DIPP relaxes FDI rules for LLPs to make downstream investments

The Department of Industrial Policy and Promotion (DIPP) has allowed limited liability partnerships (LLPs) to make downstream investments, with the aim of improving the ease of doing business in the country and to fast-track projects that are stuck.

The permission, however, subject to conditions that both the company and the LLP are operating in a sector where 100 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

The DIPP issued press note dated 24 November 2015, which has come into effect immediately, liberalises FDI in 15 major sectors.

Prior to this, only an Indian company having foreign direct investment (FDI) was permitted to make downstream investment in limited liability partnerships (LLPs), subject to conditions that both the company and the LLP are operating in a sector where 100 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

While the conditions remain the same post issuance of the press note, permissibility has changed as internal accrual was not explained formerly. Accumulated profits will not be regarded as internal accrual unless transferred to reserves. Downstream investments using internal accruals will be subject to relevant sectoral caps and conditionalities. Further, such investment cannot be made in an investment company unless government approval has been obtained. This is to be complied irrespective of the amount or extent of foreign investment.

The change has definitely rendered a reason to cheer to the LLPs. In this regard, we can expect a notification from RBI amending Regulation 14 (6) of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.

The RBI is expected to amend Foreign Exchange Management Regulations for transfer or issue of security by a person resident outside India.