In this blogpsot, Kartikey Johri, Student of VIPS, IP University and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about who is a person, sectors where FDI are not allowed, What is downstream investment.

In order to answer this crucial question let us begin with defining a person who may be called a foreigner. And for that we need to understand the scope of the term, ‘person’ and the concepts of Resident, Non-resident, and PIO (Persons of Indian Origin).

Who is a person

A person, according to Section 2(u) of the Foreign Exchange Management Act, 1999 is inclusive of the following:

(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and (vii) any agency, office or branch owned or controlled by such person. [1]

Thus, it means that whenever we talk about a foreigner or any other person, it is not restricted to an individual and may be any of the above things.

The same Act also defines Foreign Venture Capital Investor in Section 2(w) as an investor incorporated and established outside India which proposes to make investment in Venture Capital Funds or Venture Capital Undertakings in India and is registered with SEBI.

To answer the question, yes a foreigner can be a partner or even a designated partner in a Limited Liability Partnership, and this includes foreign companies as well. A person resident outside India or an entity incorporated outside India shall be an eligible investor for the purpose of foreign investment in Limited Liability Partnership. However the following persons shall not be eligible to invest in an Indian LLP:

1. A citizen/entity of Pakistan or Bangladesh
   2. A SEBI registered Foreign Institutional Investor (FII)
   3. A SEBI registered Foreign Venture Capital Investor (FVCI).
   4. A SEBI registered Qualified Foreign Investor (QFI)
   5. A Foreign Portfolio Investor registered in accordance with Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (RFPI). [2]

For a foreigner to be a designated partner in an LLP, it is mandatory to have at least one of the designated partners to be a resident of India (S.7 of the Limited Liability Partnership Act, 2008). The consolidated FDI Policy of India governs foreign investment into Indian LLPs along with the foreign exchange laws and regulations.

The consolidated FDI Policy in its Circular no. 2 issued by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry imposes certain conditions and restrictions on foreign investment in Indian LLPs, with respect to funding, ownership, and management of such limited liability partnerships.[3]

Foreign Direct Investment is allowed via 2 routes, that are, Automatic Route and Government Approval Route. The automatic route is for all those sectors where FDI is allowed without any prior approval of the Government or the Reserve Bank of India. Government approval route, on the other hand, is where foreign investment in Indian market requires a prior approval of the Government and such approval is put forward for consideration before the Foreign Investment Promotion Board, Department of Economic Affairs, Ministry of Finance.

In the case of a Foreigner investing in Indian LLP, the consolidated FDI Policy states that such investment shall be allowed through the Government approval route only in limited liability partnerships operating in sectors or activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions (for example, minimum capitalisation norms applicable to ‘Non-Banking Finance Companies’ or development of townships, housing, built-up infrastructure and construction-related projects).  Also, LLPs with FDI will not be allowed to operate in agricultural or plantation activity, print media or real estate business.

Sectors where FDI is not allowed

There are certain sectors, apart from the aforesaid, where foreign direct investment is disallowed through either of the routes (Automatic or Government approval) such as Atomic energy, lottery or gambling, Nidhi company, business of chit fund, trading in transferable development rights, manufacture of cigars or tobacco substitutes, and agricultural and plantation activities (excluding certain activities such as horticulture, animal husbandry, etc.)).[4]

What is downstream investment

‘Downstream investment’ means indirect foreign investment by one Indian company into another Indian company by way of subscription or acquisition. With regards to downstream investment, the consolidated FDI policy further states that an Indian company having foreign investment, direct or indirect (irrespective of percentage of such foreign investment) will be permitted to make downstream investment in an LLP, only if both, the company as well as the LLP are operating in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. It is to be noted however, that the onus shall be on the Limited Liability Partnership accepting investment from the Indian company registered under the provisions of Companies Act to ensure the compliance required with downstream investment. LLPs with FDIs will not be eligible to make any downstream investments.

Any payment made by an eligible investor towards capital contribution/profit share of LLPs will be allowed only by way of cash consideration to be received by way of inward remittance through normal banking channels, or by debit to NRE/FCNR(B) account of the person concerned, maintained with an AD category- I bank.

RBI’s Circular no. 123 dated April 16, 2014, states in its Annex 1 the provisions for reporting such foreign investment in an LLP. It states that LLPs shall report to the regional office concerned of the Reserve Bank of India, the details of the receipt of the amount of consideration for capital contribution and profit shares in form FOREIGN DIRECT INVESTMENT-LLP(I) together with the copies of FIRC (Foreign Inward Remittance Certificate) and valuation certificate (from a Chartered Accountant/Practicing Cost Accountant or an approved valuer) along with a KYC report on the non-resident investor at the earliest but not later than 30 days from date of receipt of such amount. Disinvestment/transfer of capital contribution or profit share between a resident and a non-resident shall be required to be reported within 60 days from the date of receipt of funds.

Limited Liability Partnerships are also not permitted to avail External Commercial Borrowings (ECBs).

As stated earlier, in case, an LLP with FDI, has a body corporate as a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the Limited Liability Partnership Act, 2008, such a body corporate should only be a company registered in India under the provisions of Companies Act, as applicable and not any other body, such as an LLP or a Trust. For such LLPs, the designated partner “resident in India” as defined under the ‘Explanation’ to Section 7(1) of the Limited Liability Partnership Act, 2008, would also have to satisfy the definition of “person resident in India” as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999. Further, the designated partners shall be responsible for compliance with regulations regarding foreign investment into limited liability partnership as well as liable for all the penalties imposed on the LLPs upon contravention of such regulations. Another crucial condition is regarding conversion. It states that conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations are met and with the prior approval of FIPB (Foreign Investment and Promotion Board)/Government.

[1] http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/FEMA_act_1999.pdf

[2] Scheme for Acquisition/ Transfer by a person resident outside India of capital contribution or

profit share of Limited Liability Partnerships (LLPs) (Annex 1 to Circular no. 123, RBI/2013-14/566)

[3] Para 3.2.5 of Circular no.2 of Consolidated FDI Policy, Department of Industrial Policy and Promotion

[4] Question 5 of FAQ regarding Foreign Investments in India updated up to 15 Feb, 2015; Reserve Bank of India (rbi.org.in)