In this blog post, Seuj Bikash, an Advocate, presently practicing in the Gauhati High Court who is also currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, lays down, in details, the FDI Rules that need to be followed when investing in an LLP in India.
Introduction
Limited Liability Partnership (LLP) is a comparatively new and unconventional corporate business which provides for limited liabilities of the partners unlike the traditional partnership, along with operational flexibility. On the one hand, the partners of an LLP are allowed to arrange the terms and conditions of their partnership business in accordance with their mutual agreement but on the other hand, any partner of the LLP is not responsible or liable for misconduct or negligence of the other partner/partners. An LLP presents almost all benefits of a private limited company and is advantageous from the point of view of taxation. In India, the LLPs are introduced and governed by the Limited Liability Partnership Act, 2008. LLP business type has been introduced in India to accelerate the economic growth of the country facilitating the entrepreneurial initiatives.
Foreign Direct Investment (FDI) is investment by foreign individual or organisation in the economic sectors of a country, such as banking, insurance, electricity, roads, railway, aviation, defence etc. FDI makes it possible for a business enterprise based in one country to control the ownership of a business enterprise in another country. For the growth of the Indian economy, the role of foreign investors is considered indispensable since it accelerates economic growth by supplementing domestic capital, technology and skills. FDI in India was introduced by Foreign Exchange Management Act, 1991(FEMA). The Ministry of Commerce and Industry, Government of India has passed the Consolidated FDI Policy (with effect from October1, 2011) (herein after called the FDI Policy) allowing FDI in LLPs and the said policy has laid down specific rules/guidelines with regard to the FDI in LLPs. FDI in LLPs are allowed in order attract more foreign capital investment in various economic sectors which is at present considered as a need of present time for greater development of the Indian economy.
FDI rules regarding investing in Limited Liability Partnerships (LLPs)
Rule 3.2.5 of the Consolidated FDI Policy has laid down conditions under which FDI in LLP is permitted-
The Routes of investment in LLPs and restrictions therein
The Rule 3.2.5 (a) of the Consolidated FDI Policy states that FDI will be allowed through the Govt. approval route, only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions (such as ‘Non Banking Finance Companies’ or Development of Townships, Housing, Built-up infrastructure and Construction-development projects, etc.).
The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (Notification No. FEMA.20/2000-RB, dated 3rd May, 2000) passed by the Reserve Bank of India, as amended from time to time, in its Annexure-B to the Schedule-1, gives details of those sectors where 100% FDI is allowed. These sectors are explained here under in light of the said Regulation.
(i) As regards the manufacturing activities in the Telecommunication Sector, 100% FDI is allowed.
(ii) In the Housing and Real Estate Sectors, the 100% FDI is allowed in the following areas, provided that only NRIs/OCBs are allowed to invest in those areas( the areas listed below)-
- a) Development of service plots and construction of residential premises,
- b) Investment in the real estate covering construction of residential and commercial premises including business centres and offices
- c) Development of townships
- d) City and regional level urban infrastructure facilities, including both roads and bridges
- e) Investment in manufacture of building materials
- f) Investment in participatory ventures in the all above [ that is in (a) to (e)]
- g) Investment in Housing Finance Institutions.
(iii) In the Mining Sector, 100% FDI is allowed in the Exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing.
(iv) 100% FDI is allowed in the Film Industry (i.e. film financing production, distribution, exhibition, marketing and associated activities relating to the Film Industry subject to the following conditions-
- a) Companies with an established track record in films, TV, music, finance and insurance.
- b) The company should have a minimum paid up capital of US $ 10 million if it is the single largest equity shareholder and at least US $ 5 million in other cases.
- c) Minimum level of foreign equity investment would be US $ 2.5 million for the single largest equity shareholder and US $ 1 million in other cases.
- d) Debt equity ratio of not more than 1:1, i.e., domestic borrowing shall not exceed equity.
- e) Provisions of dividend balancing would apply, etc.
Specific restrictions
The Rule 3.2.5 (b) of the consolidated FDI Policy prohibits the LLPs with FDI from operating in agricultural/plantation activity, print media or real estate business.
The economic activities, such as agricultural activities, plantation, print media, real estate etc. need observance of the standards of public health, safety and security. Such economic activities are of immense importance from social perspective also. Therefore, the law makers have rightly debarred the LLPs with FDI from operating in such sectors which generally act exclusively with profit motives.
Downstream investments
Downstream investment means investment by a company in another company/LLP. An Indian Company already having foreign investment may make investment in an Indian downstream company or LLP. Rule 3.2.5 (c) of the consolidated FDI Policy states that an Indian company, having FDI, 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, through the automatic route and there are no FDI-linked performance conditions. However, the Rule 3.2.5(d) of the policy restricts the LLPs with FDI from making any downstream investment. Thus, only the companies (with FDI), not LLPs (with FDI) are permitted to make downstream investment.
Mode of making and receiving investment
Rule 3.2.5(e) of the consolidated FDI Policy states that Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE [Non-Resident (External) Rupee account] or FCNR [Foreign Currency (Non- Resident ) account] of the person concerned, maintained with authorised dealer or authorized bank.
Rule 3.2.5(f) prohibits the investment in LLPs by Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs). Further, the LLPs are also not permitted to avail External Commercial Borrowings (ECBs).
Foreign Institutional Investors (FII), as per Rule 2.1.14 of the FDI Policy, means an entity established or incorporated outside India which proposes to make investment in India and which is registered as an FII in accordance with the SEBI (FII) Regulations 1995. Rule 2.1.15 of the FDI policy defines Foreign Venture Capital Investor (FVCI) to mean an investor incorporated and established outside India, which is registered under the Security and Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000 {SEBI (FVCI) Regulations} and proposes to make investment in accordance with these Regulations.
Other Rules
1) The Rule 3.2.5 (g) says, “In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as an designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, 1956 and not any other body, such as an LLP or a trust.”
2) The Rule 3.2.5(h) states that for the LLPs with FDI, the designated partner “resident in India”, as defined under the ‘Explanation’ to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of “person resident in India”, as prescribed under the Section 2 (V)(i) of the Foreign Exchange Management Act,1999.
3) The Rule 3.2.5(i) of the FDI Circular states that the designated partners will be responsible for compliance with all the conditions prescribed by the Rule 3.2.5 of the FDI Circular and also liable for penalties imposed on the LLP for their contravention, if any.
4) 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/Government [Rule 3.2.5(J) of the FDI Policy].
Conclusion
India is considered as major FDI destination for multinational corporations. Allowing the foreign investors to invest in LLPs will definitely foster the economic growth of the country in days to come. Since the enforcement of the Limited Liability Partnership Act, 2008, the LLPs are increasing in number. In the forthcoming years it will be efficacious for the economic growth of the nation if the Government adopts some additional measures to promote the new LLPs with small entrepreneurial businesses and enterprises.
