On 11th May, 2011, the Cabinet Committee on Economic Affairs (CCEA) first approved the proposal to amend the FDI policy and allowing Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) firms subject to specified conditions and changes made thereafter.
FDI in a LLP has been implemented in a calibrated manner, beginning with the ‘open’ sectors where monitoring is not required, subject to the following conditions:
- 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.
(FDI-linked performance related conditions means that in sectors, where conditions like minimum capitalisation 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.)
- LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.
- 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.
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.
Foreign Capital participation in the capital structure of the LLP 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 banker. For making non cash/intangible contribution towards the capital of the LLP, permission of Government of India will be required.
Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs).
Government of India is focusing to improve the business environment and ease of doing business in India with a view that the businesses can take advantages of the Limited Liability Partnership such as flexibility in managing the business, the Corporate status of the entity and limited liability as like a Company. Moreover, the Limited Liability Partnerships need not pay the Dividend Distribution Tax (DDT) while distributing the profits to the partners of the Limited Liability Partnership. The current effective rate of Dividend Distribution Tax (DDT) is 20.36%. These advantages will surely make Limited Liability Partnership as a preferred corporate vehicle for business groups from abroad who are interested in establishing a business presence in India. Since several business groups from abroad are already established and operating in India by incorporating as a Limited Liability Company, those businesses can benefit from the advantages of the Limited Liability Partnership by converting their existing company to LLP.