Volume 3,3Issue

Volume Issue 1 1

Business Alert
May 17, 2011

FDI in Limited Liability Partnership firms

In the increasingly litigious market
environment, the prospect of being a
member of a partnership firm with
unlimited liability is, to say the least,
risky and unattractive. This led to the
enactment of the Limited Liability
Partnership (LLP) Act, which became
effective from March 31, 2009. With the
passage of this Act, a new hybrid entity,
an LLP, incorporating the features of a
body corporate and a partnership, can
now be formed for the purpose of
undertaking business in India.
Recently the Government gave a nod to
changes in Foreign Direct Investment
(FDI) policy, allowing FDI in LLPs. This
alert summarizes this welcome
announcement.
FDI Policy for LLPs
The Government had in the past issued
a Discussion Paper inviting comments
from stakeholders on aspects such as:
1. Whether FDI should be allowed only
in LLPs engaged in activities falling
under automatic route
2. Should only cash contribution be
allowed
3. Allowability of downstream
investment,
4. Raising ECBs
The Cabinet Committee on Economic
Affairs (CCEA) has finally approved the
FDI policy for LLP’s. The FDI in LLPs will
be implemented in a calibrated manner,
beginning with the ‘open’ sectors where
monitoring is not required.
Salient features of the approved policy,
as contained in the Government press
release, are as follows:
 FDI in LLPs to be allowed up to 100%
in sectors/activities that are
currently eligible for 100% FDI under
automatic route and which do not
have any FDI-linked performance
conditions.
 LLPs with FDI will not be allowed to
operate in agricultural/plantation
activity, print media or real estate
business.
 Prior approval from the Foreign
Investment Promotion Board (FIPB)
will be required for FDI in a LLP.
 Downstream investment by LLPs
with FDI will not be allowed.
However, an Indian company with
foreign investments can make
downstream investment into a LLP
with prior FIPB approval, provided
both the Indian Company and the
LLP are engaged in activities eligible
for 100% FDI under automatic route
and which do not have any FDI-
linked performance conditions.
 Only cash contribution will be
permissible for FDI in LLPs.
 Foreign Institutional Investors (FIIs)
and Foreign Venture Capital
Investors (FVCIs) will not be
permitted to invest in LLPs. Further

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Volume 3 Issue 1 Business Alert– SKP Crossborder Consulting Pvt Ltd

LLPs will also not be permitted to avail External
Commercial Borrowings (ECBs).
 If designated partner is a body corporate, it can
only be an Indian Company (not trust or other
entity form).
Key implications and aspects requiring clarity
 Since FDI in LLP’s will not be permitted in
activities that have FDI-linked performance
conditions, would sectors which have conditions
attached for FDI, such as construction
development, not be able to conduct business as
LLPs with FDI?
 Whether this restriction would also cover a
sector like wholesale trading, where one of the
conditions under operational guidelines is that
wholesale trading to group companies should not
exceed 25% of the total turnover of the
wholesale venture?
 Are the minimum capitalization norms prescribed
for FDI in Non-banking Financial Companies
(NBFCs), a “performance” condition, thereby
restricting FDI in LLPs engaged in the 18
permissible NBFC activities?
 The press release containing the policy
announcement does not mention any pricing
norms for FDI in LLPs. In case of a company, the
prevailing policy and FEMA regulations stipulate
that the issue price of shares issued to a foreign
investor, should not be lower than the fair value
determined in accordance with DCF valuation
methodology, in case of an unlisted company, and
valuation in terms of SEBI (ICDR) Regulations, for
listed companies.
 In case of companies, the prevailing FDI policy
regime permits FDI by way of in-kind contributions
(i.e. contribution of capital equipment,
capitalization of pre-incorporation expenses) with
prior approval of the FIPB. However, for LLPs the
Government proposes to restrict FDI only by way of
cash contributions to the capital.
 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
Non-resident Entity (NRE) or Foreign Currency Non-
resident (FCNR) account of the person concerned,
maintained with an authorized dealer/authorized
bank. There is no clarity on whether capital
contribution through Non-resident Ordinary (NRO )
account can be done.
Approval of Foreign Investments in LLP is a welcome
step by the CCEA. However without clarifications on
these points, there remain tremendous doubts on its
actual functioning.

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action that may affect you or your business, you should
consult a qualified professional advisor.
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