Proposal for FDI in Limited Liability Partnerships

Limited liability partnerships (LLPs), which are a relatively novel concept to India, have been recognised since April 1, 2009. LLPs are different from general partnerships in several ways, but there are two prominent differences. First, partners in LLPs carry limited liability for acts of the firm. Second, the partnership firm possesses separate legal personality and to that extent it has distinct existence from its owners/partners. In that sense, an LLP is a hybrid entity. While it has the key features of a limited liability company, it has the flexibility of management and operations, small size and tax status similar to a general partnership.

Although LLPs have been in existence for over a year now, the FDI policy has not provided for separate treatment for foreign investment in LLPs. The Consolidated FDI Circular issued on April 1, 2010 permits non-resident Indians and persons of Indian origin to invest in partnership firms and proprietary concerns. Under relevant RBI guidelines, other foreign investors are required to obtain prior approval of the RBI to invest in partnership firms. The absence of specific treatment of LLPs in the FDI policy makes it unsuitable to attract foreign investment in those entities.

In this background, the Government yesterday issued a discussion paper on foreign investment in LLPs. Although the paper does not set out any specific position, it seeks views from the public on various aspects starting from whether FDI should be permitted at all in LLPs to what factors are to be considered while permitting FDI (such as issues of ownership, control, downstream investments, valuation, and the like).

The LLP as a business entity is yet to drum up the impetus it was expected to generate when the LLP Act was passed and later notified in 2009. It appears that the number of LLPs being registered is growing at a slow pace, and the present effort is an additional step to confer benefits on that entity so as to attract more entrepreneurs and professionals to utilise it as a vehicle to carry on their business or profession.

At a more general level, the practice of the Department of Industrial Policy and Promotion (DIPP) in issuing discussion papers on various topics is welcome. It makes the policy-making process transparent and inclusive. The use of policy arguments, the comparative study of position in other similarly situated countries, and in some cases the reference to empirical evidence certainly enhances the quality of policy-making. It is hoped that these discussion papers will be taken to their logical conclusion with a definition pronouncement made one way or the other. Failing this, there is a risk that it will only cause greater ambiguity and confusion in the minds of foreign investors and the Indian recipients of such investment.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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