The Reserve Bank of India (RBI) has notified norms for foreign direct investment (FDI) in limited liability partnerships (LLP) with retrospective effect subject to certain conditions.
The government had previously approved FDI in LLPs around three years ago. While retaining major clauses of the move back then, RBI has clarified a few other points. Earlier, only a company incorporated under the Companies Act, 1956 or a Venture Capital Fund was eligible to accept FDI.
RBI said its norms will be effective from May 20, 2011. However, reporting requirement of FDI in LLP shall come into force from the date of issue of instructions by the Reserve Bank in this regard.
The LLP which have received foreign investment in terms of FIPB approval between May 20, 2011 to the date of this circular, shall comply with the reporting requirement in respect of FDI within 30 or 60 days, as applicable, from the date of the latest circular.
RBI said a person resident outside India or an entity incorporated outside India shall be an eligible investor for the purpose of FDI in LLPs. However, this would exclude citizens and entities of Pakistan and Bangladesh besides SEBI registered Foreign Institutional Investor (FII), Foreign Venture Capital Investor (FVCI), Qualified Foreign Investor (QFI) or a foreign portfolio investor as per the new regulations.
LLPs operating in sectors/activities where 100 per cent FDI is allowed under the automatic route of FDI Scheme would be eligible to receive FDI. However, LLPs in agricultural/plantation activity, print media shall not be eligible to accept FDI. Moreover, LLPs in sectors eligible to accept 100 per cent FDI under automatic route but subject to FDI-linked performance related conditions (for example minimum capitalisation norms applicable to NBFCs or real estate, etc) shall also not be eligible to get FDI.
LLPs in sectors with a ceiling of less than 100 per cent FDI under automatic route will also not be allowed to get FDI.
RBI said investment through contribution to the capital of a LLP would be an eligible investment under the scheme and investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.
It added that any FDI in an LLP shall require prior government/FIPB approval and any form of foreign investment in an LLP, direct or indirect (regardless of nature of ownership or control of an Indian company) shall require government/FIPB approval.
FDI in an LLP either by way of capital contribution or by way of acquisition/ transfer of ‘profit shares’, would have to be more than or equal to the fair price.
In case of transfer of capital contribution/profit share from a resident to a non-resident, the transfer shall be for a consideration equal to or more than the fair price of capital contribution/profit share of an LLP. Further, in case of transfer of capital contribution/profit share from a non-resident to a resident, the transfer shall be for a consideration which is less than or equal to the fair price of the capital contribution/profit share of an LLP.
Payment by an eligible investor towards capital contribution/profit share of LLPs will be allowed only by way of cash consideration, RBI said.
The central bank said an Indian company, having foreign investment (direct or indirect, irrespective of percentage of such foreign investment), will be permitted to make downstream investment in an LLP only if both, the company as well as the LLP, are operating in sectors where 100 per cent FDI is allowed under the automatic route and there are no FDI-linked performance related conditions.
Moreover, an LLP with FDI under this scheme will not be eligible to make any downstream investments in any entity in India.
RBI said LLPs shall not be permitted to avail External Commercial Borrowings (ECBs) and conversion of a company with FDI, into an LLP, will be allowed only if other stipulations are met and with the prior approval of FIPB/government.
(Edited by Joby Puthuparampil Johnson)