Overview
The concept of LLP was introduced under the Limited Liability Partnership Act 2008 and is one of the most preferred forms of business entities in India due to their minimal compliances, simple procedures, and flexible procedures as compared to other business entities like partnership firms and companies. The LLP business structure allows smaller and medium-sized businesses to enjoy the status of a separate legal entity with improved transferability and limited liability to the promoters of the LLP. Whereas are restrictions upon companies regarding the capital contribution that could be withdrawn either through buy-back of shares or through reduction of capital which needs a long list of compliance to be fulfilled with higher expenses and the painfully long duration of time, it is comparatively easier to withdraw investments from LLP by the Designated Partners/Investors who have made investments through Capital Contribution or by the withdrawal of Profits.
With the Indian population spread around countries across the globe, there is a growing interest among foreigners and foreign business entities to get a foothold in the Indian markets by making FDI in Indian businesses and especially in LLPs for reasons before mentioned. Therefore, the trend of incorporation of an LLP and FDI investments in these LLPs is on an ever-increasing mode due to its being suitable for foreign investors to invest their money through the automatic route and to repatriate their money at any time without having to follow a long list of compliances.
Despite its attractive features LLPs have been troubled to receive FDI with obtaining prior government approval apart from blanket restrictions on downstream investments. However, under the “Ease of Doing Business in India” scheme for businesses, the Department of Industrial Policy and Promotion (“DIPP”) on November 24, 2015, issued a notification to provide relaxation for FDI investments in LLPs via notification circular no. FEMA.385/2017-RB dated 03.03.2017, namely Foreign Direct Investment (FDI-LLP) rules under Limited Liability Partnerships (LLP) and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
These rules have superseded the Foreign Exchange Management (Transfer by Issue of Security by a Person Resident outside India) Regulations, 2017 as notified through notification S.O. 3732(E) as notified by the Ministry of Finance (Department of Economic Affairs). Let’s further understand other aspects of FDI in the LLP process, eligibility norms, and other related compliances.
Meaning of FDI & FDI norms for LLPs
FDI is the abbreviation for Foreign Direct Investment which means a form of investment made by any foreigner or foreign business entity with an intent to acquire a stake in the Indian business entity to control ownership of the business. This kind of direct control in the ownership of the business differentiates it from foreign portfolio investment. The Reserve Bank of India has prescribed two routes of undertaking FDI into India, namely through-
Government Route & the Automatic Route. While the permission of RBI may not be required under the automatic route, it is compulsory to get clearance and permission to undertake FDI under Govt. the route. However, some business sectors have been expressly prohibited from receiving any foreign investment in India. Nevertheless, where businesses are receiving FDI under the automatic route under permitted sectors they are allowed to receive 100% FDI through the automatic route with no FDI-linked performance conditions.
Additionally, LLPs are permitted under the law to make downstream investments in another company or LLP in permitted sectors under the automatic route with no FDI-linked performance conditions. A foreign business or foreign partnership firm could join an LLP under the LLP regulations. This move was made by RBI for inviting investments in the country for the benefit of the economy and expansion of business of LLPs on a global level.
Eligibility Criteria for FDI in LLP
Under the FDI regulations rolled out for LLPs in the year 2015, the RBI has specified certain conditions for FDI in a Limited Liability Partnership (LLP). They are various kinds of funds that could be invested in an LLP with different kinds of investors, for which the residential status of an individual or a corporation is to be considered. Provided below are the individual investors who are eligible to make investments in an LLP in India who may invest either by way of capital contribution through transfer/acquiring of profit shares in the capital arrangement of an LLP-
- A person who lives outside of India i.e. Foreigner or NRI.
- A business entity incorporated outside India,
A person disqualified for Foreign Direct Investment in LLP
However, the following person is ineligible to make FDI in an LLP-
- A person who is either a citizen of Bangladesh or Pakistan;
- A business entity incorporated or based in either Bangladesh or Pakistan;
- An institution that has been recognized as a Foreign Institutional Investor in an LLP for foreign direct investment purposes.
- A Foreign Venture Capitalist or a Foreign Portfolio Investor is recognized and defined under Foreign Direct Investment by SEBI.
Business Sectors restricted for FDI in India
Following business sectors have been expressly prohibited by the Government of India-
- Lottery and Gaming
- Agriculture
- Gambling
- Businesses engage in the activities of Defence, Energy, and automatic energy.
- Cigar Products and Tobacco.
FDI in LLP – Designated Partner Requirement
In addition, to fulfill the above eligibility criteria and restrictions for FDI in an LLP, it shall be necessary for the LLP to comply with the requirement of a Designated Partner in such LLP. An LLP proposing to accept FDI in India must nominate a Designated Partner “who must be a resident in India” as provided in the definition of ‘Person Resident in India’ under section 2 sub-clause (v)(i) of the Foreign Exchange Management Act, 1999.
In addition to the above requirements and restrictions for FDI in LLP, an LLP proposing to receive FDI must also satisfy the above-mentioned requirement concerning the Designated Partner as provided under explanation to Section 7(1) of the LLP Act 2008, who after his appointment shall be responsible for the satisfaction of the all conditions and compliances concerning FDI in LLP and further will be responsible for penalty & prosecution imposed in case of any contravention of any applicable rules & regulations.
Consequences of NRIs & Foreign Nationals for incorporating LLP
Now with the proposed relaxation of FDI norms for FDI investments in LLPs in India, NRIs, and foreign citizens could incorporate an LLP in India where the annual sales turnover is lesser than Rs. 40 Lakhs and the capital contribution is up to Rs.25 lakhs without having to conduct audits or appoint an Auditor till this limit which makes it an attractive choice for investors in India.
