November 29, 2022

Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)

The concept of LLP, introduced in India through the Limited Liability Partnership Act, of 2008, has become a popular form of business entity in India owing to its simplified procedures for registration and maintenance. LLP is a structured form of partnership Firm and is simplified as compared to companies. Therefore, entities earlier going for Partnership firms have not shifted to LLP.

LLPs allow many of the small and medium-sized to enjoy a separate legal entity, improve transferability and provide their promoters with limited liability protection. Therefore, there is tremendous interest among small business owners and service providers to register their businesses as an LLP.

With the Indian population currently spread across the globe and growing interest among foreigners to get a foothold in the Indian market, there is a lot of interest in Foreign Direct Investment (FDI) in LLP. Similar to FDI in Private Limited Companies, it determines the policy for FDI in LLP by the yearly FDI Circular issued by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry.

Foreign Direct Investment (FDI-LLP) in Limited Liability Partnerships (LLP) formed and registered under the Limited Liability Partnership Act, 2008 is governed under Foreign Exchange Management (Non-debt Instruments) Rules, 2019 which have superseded Foreign Exchange Management (Transfer by Issue of Security by a Person Resident outside India) Regulations, 2017 vide Notification S.O. 3732(E) issued by Ministry of Finance (Department of Economic Affairs).

Hence, the FDI policy on LLPs was amended in 2015 to provide that investments in LLPs will not require Government approval. 100% FDI is now permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions (i.e., sector-specific conditions for investee companies).

1. Eligible Investors

The following persons are eligible to make FDI in LLP:
- A person resident outside India (other than a citizen of Pakistan or Bangladesh);
- An entity incorporated outside India (other than an entity incorporated in Pakistan or Bangladesh),
- Non-Resident Indian (NRI);
- Overseas Citizen of India (OCI)

FDI can be made in LLP by means of Capital Contribution or by way of acquisition/transfer of profit share in capital structure.

Foreign Portfolio Investor (FPI) or Foreign Venture Capital Investor (FCVI) are not eligible to make FDI in LLP.

2. Eligible investment

Contribution to the capital of an LLP would be an eligible investment under the scheme.
Note: Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.

3. Downstream Investment in LLP

Downstream investment is an Indirect route of FDI.
Under downstream investment. An eligible Indian entity (which is owned and controlled by a person resident outside India) makes an investment into another Indian company/LLP, by way of subscription or acquisition.
An Indian company or an LLP, having foreign investment, shall be permitted to make downstream investment in an LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.
The onus of compliance shall be on the LLP to accept downstream investment to ensure compliance with the above conditions.

4. Eligibility of an LLP

FDI in LLPs is permitted, subject to the following conditions :

FDI is permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.
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. However, The onus shall be on the Indian company / LLP to accept downstream investment to ensure compliance with the above conditions.
FDI in LLP is subject to compliance with the conditions of the Limited Liability Partnership Act, 2008.

5. Pricing

Original Investment in LLP

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 computed as per any valuation norm which is internationally accepted/adopted as per market practice.
To ensure the correctness of the price determined, a valuation certificate to that effect shall be issued by the Chartered Accountant by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

Transfer of contribution from Resident to Non-Resident

In case of transfer of capital contribution/profit share from a resident to a non-resident, the transfer shall be for a consideration equal to or more than the fair price of capital contribution/profit share of an LLP.

Transfer of Contribution from Non-resident to Resident

Further, in case of transfer of capital contribution/profit share from a non-resident to a resident, the transfer shall be for a consideration that is less than or equal to the fair price of the capital contribution/profit share of an LLP.

6. Conversion of LLP into Company or Vice-versa

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% is permitted under the automatic route and there are no FDI-linked performance conditions.
Similarly, an LLP having Foreign Investment can be converted under automatic route only if such LLP is engaged in a sector wherein FDI is permitted up to 100% under automatic route and there are no FDI-Linked Performance conditions..

7. Mode of payment for Capital Contribution

Payment by an investor towards capital contribution in LLPs shall be made:
- By way of inward remittance through banking channels; or
- By debit to the NRE / FCNR(B) account of the person concerned, maintained with an AD Category – bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2016.

8. Remittance of Disinvestment proceeds

The disinvestment proceeds may be remitted outside India or may be credited to the NRE or FCNR(B) account of the person concerned.
In the case of NRI or OCI, divestment proceeds shall be credited only to the NRO account of the investor, irrespective of the type of account from which the consideration was paid.

9. Reporting

Annual Return on Foreign Liabilities and Assets: LLP which has received investment by way of capital contribution in the previous year(s) including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year.

Form FDI- LLP (I) : A Limited Liability Partnerships (LLPs) receiving an amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment-LLP (I) within 30 days from the date of receipt of the amount of consideration.

The form shall be accompanied by Mandatory Documents to be attached with form LLP-I :
- FIRC /Debit statement and KYC, as applicable to be attached.
- Valuation certificate
- For investments under approval routes, requisite approvals from the Government or other notified entities shall be attached.
- Declaration and the certificate from the designated partner/ authorized representative in the specified format as mentioned in the RBI user manual.

Form FDI- LLP (II): The LLPs shall report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) within 60 days from the date of receipt of funds in Form Foreign Direct Investment-LLP (II).

Mandatory Documents are to be attached with form LLP-II
- FIRC /Debit statement/ outward remittance certificate and KYC, as applicable to be attached at the specified attachment.
- Relevant acknowledgment letters for the capital contribution being transferred are to be attached as specified.
- The valuation certificate is to be attached at the specified attachment
- Buyer and seller consent letter and transfer agreement (relevant extracts)
- Declaration from the Non-resident transferor/ transferee in the specified format as mentioned in the RBI user manual.

10. Conclusion

LLP structures have long been in use globally and have proven to be specifically advantageous for professionals to come together under its umbrella and work seamlessly without being burdened with the compliance requirements of a company or the personal exposure involved in a partnership firm. By allowing FDI investments into LLPs, India has taken a bold step in the right direction as it would provide foreign investors with an alternate form of business other than the company and would entitle them to benefit from inherent flexibility & tax efficient LLP structure. This move will boost the number of joint ventures in the country, with their corresponding benefits as employment opportunities, and improved technologies.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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