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FDI in Limited Liability Partnerships

May 31, 2011

FDI in LLP - After 2 years of notification of the Limited Liability Partnership Act 2008, and after 5 months of issuing a discussion paper on allowing Foreign Direct Investment (FDI ) in the Limited Liability Partnership (LLP) , the Government of India on 11th May, 2011 has approved the much awaited policy on FDI in Limited Liability Partnership.

The LLP Act 2008, allows foreign national and foreign LLP's to become partner in LLP but as per the Foreign Exchange Management At 1999 and regulations and rules made thereunder, foreign investment in LLP was not allowed, therefore it was necessary to prescribe a regulatory policy for allowing the FDI.

FDI in Limited Liability Partnerships (LLPs): FDI in LLPs is permitted, subject to the following conditions:

(a)  FDI in LLPs will be allowed, through the Government approval route, only for LLPs operating in sectors/activities where 100 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions (such as ‘Non Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’ etc.).

(b)  LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.

(c)  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 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.

(d)  LLPs with FDI will not be eligible to make any downstream investments.

(e)  Foreign Capital participation in the capital structure of LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank.

(f)  Investment in LLPs by Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs).

(g)  In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a 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.

(h)  For such LLPs, 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 section 2(v)(i) of the Foreign Exchange Management Act, 1999.

(i)  The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.

(j)  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.

FDI in other Entities: FDI in resident entities, other than those mentioned above, is not permitted.

While allowing FDI in LLP, the Government of India , has taken a very precautionary approach by only allowing FDI in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions, for example sectors like power, roads, information technology , manufacturing etc .

The decision of allowing FDI in LLP will take immediate effect. The above provisions will be incorporated in the next Circular on Consolidated FDI Policy to be issued on 30-9-2011.


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