GOVERNMENT APPROVES CONDITIONAL FDI IN LIMITED LIABILITY PARTNERSHIPS

I N B R I E F : On May 20, 2011, the Government of India reviewed the extant policy on FDI and decided to permit FDI in LLP firms, subject to specified conditions. The LLP route though will still remain close to the foreign institutional investors (Flls) and foreign venture capital investors (FVCIs). They will also not be permitted to avail external commercial borrowings (ECBs). The changes made are to come into immediate effect and will be incorporated in the next Circular on Consolidated FDI Policy to be issued on 30-9-2011.

BACKGROUND The government has vide an amendment to the Consolidated Foreign Direct Investment (hereinafter FDI) Policy 2011 provided for FDI to be allowed in a Limited Liability Partnership (hereinafter LLP), through the Government approval route, in those sectors or activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions. The same though has not been allowed where the LLP is operating in agricultural/plantation activity, print media or real estate business. The LLPs receiving investment in the said form will not however be eligible to make any downstream investments. Certain conditions though have been placed in relation to the funding, ownership and management of LLPS.

FUNDING OF LLPS An Indian company, having FDI, will be permitted to make downstream investment in LLPs only if both the companies, as well as the LLP are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions. Also, 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. Further, Foreign Institutional Investors (Flls) 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.)

OWNERSHIP AND MANAGEMENT OF LLPS 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 Act, 1999. In case the LLP has a body corporate as a designated partner, 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. In any case, the designated partners will be responsible for compliance with the conditions and liable for all penalties imposed on the LLP for their contravention.

CONVERSION OF COMPANY WITH FDI INTO LLP Conversion of a company with FDI into an LLP will be allowed only if the all the stipulations are met and the approval of Foreign Investment Promotion Board (FIPB) or government.