Complete Guide on Foreign Direct Investment in an LLP (Limited Liability Partnership)

In a big benefit move, the Reserve Bank of India (RBI) has allowed foreign direct investment in limited liability partnerships. The LLP Act 2008 allowed foreign nationals and foreign LLPs (Limited Liability Partnerships) to become a partner in LLP but as per the Foreign Exchange Management Act and regulations and rules, foreign investment in LLP was not allowed, therefore it was necessary to prescribe a regulatory policy for allowing Foreign Direct Investment (FDI). FDI has now been allowed in Limited Liability Partnerships as well.

Overview of FDI in LLP

The concept of LLP, introduced in India through the Limited Liability Partnership Act, 2008 has become a popular form of business entity in India owing to its simplified procedures for registration and maintenance. LLPs allow many of the small and medium-sized to enjoy a separate legal entity, improve transferability and provide its promoters with limited liability protection. Therefore, there is tremendous interest among small business owners and service providers to register their business as an LLP.

With the Indian population currently spread across the globe and growing interest among foreigners to get a foothold into the Indian market, there is a lot of interest for Foreign Direct Investment (FDI) in LLP. Similar to FDI in Private Limited Company, 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.

Routes for Foreign Direct Investment in an LLP

The RBI has permitted two routes for Foreign Direct Investment in India. The routes are as follows:

• Automatic Route
• Approval/ Government Route

Under the Automatic route, there is no requirement of permission from the RBI for foreign direct investment. If an entity is seeking foreign investment under this, then no approval is required. For the Approval/ Government route, prior permission is required for Foreign Direct investment. There are specific sectors in which Foreign Direct Investment is not allowed. 

The limited liability partnership act allows a foreign entity or foreign partnership to be a member of the LLP. This is not permitted due to the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Given this, the government brought out a change to allow foreign direct investment in a partnership. Before this move, the RBI permitted FDI only for companies and capitalists. A relaxation was brought out to allow Foreign Direct Investment in an LLP.  This move was considered by the RBI to improve the economy and status played by LLPs in the foreign market.

Criteria for Foreign Direct Investment in an LLP (FDI-LLP)

The RBI has brought out specific criteria for Foreign Direct Investment in an LLP. For this, there are eligible investors and the forms of funds that can be invested in an LLP. For this purpose, the residence status of an individual or entity is taken into consideration. The following are the investors who are allowed to invest in an LLP.

• A resident of outside India.
• A business/ company/ entity incorporated outside India.

LLPS not eligible for accepting FDI:

LLP engaged in the following sectors/activities shall not be eligible to accept FDI:

• Sectors eligible to accept 100% FDI under automatic route but which are subject to FDI-linked performance related conditions (for example minimum capitalization norms applicable to ‘Non-Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’, etc.)
• Sectors eligible to accept less than 100% FDI under automatic route;
• Sectors eligible to accept FDI under Government Approval route
• Agricultural/plantation activity and print media
• Sectors not eligible to accept FDI at all which are as follows:
• Business of chit fund, or
• Nidhi company, or
• Agricultural or plantation activities, or
• Real estate business, or construction of farm houses, or
• (v) Trading in Transferable Development Rights (TDRs).
• Lottery Business including Government /private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
• Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Eligible investment which is allowed for Foreign Direct Investment in an LLP

Under the Automatic Route, 100% investment is permitted for an LLP. LLPs do not require prior permission from the RBI for foreign investment. Hence foreign investment that is required for an LLP is carried out by the procedure adopted in the automatic route. There is no requirement for the Foreign Direct Investment in an LLP to be linked to any performance of the business of the LLP. This means that FDI invested in an LLP does not depend on any condition, such as the performance of the LLP. There are no other requirements for FDI in an LLP.

Form of Payment – Foreign Direct Investment in an LLP

Payment by an investor towards capital contribution in LLPs shall be made:

• by way of inward remittance through banking channels; or
• by debit to NRE / FCNR(B) account of the person concerned, maintained with an AD Category – I bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Compliance with Reporting of FDI in an LLP

Certain compliance measures have to be taken by the LLP receiving foreign investment as follows:

• 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 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: (a) copy/ies of the FIRC/s evidencing the receipt of the remittance. (b) KYC report in respect of the foreign investor in the format specified in.
• 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).

Conclusion

Although there are some restrictions and shortcomings in FDI in LLPs, but still it is a growing sector for the investors to invest since it gives them the free hand to withdraw the money and to re-patriate the same into their country which is otherwise not possible in Proprietorships and Partnerships. Initially, Foreign Direct Investment was only allowed for companies in India. To improve the funding requirements for an LLP, the RBI relaxed the norms for Foreign Direct Investment in an LLP. However, there are specific criteria to be followed by the LLP receiving Foreign Investment.  FDI in an LLP is only permitted through the automatic route. In this way, the LLP can receive 100% investment. The investment made must not have any conditions related to performance linked to the LLP.  When it comes to the reporting criteria, the LLP must follow effective protocols. By allowing LLPs to have access to FDI, the RBI has improved the funding requirement of an LLP and also enhances the amount of foreign investment in the country. Through this initiative, foreign investors have an alternate route to invest in India.