Modes of FDI in LLP (Limited Liability Partnership)
There are two modes of investing in any business entity-
i. Direct Investment
Direct investment is when a foreign person/ business entity invests directly to acquire a stake in a business taking control of the business.
ii. Downstream Investment/Indirect Investment
Indirect investment is an investment that is made by either a foreign person/business entity or a domestic business entity. Indirect investment is an investment made by a foreign entity that owns shares/control in any business Indian entity (either owned or controlled by a person resident outside India) and such business entity makes an investment in LLP helping the foreign person or entity to acquire shares or ownership indirectly in LLP either through subscription to shares or through acquisition. Apart from being known as an indirect investment, it is also known as a downstream investment. A domestic company/LLP holding the foreign investment is allowed to make downstream investment in an LLP engaged in sectors in which 100% FDI is allowed under the automatic route with no FDI-related performance conditions. The onus of fulfilling compliances related to the acceptance of downstream investments shall be on the LLP that accepts downstream investments.
Valuation of Investment through FDI
FDI in an LLP made either through capital contribution or through acquisition or transfer of shares in an LLP should be more than or equal to the fair price as calculated with any valuation standards which are globally accepted or recognized as per market practices (hereinafter mentioned as “fair price of capital contribution/ profit share of an LLP”) and a valuation certificate to the same effect shall be issued by a Chartered Accountant or by a practicing Cost Accountant or a registered approved valuer panel maintained by the Central Government of India.
If the capital transfer has been made by a way of capital contribution/ profit share from a resident to a non-resident, such transfer shall be valued for a consideration that is either equal to or above the fair price of capital contribution/ profit share of an LLP. On the other hand, in cases where a transfer of capital contribution/ profit share has been done from a non-resident to a resident, such transfer shall be valued for a consideration that is either lesse
r than or equal to the fair price of the capital contribution/ profit share of an LLP.
Mode of payment
The transfer of consideration for acquisition or transfer or subscription of shares/ownership/control shall be paid in a manner as prescribed under the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.
Transfer of Disinvestment proceeds
In case of disinvestment, the proceeds from such disinvestment may be remitted outside India by crediting the amount to the Non-Residential External (NRE) or Foreign Currency Non-Resident Account (Banks) account of the respective foreign person.
Reporting of FDI transactions – An LLP that has received foreign investments through FDI needs to report investments to the respective authorities through the following-
i. Annual Return on Foreign Liabilities and Assets– An LLP which has received investments through capital contribution in the previous year(s) including the current FY must submit form FLA to the Reserve Bank of India either on or before the 15th of July every year.
ii. Form FDI- LLP (I )- Limited Liability Partnerships (LLPs) who have received or are receiving the amount of consideration either for capital contribution and/or acquisition of profit shares are required to submit a report in Form Foreign Direct Investment-LLP (I) form within a period of 30 days from the date of receipt of consideration.
iii. Form FDI- LLP (II)- Further, Limited Liability Partnerships (LLPs) shall be required to report any disinvestment or transfer of capital contribution or profit share among a resident and a non-resident or vice-versa within a period of 60 days from the date of acceptance of funds in Form Foreign Direct Investment-LLP (II).
Mandatory Documents to be attached with FDI LLP forms-
The RBI directions prescribe certain documents to be attached while submitting returns and forms online which have been provided below-
i. Form FDI- LLP (I )
- A Foreign Inward Remittance Certificate(FIRC) or a Debit statement and KYC;
- A Valuation certificate provides an assessment of the value of consideration in a specified manner;
- A declaration and a certificate from the designated partner/ authorized representative in the format as specified by RBI in the RBI user manual.
ii. Form FDI- LLP (II)
- A Foreign Inward Remittance Certificate (FIRC)FIRC /Debit statement/ outward remittance certificate and KYC as applicable;
- Copy of acknowledgment letters for the capital contribution being transferred to be attached in the specified format;
- A Valuation certificate provides an assessment of the value of consideration in a specified manner;
- Relevant extracts of the Purchaser and Seller consent letter and copy of the transfer agreement;
- A Declaration from the Non-resident transferor/ transferee in the format as specified by RBI in the RBI user manual.
Conclusion
Therefore, Foreign Direct Investment (FDI) was previously restricted to business entities like companies only and for LLPs, there was a long list of compliances and conditions to be followed for receiving investments through FDI. However, the RBI relaxes the rules & regulations related to FDI to help businesses to meet their financial requirements and help the economy to grow which helped LLPs to collect & receive 100 percent investment flexibly. For this, each LLP must follow all applicable compliances with an effective reporting process in the reporting criterion. The RBI has further enhanced the funding requirements of LLPs while concurrently raising the amount of foreign investment in the country through their access to foreign investors and FDI. It has given a convenient alternative avenue to the foreign person/business entities to make investments in India and is definitely a bold step in the right direction for the Indian economy in the long term not it will only benefit the Indian economy but will also prove advantageous for investors with inherent flexibility & tax-efficient LLP structure. This move will also boost joint ventures and strategic partnerships in the country with their resultant benefits such as employment opportunities and improved technologies in the future. Thus, LLP structures have long been in use globally and have proven to be specifically advantageous for professionals to come together under one roof to join hands together and work smoothly with efficiency without being troubled with the tedious list of compliances of a company or the personal liability involved in a partnership firm.
