The Reserve Bank of India has decided to allow limited liability partnership (LLP) companies formed and registered under the Limited Liability Partnership Act, 2008 to accept foreign direct investment (FDI), subject to certain conditions.
In terms of extant instructions, only a company incorporated under the Companies Act, 1956 or a venture capital fund is eligible to accept FDI.
RBI said it has amended the principal regulations through the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2014 notified on 19 March 2014 (dated 13 March 2014).
While the changes are effective from 20 May 2011, RBI said, the reporting requirement of FDI in LLP will come into force from the date of issue of instructions by the RBI in this regard.
The LLP which have received foreign investment in terms of FIPB approval between 20 May 2011 and the date of this circular, should comply with the reporting requirement in respect of FDI within 30 or 60 days, as applicable, from the date of this circular, RBI said.
The scheme for acquisition / transfer by a person resident outside India of capital contribution or profit share of limited liability partnerships (LLPs) would be called foreign direct investment (FDI-LLP) in limited liability partnerships (LLPs) formed and registered under the Limited Liability Partnership Act, 2008.
To be eligible to invest under the LLP-FDI scheme, a person should be resident outside India or an entity should be incorporated outside India.
However, a citizen / entity of Pakistan and Bangladesh, a SEBI-registered foreign institutional investor (FII), SEBI registered foreign venture capital Investor (FVCI), SEBI-registered qualified foreign investor (QFI) and a foreign portfolio investor registered in accordance with Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (RFPI) are not eligible to invest under the scheme.
To be eligible to invest under LLP-FDI scheme, an LLP, existing or new, should be operating in sectors / activities where 100 per cent FDI is allowed under the automatic route of FDI scheme.
An LLP engaged in the following sectors / activities will not be eligible to accept FDI:
- Sectors eligible to accept 100 per cent FDI under automatic route but are subject to FDI-linked performance related conditions (for example minimum capitalisation norms applicable to 'non-banking finance companies' or 'development of townships, housing, built-up infrastructure and construction-development projects', etc.); or sectors eligible to accept less than 100 per cent FDI under automatic route; or sectors eligible to accept FDI under government approval route; or agricultural/plantation activity and print media; or sectors not eligible to accept FDI, i.e, any sector which is prohibited under the extant FDI policy.
Eligible investment under the scheme include contribution to the capital of an LLP and investment by way of 'profit share' will fall under the category of reinvestment of earnings.
Any FDI in an LLP would require prior government / FIPB approval.
Any form of foreign investment in an LLP, direct or indirect (regardless of nature of 'ownership' or 'control' of an Indian company) shall require government/FIPB approval.
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 (hereinafter referred to as ''fair price of capital contribution / profit share of an LLP'') 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.
In case of transfer of capital contribution/profit share from a resident to a non-resident, the transfer should be for a consideration equal to or more than the fair price of capital contribution/profit share of an LLP.
Further, in case of transfer of capital contribution / profit share from a non-resident to a resident, the transfer should be for a consideration which is less than or equal to the fair price of the capital contribution/profit share of an LLP.
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 way of 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.
LLPs should report to the regional office concerned of the Reserve Bank, the details of the receipt of the amount of consideration for capital contribution and profit shares.
The authorised 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) should be reported within 60 days from the date of receipt of funds.
An Indian company, having foreign investment (direct or indirect, irrespective of percentage of such foreign investment), 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 under the automatic route and there are no FDI-linked performance related conditions.
Onus would be on the LLP accepting investment from the Indian company registered under the provisions of the Companies Act, as applicable, to ensure compliance with downstream investment requirement as stated above.
An LLP with FDI under this scheme will not be eligible to make any downstream investments in any entity in India.
In case, an LLP with FDI has a body corporate as a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the Limited Liability Partnership Act, 2008, such a body corporate should only be a company registered in India under the provisions of the Companies Act, as applicable and not any other body, such as an LLP or a trust.
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.
Conversion of a company with FDI into an LLP will be allowed only if the stipulations above (except the stipulation on mode of payment) are met and with the prior approval of FIPB/government.
LLPs will not be permitted to avail external commercial borrowings (ECBs).