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Limited Liability Partnership

Foreign Direct Investment in an LLP (Limited Liability Partnership)

Varun Hariharan

| Updated: Apr 10, 2020 | Category: FEMA, Limited Liability Partnership

Foreign Direct Investment in an LLP

A partnership can be defined as an association between two or more people to share profits. The Indian government to provide some benefits to partnerships has brought out the Limited Liability Partnerships Act, 2008 (LLP Act). This legislation was enacted in the year 2009. Some of the provisions of the act provide this form of partnership with some benefits.

This form of partnership is a hybrid between the traditional partnership and a company. LLP can enjoy the benefit of limited liability and perpetual succession. This means that the partnership can exist without the supervision of the management. Apart from this, the benefits of a traditional partnership are enjoyed by the partners.  Because of this, an LLP is an appropriate form of business structure.  The Government and RBI have brought out provisions for Foreign Direct Investment in a company. To improve the condition of borrowings taken by an LLP, the government has relaxed the rules for an LLP. Foreign Direct Investment is allowed for LLP also. However, there are certain conditions to be satisfied for the LLP to be compliant with the use of Foreign Direct Investment.

Routes for Foreign Direct Investment in an LLP

The RBI has permitted two routes for Foreign Direct Investment in India. The routes are as follows:

  • Automatic Route
  • Approval/ Government Route

Under the Automatic route, there is no requirement of permission from the RBI for foreign direct investment. If an entity is seeking foreign investment under this, then no approval is required. For the Approval/ Government route, prior permission is required for Foreign Direct investment. There are specific sectors in which Foreign Direct Investment is not allowed. 

The limited liability partnership act allows a foreign entity or foreign partnership to be a member of the LLP. This is not permitted due to the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Given this, the government brought out a change to allow foreign direct investment in a partnership. Before this move, the RBI permitted FDI only for companies and capitalists. A relaxation was brought out to allow Foreign Direct Investment in an LLP.  This move was considered by the RBI to improve the economy and status played by LLPs in the foreign market.

Criteria for Foreign Direct Investment in an LLP (FDI-LLP)

The RBI has brought out specific criteria for Foreign Direct Investment in an LLP. For this, there are eligible investors and the forms of funds that can be invested in an LLP. For this purpose, the residence status of an individual or entity is taken into consideration. The following are the investors who are allowed to invest in an LLP.

  • A resident of outside India.
  • A business/ company/ entity incorporated outside India.

The following cannot carry out Foreign Direct Investment in an LLP:

  • A person who is a resident of Pakistan or Bangladesh;
  • A business/ company/ entity incorporated either in Pakistan or Bangladesh;
  • Any institution that has been defined as a Foreign Institutional Investor for Foreign Direct Investment in an LLP;
  • A Foreign Venture Capitalist under SEBI; and
  • An investor defined as a Foreign Portfolio Investor for Foreign Direct Investment.

Therefore it is evident that an entity or person outside India can provide Foreign Direct Investment in an LLP.

Eligible investment which is allowed for Foreign Direct Investment in an LLP

Under the Automatic Route, 100% investment is permitted for an LLP. LLPs do not require prior permission from the RBI for foreign investment. Hence foreign investment that is required for an LLP is carried out by the procedure adopted in the automatic route. There is no requirement for the Foreign Direct Investment in an LLP to be linked to any performance of the business of the LLP. This means that FDI invested in an LLP does not depend on any condition, such as the performance of the LLP. There are no other requirements for FDI in an LLP.

However, certain partnerships are not allowed to use FDI. Under the automatic route, an LLP can receive 100% investment. However, if there are any forms of performance-related conditions related to the activities of the business carried out by the LLP, then it is not permitted. Consider for a particular business; certain requirements have to be met, such as capitalization requirements. In such instances, FDI is not permitted.

Specific sectors do not accept 100% investment under the automatic route. Here the partial investment is considered, and such investments cannot be taken as foreign direct investment in an LLP.

