The current inflow of foreign direct investment (FDI) to the country may rise soon as the Cabinet Committee on Economic Affairs (CCEA) has allowed FDI in limited liability partnership (LLP) firms, according to a government statement released on May 11.
With this approval, the LLPs will have the opportunity to choose among domestic and foreign investors, thus creating a more competitive environment. The initiative is also expected to encourage more partner firms to get converted to LLPs.
Although the new initiative may usher in more foreign funding, it will be implemented only in a calibrated manner and only in sectors like mining, power, roads & highways, manufacturing and pharmaceuticals where 100 per cent FDI is allowed for companies through the automatic route and there are no FDI-linked performance-related conditions. However, LLPs involved in agricultural and plantation activities, print media or real estate business will not be allowed to have FDI.
LLPs will not be permitted to avail of external commercial borrowings; neither can they make any downstream investment. The Cabinet has further decided that foreign institutional investors and foreign venture capital investors will not be permitted to invest in LLPs. These restrictions are effective measures on the government’s part to prevent LLPs from turning into new investment vehicles.
LLP happens to be a relatively new hybrid business structure, consisting of the features of a partnership firm and a corporate entity. In other words, an LLP is a combine of a company’s limited liability and the flexibility of a partnership firm. The structure was originally put in place from April, 2009, to encourage small businesses to undertake larger ventures as the liability of the partners is limited. There are approximately 4,679 LLPs registered with the Ministry of Corporate Affairs, as on May 2.
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