Foreign Direct Investment is Permitted in LLPs [A Look At Restrictions And Conditions]

The Cabinet Committee on Economic Affairs (CCEA) on the 11May 2011 approved the proposal to amend the policy on allowing Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) firms.  A Notification to this effect (which covers minutia) is still awaited.

LLP Act, 2008 was notified in April 2009.  However, FDI was not permitted into the LLP up until now.

This approval however comes with some restriction and will be initiated in the “open sector” where no monitoring is required. However, here too certain conditions have been laid. The following is a brief on the restrictions and conditions.

  1. Sector and Activities: FDI in an LLP will be permitted only in those sectors/ activities where 100% FDI is permitted through automatic route.  Accordingly, FDI is not permitted in sectors prohibited for FDI (like, agriculture, plantation, print media, real estate); sectors having a cap (like telecom); sectors falling under approval route (DIPP approval); or where FDI under automatic route with conditions.
  2. Downstream Investment by LLP:  LLPs with FDI will not be eligible for making any downstream investment. However an Indian company, having FDI, will be permitted to make downstream investment in LLPs only if both the company as well as the LLP, are operating in sectors where 100% FDI is allowed, through the automatic route.
  3. External Commercial Borrowings:  LLPs will not be permitted to avail external commercial borrowings.
  4. Capital Participation:  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 NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will notbe permitted to invest in LLPs
  5. Taxation:  In 2009, the tax rate for LLP is done at 30% + cess.  An LLP is not subject to dividend distribution tax.  A minimum alternate tax (MAT) of 18.5% is applicable.
  6. Ownership and management:  The designated partners in respect of LLPs with FDI, has to be a “resident in India”  and such person should fulfill the requirement for this term as set out in Foreign Exchange Management Act, 1999.  Designated partners will be responsible for all compliances of the LLP, including compliances under FDI.
  7. Conversion of a company with FDI to LLP:  Prior approval of the FIPB/ Government is required for a Company with FDI to convert into an LLP.

Disclaimer:  This article is for informational purposes only and is intended but not promised or guaranteed to be correct, complete and up-to-date. This is not a legal advice or opinion.

[The article is contributed by guest author Sharda Balaji, founder of Novojuris, a legal consulting firm.]

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