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Indian Limited Liability Partnerships Opened For Receiving Foreign Direct Investments

12 May 2011

Limited Liability Partnership ('LLP') emerged as a form of entity for undertaking businesses in India in agreement with the Limited Liability Partnership Act, 2008 ('LLP Act') on 1 April 2009. This form of entity is a hybrid, combining distinct features of a company with that of a traditional partnership. The Company law authorities have been mandated to administer LLPs, albeit a lighter set of compliance and reporting is required vis-?-vis companies. Taxand India summarises the key features of the announcement.

The FDI in LLPs will be implemented in a calibrated manner. This cautious step wise approach has been followed in relation to several other initiatives by the Government as it allows a review of the implications and remedial action as the reform is rolled out in a phased manner.

In the first stage, FDI will be allowed only in the 'open' sectors where monitoring of foreign investment is not required, subject to a number of conditions. Indian companies having FDI are permitted to convert into LLPs as prescribed under the LLP Act; however, such conversion would be permitted only if the above stipulations are met and prior approval of the FIPB is obtained.

The designated partners will be responsible for compliance with the above conditions and in case of violation of any of the prescribed conditions the designated partners will be liable for all penalties.

Taxand's Take

This is a welcome announcement as this will permit foreign investors to undertake businesses through LLPs. However, as indicated earlier, formal notification from the Government and the RBI is awaited before this announcement can be implemented.

There are, however, a number of issues that are not addressed:
  • There is lack of clarity on whether this condition applies to all Indian companies or only those Indian companies which are regarded as 'foreign owned or foreign controlled' under the FDI policy
  • The requirement of a corporate body, being a designated partner, to be a company registered with Indian Companies Act, 1956 needs to be given due consideration
  • The monetary value of the capital contribution of a partner to a LLP needs to be accounted for as per provisions of the LLP Act. The announcement does not make any reference to the pricing guidelines and it remains to be seen how the pricing guidelines would apply to such infusion or divestment of capital contribution and transfer of economic interest
  • It is unclear if the prohibition on LLPs to make downstream investments also restricts LLPs with FDI from making overseas investments

The announcement provides that the FDI in LLPs will be implemented in a calibrated manner and hence expansion in the scope of eligible activities and the limitation of the restrictions could be expected as the policy makers and regulatory authorities get comfortable with the inflow of foreign investment into LLPs.

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Mukesh Butani
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