FDI norms for LLPs may be eased

The government has indicated that it will opt for gradual liberalisation of foreign direct investment norms for Limited Liability Partnerships (LLPs).

In a consultation paper issued today, the department of industrial policy and promotion sought comments on whether FDI should be restricted to LLPs operating in sectors without any investment caps, conditionalities or entry route restrictions.

In addition, the 12-page paper indicated that foreign investment might not be permitted in sectors such as real estate, plantations and agriculture.

The other question on which stakeholders’ comments has been sought is the FDI ceiling and whether having an Indian partner should be mandated. The mode of entry — automatic route by informing the Reserve bank of India or the approval route – is the other area where public comments have been sought.

Further, the government is exploring if LLPs should be barred from making downstream investments and if foreign-owned or -controlled Indian companies should be barred from investing downstream in LLPs. Based on the feedback, the government policy will address the issue of investment by foreign institutional investors and venture funds in LLPs.

LLPs, which constitute a corporate structure between that of a partnership and a company, face various structural, legal and constitutional ambiguities and might act as a hurdle in allowing FDI in this sector.

For instance, there is lack of clarity on the definition of a ‘person resident in India’. The Foreign Exchange Management Regulations or Fema provide that, persons resident outside India are barred from investing in firms and proprietary concerns, unless approved by RBI. There are currently no specific provisions addressing LLPs.

There are also ambiguities on the rights attached to the partnership interest — one being an ownership right and the other the right of management and control.

The first provides the partner with a right to share the profits and losses, while the second allows a partner to participate in the management and have voting rights.

“However, any transfer of the rights of a partner to share the profits and losses of the LLP, does not, by itself, affect the right of management and control. There appears to be no requirement for an individual/ body corporate, enjoying economic benefits, to be a legal partner in an LLP. Such flexibility in the LLP Act can result in a variety of formulations being available to partners/ LLP,” the document said.

While foreign ownership can be determined on the basis of profit-sharing percentages, ownership can also be determined in accordance with the capital sharing percentage of the foreign investors.

There are also grey areas related to valuation and control of LLPs, apart from contribution of a partner by way of tangible, movable or immovable property or benefits to LLPs. Non-cash considerations are dealt with differently by the FDI norms at present.

There are also issues related to monitoring FDI into LLPs that are to be addressed by the government, the paper noted.

Given the ambiguities, LLPs have not been popular, with only 914 such entities registered in the country since 2001.