Foreign Direct Investment in LLP
Foreign
Direct Investment in LLP
SHORT SUMMARY:
VIA [1]Notification
No. FEMA.385/2017-RB dated 3rd March, 2017 Reserve Bank of India (“RBI”) has
notified the Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident outside India) (Second Amendment) Regulations, 2017. The same has been published in the official
gazette. As a result of this Second amendment sub – regulation 9 of regulation
5 and Schedule 9 of Foreign Exchange Management (Transfer or Issue of Security
by a Person Resident outside India) Regulations, 2000 substituted.
In
this Flash editorial, the auditor begins by referring the powers of RBI for
amendment in Regulation, 2000. The main thrust of the article, however, is upon
the provisions / regulations of Foreign Direct Investment in Limited Liability
Partnership (“LLP”) by way of capital contribution or by way of acquisition /
transfer of profit shares in the capital structure of an LLP.
This is article no. 216
of the series of editorials written by the author on corporate laws {including
Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
Introduction:
RBI has made amendment
in the Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Regulations, 2000. The power of amendment is vested
with RBI in clause (b) of sub-section (3) of Section 6 of Foreign Exchange Management
Act, 1999 (42 of 1999) “Without prejudice to the generality of the
provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit,
restrict or regulate the following:— (b) transfer or issue of any security by a person
resident outside India;” and Section 47 of the Foreign Exchange Management
Act, 1999 (42 of 1999) “47- Power to make regulations.”
The Scheme shall be called Foreign Direct
Investment (FDI-LLP) in Limited Liability Partnerships (LLP) formed and registered
under the Limited Liability Partnership Act, 2008.
ELIBIBLE INVESTOR
|
NON ELIGIBLE INVESTOR
|
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Person resident outside India
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A person resident outside India citizen of
Pakistan or Bangladesh
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|
An entity incorporated outside India
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An entity incorporated outside India in Pakistan
or Bangladesh
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|
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Foreign Portfolio Investor
|
|
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Foreign Institutional Investor
|
|
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Foreign Venture Capital Investor registered in
accordance with SEBI guidelines
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Conditions for
Contribution in LLP:
Permitted Sectors:
FDI is permitted under the automatic route in LLPs
operating in [2]sectors
/ activities where 100% FDI is allowed through the automatic route and there
are no FDI linked performance conditions.
Conditions of LLP Act:
FDI in LLP is subject to the compliance of the
conditions of Limited Liability Partnership Act, 2008.
Compulsory Reporting’s:
All LLPs which have received Foreign Direct
Investment in the previous year(s) including the current year shall submit to
the Reserve Bank of India, on or before the 15th day of July of each year, a
report titled 'Annual Return on Foreign Liabilities and Assets' as specified by
the Reserve Bank from time to time.
Reporting of foreign investment in LLPs and
disinvestment/transfer of capital contribution or profit shares between a
resident and a non-resident may be made in a manner as prescribed by Reserve
Bank of India from time to time
Whether a Company / LLP are eligible for Downstream
Investment if they have accepted FDI?
An Indian
company or an LLP, having foreign investment, will be permitted to make
downstream investment in another company or LLP engaged in sectors in which
100% FDI is allowed under the automatic route and there are no FDI linked
performance conditions
Whether a Company accepted FDI is eligible for
conversion into LLP
A company
having foreign investment can be converted into an LLP under the automatic
route only if it is engaged in a sector where foreign investment up to 100
percent is permitted under automatic route and there are no FDI linked
performance conditions.
CONCLUSION:
The Government of India, by a Press Note issued in April 2011, took a
precautionary approach by allowing Foreign Direct Investment (FDI) in LLP
subject to certain conditions. Though the Press Note was issued in April 2011,
RBI allowed FDI under prior Government ‘approval route’ only in
2014.
FDI in LLP: 2014
Pursuant to A.P. (DIR Series) Circular No.
123 of 2014, LLPs were eligible to accept FDI in permitted sectors and limited to
sectoral cap, only with prior approval of Government/ RBI.
Though foreign partners were allowed under the Act, subscription to capital
from such partners was an issue.
Allowing FDI in LLP is a welcome move of the Government of India, as it
would provide foreign investors an alternate form of business other than
company and would entitle them to benefit with inherent flexibility & tax
efficient LLP structure. The amendment
reflects the vast liberalization of the FDI conditions for LLPs in the country.
As the bar on LLPs from availing of External Commercial Borrowings (ECB) has
been done away with in line with the extant Consolidated FDI Policy, 2016.
Link of the Regulations:
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S. No.
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Particular
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Link
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1.
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Foreign Exchange Management (Transfer
or issue of Security by a Person Resident outside India) Regulations, 2000
|
|
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2.
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Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident outside India) (Second Amendment)
Regulations, 2017
|
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer:
The
entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such information.
IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR
INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE
OF THE INFORMATION.
This is only a knowledge sharing initiative and author does
not intend to solicit any business or profession.
[2] Link of the Circular for sectors/ activities
where FDI is allowed : http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf
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