Government Nod to FDI in LLPs

(The following post is contributed by Rohan Bagai)

The Cabinet Committee on Economic Affairs (CCEA) recently approved foreign direct investment (FDI) in limited liability partnership (LLP) firms whilst setting out a few disclaimers in its press release dated May 11, 2011. This follows from a consultation process initiated last year pursuant to a discussion paper.

As such, an LLP is a crossbreed business structure, which fuses the characteristics of a partnership firm with that of a corporate entity. Besides, it bestows the pluses of a company and elasticity of a partnership.

The LLP model was first introduced in India through the Limited Liability Partnership Act, 2008 (LLP Act) that was notified on March 31, 2009. Later, the LLP Act was amended to clear way for companies and firms to convert into LLPs. As per the Government website for LLPs, as on May 2, 2011, 4,670 LLPs have been registered in India.

According to the cabinet announcement, FDI in LLPs, “will be implemented in a calibrated manner, beginning with the ‘open’ sectors where monitoring is not required, subject to certain stipulations”. In view of the same, FDI in LLPs would be permissible through the Government route i.e. Foreign Investment Promotion Board (FIPB) approval, in those sectors/activities where 100% FDI is allowed.

That said, FDI in LLPs would not be allowed in agricultural/plantation activity, print media and real estate businesses. In addition, such FDI funded LLPs would not be eligible to make any downstream investments or avail external commercial borrowings (ECBs). Other restrictions are that FDI will be allowed only against cash consideration, and that foreign institutional investors (FIIs) and venture capital investors (FVCIs) cannot invest in LLPs.

Interestingly, even foreign investors with existing investments by means of joint ventures and wholly owned subsidiaries can now restructure and convert themselves to LLP as long as they meet the pre-requisites provided for in the said release.

“This approval will benefit the Indian economy by attracting greater FDI, creating employment and bringing in best international practices and latest technologies in the country”, the government acknowledged in its release.

However, given the wide array of restrictions, it is unlikely that a wave of FDI will flow into the sector. But, if the initial experience is smooth, it may provide justification for gradual withdrawal of some of the restrictions that may then make a meaningful impact on the growth of LLPs.

– Rohan Bagai

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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