FDI in LLPs permitted. Are private limited companies still the better route?
FDI in LLPs permitted. Are private limited companies still the better route?

Limited Liability Partnerships have been growing in popularity and importance as a simplified form of business that give protection of limited liability to businesses, and the benefits of an incorporated body. The Limited Liability Partnerships Act, 2008 notified in 2009, creates a framework for businesses to function as LLPs. However, India could not fully tap the potential of the new business vehicle, Foreign Direct Investment (FDI) into LLPs was not permitted. This has changed now, with elaborate rules for FDI investment into LLPs.

The Cabinet Committee on Economic Affairs issued a new notification issued on May 11, 2011, approving FDI in LLPs. This post explains some of the key features of the notification. It examines the position of a domestic LLP partner versus a foreign national who is a partner, and examines the position of foreign investment in LLP vis-a-vis companies. This will help in startups and SMEs looking for foreign investment to decide whether they should incorporate as LLPs or companies.

1. Sector and routes

FDI in LLPs permitted. Are private limited companies still the better route?

There are limited sectors in which FDI is permitted in LLPs, as compared to FDI in companies. Further the procedure for investing in an LLP is not as streamlined as that for investing into a company.

i. Permitted Sectors for FDI

FDI in LLPs is allowed only in those sectors which come under the ‘automatic route’, that is, in those sectors under the FDI policy where 100% FDI in a company is allowed, without permission of the FIPB. Examples of such sectors are private petrol refining, construction development, electricity, pharmaceuticals, transportation infrastructure, tourism, advertising, films, mass transit, and pollution control. This includes the software and IT industry as well.

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FDI in LLPs is also not allowed in sectors which have performance-linked conditions, such as minimum capitalization requirements.

ii. Approval route or automatic route?

Note that there is another difference in the procedure for FDI in an LLP. While under the automatic route, no permission is required for FDI into a company, FIPB approval is required for approval into an LLP.

iii. Prohibited Sectors

There are certain sectors such as agricultural/plantation activity, print media or real estate business were LLPs with FDI are not allowed at all.

2. Investment activities of LLPs with FDI

Corporate groups usually have a web of interconnected shareholdings within their group. They also have investing or holding companies to invest in other entities within a particular geographic region or sector. Such investments are known as downstream investments. Downstream investments are permitted for companies under the FDI policy, subject to certain conditions. However, this is absolutely barred for an LLP with FDI. Such an LLP is prohibited from making any downstream investments into any other entity.

3. Source of LLP Funding

There are two limitations placed on who can invest in a LLP when it comes to foreign direct investment.

  • An Indian company having an FDI cannot make a downstream investment in a LLP unless both the company, as well as the LLP are operating in sectors where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.
  • Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) are also not eligible to invest in LLPs. This prohibition does not exist for investment into companies.
  • While companies are allowed to take loans from foreigners (known as External Commercial Borrowings or ECBs) for various purposes, LLPs are prohibited from any External Commercial Borrowings (ECBs.) This severely restricts borrowing options for LLPs. They will have to completely rely on domestic sources (Banks, NBFCs, owners or their relatives) for loans.

  • 4. Capital Contribution by Foreign Partner

    The foreign partner can only bring in capital in the form of cash through inward remittance under automatic route. Remittance of any non-cash consideration for holding equity in the venture will require specific approval.