Foreign Investors setting up business in India can enter the Indian market through many ways including establishing a Branch / Liaison Office, incorporating a subsidiary in India, through a Limited Liability Partnership (LLP) and other means that have been prescribed. A LLP is viewed as an alternate corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organising their internal operations as a partnership through an agreement mutually arrived at by the partners.
LLP offers many operational advantages as compared to a company, as no meetings in the year are mandated and the functioning of an LLP is not as highly regulated as that of a company. For instance:
- No requirement for minimum contribution;
- Audit requirements are after a particular threshold is reached which provides respite to a start up in the first few years of operations;
- Lesser daily and annual compliances in filings with RoC.
RBI Relents in April 2014
Sometime in April this year, RBI has issued a circular detailing the provisions relating to investment in India through an LLP. A limited liability partnership is regulated by the Limited Liability Partnership Act, 2008 and is similar to a company in that it has a separate legal entity. LLP is liable to the full extent of its assets (much like a company) whereas the liability of the partners of LLP shall be limited to their agreed contribution in the LLP similar to that in a Company.
While the Government of India through Department of Industrial Policy and Promotion (DIPP), permitted FDI in LLP through approval of the Foreign Investment and Promotion Board (FIPB), RBI had not amended the principal regulation (commonly known as FEMA 20) in this behalf.
On 16th April 2014, RBI issued a notification inter alia providing that investments in a LLP formed and registered under the LLP Act, 2008 shall be eligible to accept Foreign Direct Investment (FDI) subject to certain conditions stipulated in that circular.
Conditions for Investment
Who can invest?
A person resident outside India or an incorproated entity (outside India) shall be eligible investor for the purpose of FDI in LLPs. Investment in LLPs by Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted.
An LLP, existing or new, operating in sectors/activities where 100% FDI is allowed under the automatic route of FDI Scheme and where there are no performance linked conditions (such as FDI in housing and township) would be eligible to receive FDI. However, any FDI in a LLP shall require prior Government approval i.e. approval from the Foreign Investment Promotion Board (FIPB) regardless of whether such investment is direct or indirect and the nature of ownership or control.
How to invest?
FDI investment in LLP may by way of contribution to the capital of a LLP or transfer of profit shares. Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.
Valuation and Pricing
FDI in an LLP either by way of capital contribution or by way of acquisition / transfer of ‘profit shares’, would have to be more than or equal to the fair price as worked out with any valuation norm which is internationally accepted/ adopted as per market practice and a valuation certificate to that effect shall be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.
Mode of payment for an eligible investor
The mode of payment by an eligible investor towards capital contribution/profit share of LLPs will be allowed only by way of cash consideration to be received by 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.
Reporting norms are similar to that of FDI in a company.
- The reporting obligation is on the LLP which shall send a report to the regional office of the Reserve Bank providing details of the receipt of the amount of consideration for capital contribution and profit shares in Form FOREIGN DIRECT INVESTMENT-LLP(I) through an AD Category – I bank, and valuation certificate as regards pricing not later than 30 days from the date of receipt of the amount of consideration.
- The AD Category – I bank in India, receiving the remittance should obtain a KYC report in respect of the foreign investor from the overseas bank remitting the amount.
- Disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) shall require to be reported within 60 days from the date of receipt of funds in Form FOREIGN DIRECT INVESTMENT-LLP(II).
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.
LLPs with FDI will not be eligible to make any downstream investments.
FIPB Approvals so far
Between 2011 and 2013 FIPB while approving several instances of FDI in LLPs has reiterated that all conditions laid for investment in LLPs need to be met otherwise FIPB will not approve the investment. (See here for Review of FIPB 2011 – 2013).
FIPB rejected an investment in a LLP which was a manufacturing concern where the intent was to use internal accurals of a foreign owned Indian company for investment. Thereafter, the upon the Parties undertaking to make the investment through normal banking channels, FIPB approved the same. Even in cases where the investment in LLP was non-repatriable, while approving the same, FIPB has stipulated that the approval will be subject to the foreign investment meeting all conditions applicable.
LLPs in India need to have at least two “designated partners” who are responsible for compliance with the provisions of LLP Act and at least one of them shall be “resident in India”. In case one or more of the partners of a LLP are bodies corporate, then at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as “designated partners”.
The existing clause in the FDI policy is worded differently as follows:
- 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 / 2013 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 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.
Adding to the above, FIPB decided that the ‘designated partners’ should also have a contribution to the capital of LLP and pro-rata voting rights and this should be made as a condition.
The cheer for investors at being afforded this additional avenue for investment is dampened by the various levels at which conditions are imposed in FDI in LLP.
Prior to structuring the investment in LLP care must be taken to adhere to conditions of FEMA 20 as amended by RBI notification as well as the FDI Policy issued by the Department of Industrial Policy and Promotion (DIPP). Should an investor require to structure further investments through its entity in India, a LLP would not be a recommended structure. Conversely, where LLP is required for ease of operations in India and where such LLP is or is proposed to be engaged in a business activity permitted by RBI regulations without any conditions, FIPB approval may be sought and investment made.