13th May, 2011

FOREIGN DIRECT INVESTMENT

IN LIMITED LIABILITY PARTNERSHIP

EXECUTIVE SUMMARY
After 2 years of notification of the Limited Liability Partnership Act
2008, and after 5 months of issuing a discussion paper on
allowing Foreign Direct Investment (FDI ) in the Limited Liability
Partnership (LLP) , the Government of India , has approved the
much awaited policy on FDI in Limited Liability Partnership. FDI in
LLP is allowed in sectors activities where 100% FDI is allowed,
through the automatic route and there are no FDI-linked
performance related conditions.
The LLP Act 2008, allows foreign national and foreign LLP's to
become partner in LLP but as per the Foreign Exchange
Management At 1999 and regulations and rules made
thereunder, foreign investment in LLP was not allowed, therefore
it was necessary to prescribe a regulatory policy for allowing the
FDI.
While allowing FDI in LLP, the Government of India , has taken a
very precautionary approach by only allowing FDI in sectors
where 100% FDI is allowed, through the automatic route and
there are no FDI-linked performance related conditions, for
example sectors like power, roads, information technology ,
manufacturing etc .
The necessary details of the policy has been outlined below:
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a) LLPs with FDI will be allowed, through the Government
approval route, in those sectors/activities where 100% FDI is
allowed, through the automatic route and there are no FDI-linked
performance related conditions.
By FDI-linked performance related conditions, it is meant that in
sectors, where conditions like minimum capitalization etc are
prescribed like development of Townships, NBFC, even though
100% FDI is allowed under automatic route, LLP's will not be
allowed to bring FDI with the approval of Government of India.
b) LLPs with FDI will not be allowed to operate in
agricultural/plantation activity, print media or real estate
business.
c) LLPs with FDI will not be eligible to make any downstream
investments, which mean LLP having FDI, cannot make further
investment in LLP or companies engaged in any business, even
though 100% FDI is allowed under those sectors.
The Government of India has also prescribed the following
conditions relating to funding, ownership and management of
LLP's:
I. Funding of LLPs:
(a) Downstream Investment by Company: An Indian
Company, having FDI, will be permitted to make downstream
investment in LLPs only if both the company, as well as the LLP is
operating in sectors where 100% FDI is allowed, through the
automatic route and there are no FDI-linked performance related
conditions.
(b) Investment by Cash Consideration: Foreign Capital
participation in the capital structure of the LLPs will be allowed
only by way of cash considerations, received by inward
remittance, through normal banking channels, or by debit to
NRE/FCNR account of the person concerned, maintained with an
authorized dealer/authorized bank. For making non
cash/intangible contribution towards the capital of the LLP,
permission of Government of India will be required.
(c) FII/ Foreign Venture Capital: Foreign Institutional Investors
(Flls) and Foreign Venture Capital Investors (FVCIs) will not be
permitted to invest in LLPs.
(d) External Commercial Borrowings: LLPs will also not be
permitted to avail External Commercial Borrowings (ECBs.)
II. Ownership and Management of LLPs:
(a) Determination of Designated Partner: The LLP Act 2008,
provides that atleast one designated partner shall be person
resident in India.
As per explanation to section 7 of the LLP Act 2008, the term
“resident in India” means a person who has stayed in India for a
period of not less than one hundred and eighty-two days during
the immediately preceding one year.
But for the purpose of determination of the designated partners in
respect of LLPs with FDI, the term “resident in India” would have
the meaning, as defined for “person resident in India”, under
Section 2(v) (i) (A) & (B) of the Foreign Exchange Management
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Act, 1999;
As per section 2(v) (i) (A) & (B) of the Foreign Exchange
Management Act, 1999, a person resident in India means
(i) a person residing in India for more than one hundred
and eighty-two days during the course of the preceding financial
year but does not include—
(A) a person who has gone out of India or who stays
outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation
outside India, or
(c) for any other purpose, in such circumstances as
would indicate his intention to stay outside India for an
uncertain period;
(B) a person who has come to or stays in India, in either
case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India,
or
(c) for any other purpose, in such circumstances as
would indicate his intention to stay in India for an
uncertain period;
(b) Body Corporate as Designated Partner: In case of LLP
having FDI and a body corporate is a designated partner, than the
body corporate should only be a company registered under the
Companies Act and not any other body, such as an LLP or a trust.
(c) Compliance of FDI Policy: The designated partners will share in contribution of capital , identification of control in case of
be responsible for compliance with the above conditions and downstream investment by Companies in LLP, investment by NRI
liable for all penalties imposed on the LLP for their contravention. on non repatriation basis etc and it therefore necessary to wait for
the final policy , before making any decision.
(d) Conversion into LLP: Any conversion of a company with
FDI into an LLP will be allowed only if the company is engaged in
sectors/activities where 100% FDI is allowed, through the
automatic route and there are no FDI-linked performance related
conditions and prior approval of FIPB/Government is obtained.

OUR OBSERVATIONS:
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. It is to be
noted that LLP as opposed to company are not subject to
dividend distribution tax @ 16.225%
The aforesaid move will boost the number of joint ventures in the
country and specifically in infrastructure sector, where most of
projects till date are executed in form of unincorporated joint
venture where most.
Disclaimer: This document is a copyright of Corporate
Professionals Group. The entire contents of this document have
been developed on the basis of relevant statutory provisions.
Though the author has made utmost efforts to provide authentic
information however, the author and the company expressly
disclaim all and any liability to any person who has read this
document, or otherwise, in respect of anything, and of
consequences of anything done, or omitted to be done by any
such person in reliance upon the contents of this document.

Going further, with the successful results of allowing FDI in LLP,

the Government might further liberalize the FDI policy for LLP and
bring more sectors under the automatic route of investment.

It is to be noted that this is preliminary policy statement and there

are lot of issues, which needs to seen into like the reporting
system, conditions of transfer of partners interest, valuation of

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