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Foreign Direct Investment In LLPs

May 18, 2018     by Simratjeet Kaur

Limited Liability Partnerships or LLPs have been a preferred business vehicle in countries such as United Kingdom, United States of America, Australia, Singapore etc. as it combines pros of a company and negates cons of a partnership firm.

In India, the Limited Liability Partnership Act, 2008 (hereinafter called “the LLP Act, 2008”) was notified on 31 March 2009. The LLP Act 2008 permitted foreign nationals and foreign LLP’s to become partner in LLPs incorporated in India. But the same was not supported by Foreign Exchange Management Act, 1999 and rules and regulations made thereunder. In the year 2011, the regulatory policy for FDI was amended and 100% FDI was allowed in LLPs under approval route.

 

FDI through Automatic Route

Though LLP form of doing business was gaining popularity among Indian residents but Non-residents chose to stay away for obvious reasons of requirement of approval even where 100% FDI was allowed under automatic route (in case of Private limited company). It took four years to realise the need to simplify provisions. The Government in the year 2015, permitted FDI upto 100% through Automatic route in LLPs which are operating in sectors where 100% FDI is allowed through Automatic route.

 

New FDI Regulations

The Government, in its bid to promote ease of business in India, has again revamped the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 [hereinafter referred to as New FDI Regulations]. The New FDI Regulations have simplified many aspects concerning FDI, such as downstream investment and transfer of such FDI in Companies and LLPs alike.

 

Provisions for Foreign Direct Investment in LLPs as given in New FDI Regulations, have been summarised below:

1. 100% FDI Permitted:

A person resident outside India can contribute to the capital of an LLP operating in sectors where 100% foreign investment is permitted under automatic route and no FDI linked performance conditions are applicable.

 

2. Investment by way of “profit share”:

As per the New FDI Regulations, investment by way of “profit share” shall be categorised as reinvestment of earnings.

 

3. Conversion of Company into LLP:

A Company having foreign investment can be converted into LLP under automatic route provided:

  1. It is engaged in a sector where 100% foreign investment is permitted under automatic route
  2. There are no FDI linked performance conditions prescribed

 

4. Conversion of LLP into Company:

An LLP having foreign investment can be converted into a Company under automatic route provided:

  1. It is engaged in a sector where 100% foreign investment is permitted under automatic route
  2. There are no FDI linked performance conditions prescribed

However, the conversion of LLP into Private Limited Company is currently not possible in India, as both LLP Act, 2008 and Companies Act, 2013 are silent on the matter.

 

5. Valuation:
  1. Investment by way of capital contribution or by way of acquisition / transfer of profit shares to be worked out on the basis of fair price valuation.
  2. A Chartered Accountant or Practicing Cost Accountant or Valuer on the panel of the Central Government to issue a valuation certificate to that effect.
  3. Fair price valuation to be carried out as per any Internationally accepted valuation methodology.

 

6. Consideration for transfer of capital contribution / profit share:

The consideration to be worked out as follows:

Transfer from Transfer to Consideration
Person resident in India Person resident outside India Consideration should not be less than the fair price of capital contribution
Person resident outside India Person resident in India Consideration should not be more than the fair price of the capital contribution

 

7. Reporting of investment in and transfer of capital contribution / profit shares:
Purpose Form Name To be filed with Timeline
To report receipt of amount of consideration for capital contribution and acquisition of profit shares LLP (I) Regional Office of RBI Within 30 days from the date of receipt of consideration
To report disinvestment / transfer of capital contribution or profit share between a resident and a non-resident and vice versa. LLP (II) Authorised Dealer bank Within 60 days from the date of receipt of funds.

Please note that above mentioned forms have been integrated into Single Master Form (SMF) w.e.f. 1st September, 2018. To read more about the same, please visit Single Master Form (SMF) And The New Filing Platform FIRMS.

 

Our first blog in the series is related to the changes in New FDI Regulations related to issue of securities. The same can be read at Issue of Securities: A Glimpse into the new FDI Regime.

 

Readers may also like to go through the following blogs:

  1. Foreign Direct Investment (FDI) by a Non-Resident Indian (NRI)
  2. FDI in Limited Liability Partnership
  3. Compounding under LLP Act, 2008
  4. How to close an LLP  in India (Easy Exit / Strike off)
  5. Striking off a Company/LLP: Simplified

 

 

 

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