Foreign Direct Investment in an LLP (Limited Liability Partnership)

The Reserve Bank of India (RBI) has allowed foreign direct investment in limited liability partnerships. The LLP Act 2008 allowed foreign nationals and foreign LLPs (Limited Liability Partnerships) to become a partner in LLP but as per the Foreign Exchange Management Act and regulations and rules, foreign investment in LLP was not allowed, therefore it was necessary to prescribe a regulatory policy for allowing Foreign Direct Investment (FDI). FDI has now been allowed in Limited Liability Partnerships as well.

Limited Liability Partnerships (LLP) introduced in India through the Limited Liability Partnership Act 2008 has become a popular form of business entity in India owing to its simplified procedures for registration and maintenance. LLPs allow many of the small and medium-sized to enjoy a separate legal entity, improve transferability and provide its promoters with limited liability protection. Therefore, there is tremendous interest among small business owners and service providers to register their business as an LLP

Foreign Direct Investment in an LLP (Limited Liability Partnership)

Overview of FDI in LLP

The concept of LLP, introduced in India through the Limited Liability Partnership Act, 2008 has become a popular form of business entity in India owing to its simplified procedures for registration and maintenance. LLPs allow many of the small and medium-sized to enjoy a separate legal entity, improve transferability and provide its promoters with limited liability protection. Therefore, there is tremendous interest among small business owners and service providers to register their business as an LLP.

With the Indian population currently spread across the globe and growing interest among foreigners to get a foothold into the Indian market, there is a lot of interest for Foreign Direct Investment (FDI) in LLP. Similar to FDI in Private Limited Company, it determines the policy for FDI in LLP by the yearly FDI Circular issued by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry.

Changes to FDI Norms pertaining to LLP in November 2015

Post changes to FDI regulations on 10th, November 2015, where it allows 100% FDI in LLP under the automatic route. The businesses operating in sectors/activities can get 100% FDI, through the automatic route, and there are no FDI-linked performance conditions. Further, the terms ‘ownership and ‘control’ and ‘internal accruals’ with reference to the definitions of LLPs – allowing for smooth FDI in LLP.

In addition, LLPs can also make downstream investment in another company or LLP in sectors in which it permits 100% FDI under the automatic route, and there are no FDI-linked performance conditions.

Routes for Foreign Direct Investment in an LLP

The RBI has permitted two routes for Foreign Direct Investment in India. The routes are as follows:

  • Automatic Route
  • Approval/ Government Route

Under the Automatic route, there is no requirement of permission from the RBI for foreign direct investment. If an entity is seeking foreign investment under this, then no approval is required. For the Approval/ Government route, prior permission is required for Foreign Direct investment. There are specific sectors in which Foreign Direct Investment is not allowed. 

The limited liability partnership act allows a foreign entity or foreign partnership to be a member of the LLP. This is not permitted due to the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Given this, the government brought out a change to allow foreign direct investment in a partnership. Before this move, the RBI permitted FDI only for companies and capitalists. A relaxation was brought out to allow Foreign Direct Investment in an LLP.  This move was considered by the RBI to improve the economy and status played by LLPs in the foreign market

Criteria for Foreign Direct Investment in an LLP (FDI-LLP)

The RBI has brought out specific criteria for Foreign Direct Investment in an LLP. For this, there are eligible investors and the forms of funds that can be invested in an LLP. For this purpose, the residence status of an individual or entity is taken into consideration. The following are the investors who are allowed to invest in an LLP.

  • A resident of outside India.
  • A business/ company/ entity incorporated outside India.

LLPS not eligible for accepting FDI

LLP engaged in the following sectors/activities shall not be eligible to accept FDI:

  • Sectors eligible to accept 100% FDI under automatic route but which are subject to FDI-linked performance related conditions (for example minimum capitalization norms applicable to ‘Non-Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’, etc.)
  • Sectors eligible to accept less than 100% FDI under automatic route;
  • Sectors eligible to accept FDI under Government Approval route
  • Agricultural/plantation activity and print media
  • Sectors not eligible to accept FDI at all which are as follows:
  • Business of chit fund, or
  • Nidhi company, or
  • Agricultural or plantation activities, or
  • Real estate business, or construction of farm houses, or
  • (v) Trading in Transferable Development Rights (TDRs).
  • Lottery Business including Government /private lottery, online lotteries, etc.
  • Gambling and Betting including casinos etc.
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Eligible investment which is allowed for Foreign Direct Investment in an LLP

Under the Automatic Route, 100% investment is permitted for an LLP. LLPs do not require prior permission from the RBI for foreign investment. Hence foreign investment that is required for an LLP is carried out by the procedure adopted in the automatic route. There is no requirement for the Foreign Direct Investment in an LLP to be linked to any performance of the business of the LLP. This means that FDI invested in an LLP does not depend on any condition, such as the performance of the LLP. There are no other requirements for FDI in an LLP.

Form of Payment – Foreign Direct Investment in an LLP

Payment by an investor towards capital contribution in LLPs shall be made:

  • by way of inward remittance through banking channels; or
  • by debit to NRE / FCNR(B) account of the person concerned, maintained with an AD Category – I bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Compliance with Reporting of FDI in an LLP

  • Annual Return on Foreign Liabilities and Assets: LLP which has received investment by way of capital contribution in the previous year(s) including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year.
  • Form FDI- LLP (I):A Limited Liability Partnerships (LLPs) receiving amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment-LLP (I) within 30 days from the date of receipt of the amount of consideration. The form shall be accompanied by: (a) copy/ies of the FIRC/s evidencing the receipt of the remittance. (b) KYC report in respect of the foreign investor in the format specified in.
  • Form FDI- LLP (II):The LLPs shall report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) within 60 days from the date of receipt of funds in Form Foreign Direct Investment-LLP(II).

FAQs

What is an LLP?

A Limited Liability Partnership (LLP) is a legal business structure that combines features of both a partnership and a corporation. It provides limited liability to its partners, meaning their personal assets are protected from business liabilities.

Can Foreign Direct Investment (FDI) be made in an LLP?

The permissibility of FDI in an LLP depends on the regulatory framework of the specific country. In some jurisdictions, LLPs may allow foreign investment, while in others, there may be restrictions or specific conditions.

Are there any restrictions on the types of businesses that can attract FDI in an LLP?

Restrictions on the types of businesses that can attract FDI in an LLP may vary. Some countries impose restrictions on sectors such as defense, aviation, and retail. It’s essential to check the specific regulations in the relevant jurisdiction.

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