Liberalisation of Foreign Investment in Limited Liability Partnership

An internationally accepted vehicle of business in the form of Limited Liability Partnership (LLP) had  emerged in India post enactment of the Limited Liability Partnership Act, 2008 (LLP Act).

One of the main advantages of a LLP is that it enshrines some benefits of a Corporate Structure (especially limited liability of shareholders) within the more flexible partnership firm format.

Foreign Direct Investment (‘FDI’) in LLP was first permitted in Indian Foreign Investment Regulations in 2011. However such FDI was circumscribed with many restrictions such as needing prior Government approval for investment into LLP or conversion of an existing FDI invested company to LLP, prohibition on downstream investments or on availing External Commercial Borrowings (ECBs or Foreign Loans), requirement to have a resident designated partner, etc.

In November 2015 the Government vide Press Note 12, relaxed regulations to bring FDI in LLP under the automatic route in sectors where 100% FDI is allowed through the automatic route and where there are no FDI-linked performance conditions. Further, it also permitted downstream investments by a LLP having FDI into another Company / LLP, in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.

Following this, the Reserve Bank of India issued Notification No. 362/2016-RB on 15 February 2016, amending the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20’). This gave a statutory framework under the Foreign Exchange Management Act, 1999 (FEMA) to these Government relaxations.

The above changes though positive towards Foreign Investors in LLP, did not address some important concerns such as the need for such investors to mandatorily have an Indian registered company or an Indian resident individual as a Designated Partner (‘DP’) in the LLP, prohibition on availing ECBs etc.

Reserve Bank of India has been responsive to these concerns and has recently on 3 March, 2017 issued Notification No. FEMA.385/2017-RB. This Notification further amends FEMA 20 and brings about some needed changes to FDI regulations in LLP.

Requirement of having a resident Designated Partner deleted

A DP is mandatory in a LLP under the LLP Act, 2008, however such DP can either be an Individual or other person such as another LLP, Company, Trust etc. The erstwhile FEMA 20 only permitted such a DP which was a Company registered in India under the provisions of the Companies Act, as applicable and did not permit such DP to be any other body such as a Trust or a LLP. Further, it was necessary that if an individual was appointed a DP he also needed to be a ‘person resident in India’ under FEMA.

These conditions have now been relaxed and now a Foreign Company can also be a DP. Further, if an individual is appointed as DP, he need not satisfy the residency test under FEMA. Such DPs would however continue to need to comply with conditions prescribed for them under the LLP Act, 2008.

Conversion of a Company with FDI into LLP under automatic route

Conversion of a Company with foreign investment into LLP, which was earlier under the Government approval route, is now permitted under the automatic route for Companies being engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.

Availing ECB by LLP with Foreign Investment permitted

Schedule 9 of FEMA 20 earlier restricted any LLP with FDI to avail ECB. However, in the revised Schedule 9 of FEMA 20, this provision has been deleted. Hence it is expected that RBI will now amend ECB regulations to permit LLP with Foreign investment to avail ECB. Such LLPs wishing to avail ECBs will need to wait until ECB regulations are amended to provide this facility.

Reporting requirements

The revised Schedule 9 does not currently prescribe detailed reporting requirements. It is expected that RBI may soon issue an AP DIR Circular prescribing reporting requirements of foreign investment in LLPs and disinvestment / transfer of capital contribution or profit shares between a resident and a non-resident in LLPs.

Open areas

Some aspects need more clarification by the Government / RBI. What exactly is meant by “sectors having FDI linked performance conditions”? These need to be clearly defined or these sectors should be clearly be mapped. Earlier Schedule 9 provided some examples like Real Estate Sector, Non-Banking Financial Companies, etc. Some sectors like Wholesale Trading / Cash and Carry do have some operational guidelines but are these FDI linked performance guidelines? FIPB had in the past rejected applications for FDI in LLP in the wholesale cash and carry business.  If this interpretation is to be taken, many sectors where there are conditions though not necessarily performance linked, may get covered and FDI may not be permissible in LLPPs under the automatic route. This does not seem to be the intention of either the government or the RBI, however if there is more clarity in this matter, it would go a long way in building confidence in Foreign Investors.

Another area that needs clarification is repatriation of past accumulated reserves / capital lying to the credit of a non-resident partner’s capital account. Current regulations do not provide any explicit guidelines with respect to repatriation of past accumulated reserves / capital. The logical view is that such past profits / capital lying to the credit of the partners’ account should be considered as being akin to the capital of the shareholders in a company and repatriable under the automatic route (like capital reduction / buy-back). Clarifying this too will improve the investment climate.

Yet another point pertains to exit of a non-resident partner, which the current regulations envisage only in form of transfer of share in the LLP. An important form of exit viz. retirement is not explicitly covered. The regulation needs to be further expanded to cover this situation and assuage foreign investors that this form of exit is also permitted.

Final Thought – A Huge Positive

Schedule 9 now brings about the much required relaxations regarding DP, ECB, and Conversion of company to LLP. The Government or RBI would do well to issue FAQs / additional guidelines to provide more clarity so that LLP becomes the operating entity of choice that foreign investors would use to invest in India.