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FDI In Limited Liability Partnership Partnership Firms And Its Concerns

October 31, 2011

As per the extant regulations, Foreign Direct Investment (FDI) is allowed in Companies incorporated in India, Partnership Firms, Proprietary concerns and Trusts either under Automatic route or with the prior approval of Government as applicable terms and conditions permit.

A Limited Liability Partnership (LLP) is a partnership in which partners have limited liability. LLP is a blend of partnership firm and corporate body. In an LLP no partner is responsible or liable for other partner's misconduct or negligence in other words individual partners shielded from joint liability created due to another Partners wrongful decisions or misconduct. This is an important difference from that of an unlimited partnership. Unlike corporate shareholders, the partners have the right to manage the business directly. As opposed to that, corporate shareholders have to elect board of directors under the applicable law.

Limited liability partnerships are distinct from limited partnerships in some countries. All LLP partners in LLP will have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries the LLP is more suited for businesses where all investors wish to take an active role in management.

The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislation's in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLP's in a body corporate form i.e. as a separate legal entity, separate from its partners/members.

As on date LLP is a globally known form of running business in different parts of the World. In India, The LLP Act, 2008 was published in the official gazette of India on January 9, 2009 and the rules were published in the official gazette on April 1, 2009.

Under FEMA, eligible capital accounts transactions are notified by RBI in consultation with Central Government and thereby Foreign Direct Investment is allowed only in Companies incorporated in India, Partnership Firms, Proprietary concerns and Trusts. Though LLP Act, 2008 was published in January 2009, the RBI has not notified eligibility for Foreign Investment in LLP's in India till recent past.

Finally, after receiving many representations from the Public, RBI in a move to attract more foreign investment, allowed FDI in Limited Liability Partnership (LLP) firms on May 11, 2011.

Regulatory Authorities nodded to amend the policy and thereby Cabinet Committee on Economic Affairs has approved the proposal for allowing (FDI) in Limited Liability Partnership (LLP) firms on May 11, 2011. The Department of Industrial Policy & Promotion has released Press No.1 (2011 series) allowing amendment to relevant paragraphs of Circular 1 of 2011- Consolidated FDI policy on May 20, 2011 vide D/o IPP file No. 5/19/2010 -FC-I.The same is required to be notified by RBI for legal sanctity

In its first move, FDI is allowed in LLP's operating in sectors/activities were 100% FDI is allowed under automatic route and were there are no FDI linked performance related conditions (such as Non Banking Companies or Development of Townships, Housing and Built up infrastructure and construction- development projects etc). In other words FDI is not allowed to LLP's operating in sectors where approval of Foreign Investment Promotion Board (FIPB) is required or sectors where 100% FDI is allowed under automatic route but has FDI- linked performance related conditions to be met.

Birds eye view on Investment in Partnership Firms and LLP:

Sr. No. Type of Investor Conditions for Partnership Firms Conditions for LLP's
1. NRI and PIO with non- repatriation Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers/ Authorized banks. No mention about investment on Non-repatriation.
2. NRI and PIO with repatriation Investment with prior permission of Reserve Bank of India. The same will be approved in consultation with Government of India Investment to capital only in cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account.

The investment can be made only with the prior approval of Government of India.

3. Otherthan NRI and PIO which included Foreign Nationals, Venture Capitals etc Investment with prior permission of Reserve Bank of India. The same will be approved in consultation with Government of India Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs.

A company incorporated outside India, is allowed to invest in India as per the conditions mentioned in the above row.

4. Restricted activities in India Firm should not engage in business of agricultural/plantation or real estate business or print media sector LLP should not operate in agricultural/plantation activity, print media or real estate business.
5. External commercial borrowings Existing regulations doesn't cover Partnership Firm as eligible borrower. LLP's will not be permitted to avail External Commercial Borrowings (ECBs).
6. Sectors There is no major variation between Investment in a Company incorporated in India and a Partnership Firm. Investment is allowed in sectors where 100% FDI is allowed under automatic route with no FDI linked performance related conditions.

* Note:
NRI: Non resident Indian
PIO: Person of Indian Origin

CONDITIONS UNDER THE PRESS NOTE:

The present proposal for FDI to Indian LLP is covered under 4 heads covering Funding, Ownership & Management, Conversion of Partnership to LLP, Liabilities of Designated Partners:

The important concepts covered under the above heads are as mentioned here under;

Sr.No. Investor Terms and conditions
1. Funding:
In addition to the points mentioned in above table,- Downstream Investment by LLP in another LLP or Company

- Downstream Investment by Indian Company to LLP.

 

 

This is not allowed.

It is allowed only when the Indian Company and LLP activities fall under 100% automatic route and were there are no FDI- linked performance related conditions.

2. Ownership and Management – As per LLP Act, 2008, atleast one designated Partner should be person resident in India. The term "resident in India" would have the meaning, as defined for "person resident in India", under Section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999;
– In case the LLP has a bodycorporate or body corporate nominated individual as a designated partner, the body corporate should only be a company registered under the Companies Act, 1956 and not any other body, such as an LLP or a trust.
3. Conversion of a company with FDI into an LLP will be allowed only with the prior approval of FIPB/Government
4. Responsibility The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.

CONCERNS:

If we closely study the proposal of the Cabinet Committee and Press Note issued by DIPP, Foreign Body Corporate cannot be a Designated Partner. Where as a Foreign National or a NRI or PIO can become a Designated Partner. A Designated Partner under the LLP Act, 2008 is accountable for regulatory and legal compliance's under the said Act. Responsibility under the said Press Note is imposing accountability for compliance to the conditions applicable thereunder to only Designated Partners. In other-words this is boon to Foreign Body Corporate.

In any industry, beside doing business, compliance to conditions of statutory enactments has to have same weightage. Other-wise the spirit of enactment will not be met. When upto 100% FDI by Foreign Body Corporate is allowed to an LLP registered in India, it is reasonable to make even the Foreign Body Corporate responsible at par with other designated partners.

In addition to above, the investment by NRI or PIO on Non repatriation is yet to be recognized by the Government.

CONCLUSION:

When compared with a Company or a traditional partnership firm, LLP is chosen as the best suited model by the entrepreneurs because of its flexibility, less regulatory compliance and limitation of liability of the Partners.

It appears that the number of LLPs being registered is growing at a slow pace, and the present effort is an additional step to confer benefits on that entity so as to attract more entrepreneurs and professionals to utilise it as a vehicle to carry on their business or profession. So, instead allowing investment only through prior government approval, Government can give detailed terms and conditions for smaller Partnerships and pass on the responsibility to RBI regional offices with the help of professionals by taking proper certifications.

Disclaimer: The entire contents of this document have been developed on the basis of relevant statutory provisions. Though the author has made utmost efforts to provide authentic information however, the author and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

Note:This Article was published in the Fort-nightly journal- Vol 21 (July 16-31, 2011) of 'Taxmann's Corporate Professionals Today'

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  • By admin  gg 1 Comments   

    1 Comments

    Posted by CS Sriram R on
    • Dec 18 2012
    Reply  
    the analysis and inputs are very useful. please give me the formalities for NRI to become a partner in LLP

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