Apart from this, an investment that comes under the ambit of the approval/ government route cannot be taken as foreign direct investment in an LLP.

There are specific sectors under which foreign investment is not allowed. For these sectors, Foreign Investment would be permitted in an LLP.  Apart from this, there are prohibited sectors in which the RBI does not permit FDI. Foreign investment would not be allowed in an LLP in these sectors.

FDI is prohibited in the following sectors:

  • Gambling
  • Gaming and Lottery
  • Tobacco and Sale of Cigar Products
  • Chit Funds Businesses
  • Agricultural Sectors
  • Business Dealings in energy, automatic energy, and defence.

Therefore there will be a complete prohibition of Foreign Direct Investment in an LLP in the above sectors.

Mode of Foreign Direct Investment in an LLP

Foreign investment into a company or entity can be made through two ways:

  • Direct Investment- Direct investment is the investment that is made directly by a foreign entity into an Indian Entity.
  • Indirect Investment- Indirect investment is the investment that is made indirectly by a foreign entity into an Indian entity. When a foreign company has a certain percentage or share in a company, and the foreign entity invests in the LLP through the Indian company. This form of investment is called Indirect Investment. This is also known as downstream investment.

An Indian company that has an investment in the form of Foreign Direct Investment would be able to invest the LLP only if the Indian company and the LLP have 100% of the investment through the automatic route. Apart from this, there must be no conditions related to FDI linked performance. Once the LLP receives the FDI, they must report and comply with the Companies Act 2013 of the Companies Act 1956. FDI should be compliant with the conditions laid down by the Limited Liability Partnership Act, 2008.

Mode of Pricing for Foreign Direct Investment in an LLP

Pricing for FDI in an LLP is carried out in the following ways:

  • Capital Contribution
  • Acquisition or transfer of profit shares

The valuation has to be done according to the standards which are acclaimed and approved internationally.  The certificate of valuation has to be provided by a cost accountant or a chartered accountant prescribed by the government.

In case there is a transfer of capital contribution or the profit from an Indian resident to a non-resident, then the consideration would match or be more than the fair price of capital contribution of the LLP. If there is a transfer of capital contribution from a Non-Resident Indian to an Indian resident, then the consideration would match or be less than the fair price of capital contribution of the LLP.

Form of Payment – Foreign Direct Investment in an LLP

There is a particular mode of payment that is made by an investor in an LLP. The payment can be carried out in the following ways:

  • Through inward remittance by following proper banking channels.
  • Through the Non-Resident Indian NRE or FCNR account from the Authorised Bank in compliance with the Foreign Exchange Management (Deposit) regulations 2016.

Compliance with Reporting of FDI in an LLP

Certain compliance measures have to be taken by the LLP receiving foreign investment. Apart from being compliant with the law related to the Companies Act 2013/ Companies Act 1956, they have to be compliant with the regulations related to FEMA. If there is any form of transfer/ divestment or capital contribution that occurs between the resident Indian and the Non-resident Indian, then the transaction should be according to the laws under the RBI. Foreign investment reporting also has to be carried out in compliance with the laws related to the RBI. Whenever a foreign direct investment is received by an LLP, whether in the previous year or the current year, a report has to be published to the RBI.

Conclusion

Initially, Foreign Direct Investment was only allowed for companies in India. To improve the funding requirements for an LLP, the RBI relaxed the norms for Foreign Direct Investment in an LLP. However, there are specific criteria to be followed by the LLP receiving Foreign Investment.  FDI in an LLP is only permitted through the automatic route. In this way, the LLP can receive 100% investment. The investment made must not have any conditions related to performance linked to the LLP.  When it comes to the reporting criteria, the LLP must follow effective protocols. By allowing LLPs to have access to FDI, the RBI has improved the funding requirement of an LLP and also enhances the amount of foreign investment in the country. Through this initiative, foreign investors have an alternate route to invest in India.

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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