FinMin wants review of FDI policy for LLPs, DIPP disagrees

Proposes automatic approval for small investments

The finance ministry has asked the Department of Industrial Policy & Promotion (DIPP) to review the foreign direct investment (FDI) policy for limited liability partnerships (LLPs). As foreign investment in all LLPs needs approval of the Foreign Investment Promotion Board (FIPB), the government is flooded with applications from investors proposing to invest barely a few thousand rupees in LLPs.

Finance ministry is proposing that FIPB nod should be required only for investments above a particular limit, say Rs 50 lakh, so that it doesn't have to consider projects bringing negligible FDI. Of about 30 FDI proposals bringing in new investment approved so far, 15 invested only Rs 50 lakh or less. The maximum FDI in LLPs so far is Rs 154 crore from Dubai while the minimum is Rs 30,000 from Switzerland.

"We get many small proposals like for investing only Rs 5,000. That needs to be looked at. If we put proposals below Rs 50 lakh under the automatic route most of the applications will be covered under that," said a finance ministry official who did not wish to be identified. He added some of these proposals did not secure FIPB nod, probably not because of their size but due to other issues.

DIPP raised apprehensions in setting a floor for screening applications arguing that LLPs are not so well regulated like companies and this might put the sectors where such investment is coming at risk.

"The FDI policy in LLP was floated after proper consultations and deliberations with all ministries, especially, the finance ministry. It was well aware of the future implications," a senior DIPP official told Business Standard. The official added the finance ministry should approach RBI in this regard.

FDI in LLP is permitted with prior government approval only in the sectors where 100 per cent FDI is allowed under the automatic route. LLP is viewed as an alternative corporate business vehicle that provides the benefits of the limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.

"When the FDI was allowed in LLPs initially there were some concerns because of its hybrid nature. Definitely time has come to review under which sectors it can be allowed automatically," said Dev Raj Singh, executive director, EY. He, however, pointed out putting a ceiling for automatic approvals across the sectors would not be ideal because there could be concerns in some sensitive areas.

The finance ministry has tried to allay DIPP's fears saying investment in companies in the sectors where LLPs are allowed to get foreign funds was already under automatic route. It argued the regulations regarding LLPs cannot be tightened because that is what differentiates them from companies.

The corporate affairs ministry has been asked to give its views on the matter. The issue may also be discussed in the meeting between the finance ministry and DIPP on May 20.

The Reserve Bank of India (RBI) had notified norms for allowing FDI in LLPs with retrospective effect subject to certain riders in April this year. The central bank did it after almost three years of the Cabinet Committee on Economic Affairs approving it in 2011.