shares between a resident and a non-resident may be made in a manner as prescribed by Reserve Bank of India from time to time

Whether a Company / LLP are eligible for Downstream Investment if they have accepted FDI?

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

Whether a Company accepted FDI is eligible for conversion into LLP

A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.

CONCLUSION:

The Government of India, by a Press Note issued in April 2011, took a precautionary approach by allowing Foreign Direct Investment (FDI) in LLP subject to certain conditions. Though the Press Note was issued in April 2011, RBI allowed FDI under prior Government ‘approval route’ only in 2014.

FDI in LLP: 2014

Pursuant to A.P. (DIR Series) Circular No. 123 of 2014, LLPs were eligible to accept FDI in permitted sectors and limited to sectoral cap, only with prior approval of Government/ RBI. Though foreign partners were allowed under the Act, subscription to capital from such partners was an issue.

Allowing FDI in LLP is a welcome move of the Government of India, as it would provide foreign investors an alternate form of business other than company and would entitle them to benefit with inherent flexibility & tax efficient LLP structure.  The amendment reflects the vast liberalization of the FDI conditions for LLPs in the country. As the bar on LLPs from availing of External Commercial Borrowings (ECB) has been done away with in line with the extant Consolidated FDI Policy, 2016.

Link of the Regulations:

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10876&Mode=0
[2] Link of the Circular for sectors/ activities where FDI is allowed : http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf