Foreign investments to be allowed in LLP companies, but with riders

The government is planning key changes in the consolidated foreign direct investment policy. It may allow FDI in limited liability partnership (LLP) firms but only in sectors where 100 per cent FDI is currently allowed through the automatic route.

The changes in the consolidated policy, to be announced by the end of this month, also propose to induct a fresh clause that only equity shares, fully, compulsorily and mandatorily convertible debentures and preference shares with no built-in option of any type would be considered eligible instruments for FDI.

The clarity was required as many companies were using debentures and preference shares issued, which had various options or were partly convertible as equity, for calculating FDI caps.

Equity instruments issued or transferred to non-residents having a built-in option or supported by options sold by third parties would lose their equity character and such instruments would have to comply with external commercial borrowing (ECB) guidelines.

Promoters of companies registered in India, having raised ECBs, will be allowed to pledge shares of borrowing companies or associate resident companies for securing loans raised through ECBs.

The proposed guidelines for FDI in LLPs have several riders: it will not be allowed in agriculture, plantation and real estate sectors.

An Indian company having FDI will be permitted to make downstream investment in an LLP if both the company as well as the LLP are operating in sectors where 100 per cent FDI is allowed through the automatic route.

Foreign capital participation in the capital structure of the LLP will be allowed only by way of cash consideration, received by an inward remittance through normal banking channels or by debit to an FCNR account maintained by an authorised dealer.

There are other restrictions too. Investment in LLPs by foreign institutional investors and foreign venture capital investors will not be permitted. They will not be allowed to raise ECBs either. Conversion of a company to LLP with FDI will be allowed only if various stipulations are met, and after approval by the FIPB.

On the issue of promoters raising ECBs being allowed to pledge shares of the borrowing company to secure the loan, there will be conditions. The promoter will have to get a no-objection certificate from a bank that is an authorised dealer.

The authorised dealer shall issue a no-objection certificate for such a pledge only after having satisfied itself the ECB is in line with the Fema regulations for ECBs. It will also scrutinise whether the loan agreement has been signed by both the lender and the borrower, among others.