Limited Liability Partnerships (for brevity referred as ‘LLP’) is one of the emerging trends among the types of vehicles available for conduct of business or profession. LLP’s are governed by Limited Liability Partnership Act, 2008. This article aims at understanding the overview of regulatory requirements when Foreign Direct Investments(for brevity ‘FDI’) are made in LLP’s.
FDIs in LLP’s are governed by Notification No 20/2000-RB dated 03.05.2000 (amended from timeto time) which deals with The Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000. As per Regulation 5(9) of the said regulations, any person resident outside India (other than a citizen of Pakistan and Bangladesh) or any entity incorporated outside India (other than entity in Pakistan or Bangladesh) and not being specified personsmay contribute foreign capital either by way of capital contribution or by way of acquisition/transfer of profit shares in the capital structure of LLP under FDI, subject to the terms and conditions mentioned in Schedule 9 of the said Notification.
Schedule 9 lays down the scheme for acquisition/transfer by a person resident outside India of capital contribution or profit share of LLP. As per the said scheme, FDI is allowed in fresh or existing LLP, where 100% FDI is allowed into the Company registered under Companies Act, under the automatic route of FDI scheme. That is to say where FDI is allowed in the sectors which have a restriction on investment or 100% with approval of regulators or FDI-linked performance related conditions, investments in such sectors where LLPs are operating, is not allowed. The sector where 100% of FDI is allowed under automatic route is provided in Annexure B to Schedule 1 of the subject notification.
However, FDI in LLP, where 100% is allowed under automatic route as per subject notification, requires prior approval of Government/Foreign Investment Promotion Board (for brevity referred as ‘FIPB’) as per Entry 4 of the said schedule. There is no specified format for seeking approval from FIPB. An application on the letter head of the LLP explaining the background of the activities and details of the investor has to be provided to FIPB for approval. Further, LLP should also register on www.fipb.gov.in and submit an online application along with the required documents.
It is very important to note that Indian companies (which are having FDI) intending to invest in LLP (downstream investment), is subject to all the conditions listed herein above and shall obtain prior approval of FIPB by adopting the same methodology described above. Further, such LLP and investor companyshould operate in such sectors where 100% FDI is allowed vide automatic route.
However, LLP which is in receipt of FDI under the said scheme cannot further make any downstream investment in any entity in India.
The company with FDI can be converted into LLP only if the stipulations mentioned in Schedule 9 are met and with the priorapprovalofFIPB.
On receipt of approval from FIPB and on receipt of consideration towards capital contribution or acquisition of profit share in LLP has to be reported with 30 days from such receipt to Regional Office concerned of the Reserve Bank in Form Foreign Direct Investment – LLP (I). The report shall be acknowledged by the Regional Office and will be allotted with a Unique Identification Number (UIN) for the amount reported. Further, any disinvestment/transfer of capital contribution or profit share between resident and non-resident (vice-versa) is required to be reported to Regional Office concerned of the Reserve Bank in Form Foreign Direct Investment– LLP (II)within 60 days of such transaction.
Another important condition in case of Company acting as Designated Partner of an LLP with FDI, such LLP can have only company registered in India as designated partners and no other body corporates (LLP or Trust) shall be allowed. Such designated partner or nominee thereof shall satisfy the conditions applicable for “Person Resident in India” as defined under the FEMA. The designated partners or nominees of such designated partners shall be responsible for compliance with all the conditions mentioned in the scheme and also liable for all the penalties imposed on LLPfortheir contraventions.
In case of any non-compliance of the regulations related to receipt of FDI, they have to approach FIPB for postfactoapproval and liablefor penalties under FEMA or can optfor compounding procedure.
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
