Foreign Direct Investment (FDI) is allowed in Limited Liability Partnerships (LLPs) in India, subject to certain conditions. LLPs are a relatively new form of business structure in India that were introduced in 2008. This type of business structure is a hybrid of a partnership and a private limited company, which allows for flexibility in management and limited liability for its partners.
Non-resident individuals, except citizens of Bangladesh or Pakistan or companies incorporated in Bangladesh or Pakistan, can invest in an LLP by contributing capital or acquiring or transferring profit shares, subject to the terms and conditions outlined in Schedule VI of the FEM (Non-debt Instruments) Rules of 2019, as specified in Rule 6(b) of the same.
Investment in a Limited Liability Partnership (LLP)
Foreign Direct Investment (FDI) is allowed in Limited Liability Partnerships (LLPs) in India subject to certain conditions. Schedule VI of FEM (Non-debt Instruments) Rules of 2019 outlines the following provisions:
a) Non-resident individuals or entities, except those from Pakistan or Bangladesh and not classified as Foreign Portfolio Investors (FPIs) or Foreign Venture Capital Investors (FVCIs), may contribute to the capital of an LLP operating in sectors or activities where foreign investment up to 100% is permitted under the automatic route, and no FDI-linked performance conditions exist. This is also specified in para 3.2.4(1) of the FDI Policy dated 15-10-2020.
b) Investment in an LLP by means of profit share falls under the category of reinvestment of earnings.
c) Investment in an LLP must comply with the conditions outlined in the Limited Liability Partnership Act of 2008.
d) A company with foreign investment, operating in a sector where foreign investment up to 100% is permitted under the automatic route and no FDI-linked performance conditions exist, can be converted to an LLP under the automatic route. This is also mentioned in para 3.2.4(ii) of the FDI Policy dated 15-10-2020.
e) An LLP with foreign investment, operating in a sector where foreign investment up to 100% is permitted under the automatic route and no FDI-linked performance conditions exist, can be converted to a company under the automatic route. This is also stated in para 3.2.4(iii) of the FDI Policy dated 15-10-2020.
f) Investment in an LLP by means of capital contribution or acquisition or transfer of profit shares must not be below the fair price determined as per any internationally accepted valuation norm or market practice. A valuation certificate issued by a Chartered Accountant, a practising Cost Accountant, or an approved valuer from the panel maintained by the Central Government is required.
g) In case of transfer of capital contribution or profit share from a resident person in India to a non-resident person, the transfer must be for a consideration not lower than the fair price of capital contribution or profit share of an LLP. On the other hand, if a non-resident person transfers capital contribution or profit share to a resident person in India, the transfer must be for a consideration not higher than the fair price of the capital contribution or profit share of an LLP.
h) The Reserve Bank of India specifies the mode of payment and other conditions related to the remittance of sale or maturity proceeds.
Modes of Investment and Disinvestment in LLP
Reserve Bank of India (RBI) is authorized to establish policies and procedures related to the mode of payment, remittance of sale proceeds, and reporting requirements. The following guidelines are provided:
- Mode of payment for investment in LLP: An investor’s payment towards capital contribution of an LLP must be made through inward remittance via banking channels or using funds held in NRE or FCNR(B) account as per the Foreign Exchange Management (Deposit) Regulations, 2016.
- Remittance of disinvestment proceeds for investment made in LLP: Disinvestment proceeds may be remitted outside India or credited to the NRE or ECNR(B) account of the person concerned as specified in Table 3.1(VI) of FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Reporting requirements specified by RBI for investment in LLP: RBI’s reporting requirements for any investment made in India by a person residing outside of India are explained in para 4 of FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Unless stated otherwise in RBI regulations, all reporting must be made through an Authorized Dealer bank. If a report is submitted late, a late subscription fee is payable as determined by RBI.
Detailed instructions and reporting forms are provided in Part IV of RBI FED Master Direction No. 18/2015-16 dated 1-1-2016 on ‘Reporting.’ The reporting requirements when LLP receives foreign investments are as follows:
- Form LLP(I): A Limited Liability Partnership (LLP) that receives consideration for capital contribution and acquisition of profit shares must submit Form LLP(I) within 30 days of receiving the consideration.
- Form LLP(II): Disinvestment or transfer of capital contribution or profit share between a resident and non-resident (or vice versa) must be reported on Form LLP(II) within 60 days of receiving funds. The resident transferor/transferee is responsible for reporting.
FDI-linked performance conditions:
FDI-linked performance conditions refer to the sector-specific conditions listed in Schedule I of FEM (Non-debt Instruments) Rules, 2019, which apply to companies receiving foreign investment. This is stated in Rule 2(m) of FEM (Non-debt Instruments) Rules, 2019. On the other hand, Foreign Direct Investment (FDI) is defined as an investment through equity instruments by a person residing outside India in an unlisted Indian company or in 10% or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company. If an existing investment by a person resident outside India in equity instruments of a listed Indian company falls below 10% of the post-issue paid-up equity capital on a fully diluted basis, the investment shall still be treated as FDI. This is explained in Rule 2(r) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.16 of FDI Policy dated 15-10-2020.
Foreign investment
Foreign investment means any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP. It is important to note that even if the investment is made by a resident Indian citizen, it will be counted as foreign investment if a declaration is made as per the provisions of the Companies Act, 2013 about a beneficial interest being held by a person resident outside India. Furthermore, a person resident outside India may hold foreign investment either as FDI or as Foreign Portfolio Investment (FPI) in any particular Indian company. These definitions are stated in Rule 2(s) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.17 of FDI Policy dated 15-10-2020.
It is important to note that LLPs are a relatively new form of business structure in India, and the rules and regulations around FDI in LLPs may be subject to change. Therefore, it is always advisable to consult a CA firm in Gurgaon or legal expert before making any investment decisions in LLPs in India.
Nitin Bhatia is an author and certified chartered accountant, renowned as the leading CA in Gurgaon, where he currently practices in the Delhi/NCR region. Over the years, he has developed significant expertise in International Taxation, Transfer Pricing, Expatriate Taxation, Corporate Taxation, Domestic Taxation, and litigation matters. Nitin Bhatia’s vast experience and dedication to his work have established him as a leading figure in the field of taxation, and he continues to provide exceptional services to his clients.
