Decoding FDI in LLP

18 May 2018 • Simratjeet Kaur

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18 May 2018 • Simratjeet Kaur

Updated by Srajan Garg as on November 09, 2020

The mother idea behind introducing a business vehicle of Limited Liability Partnership (LLP) by the Government of India was to provide a hybrid structure which combines pros of a company and negates cons of a partnership firm.

Does that mean that LLP is the best option over a company or a partnership firm?

Well, an LLP agreement which is the core foundation of an LLP offers more operational flexibility in structuring and managing an LLP in comparison to a private company, bound by the memorandum and articles of association. At the same time a company provides a corporate veil to its directors which is not the case with an LLP.

Purpose behind promoting FDI in LLP is to provide other alternate structure as an option.

What are the laws and regulations governing an LLP?

In case of FDI, the cardinal Act governing an LLP, the Limited Liability Partnership Act, 2008 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 are to be abided in harmony.

Who can invest in LLP in India?

A person resident outside India may invest either by way of capital contribution or by way of acquisition or transfer of profit shares of an LLP. However, the following persons are not eligible:

  1. citizen of Bangladesh and Pakistan

  2. an entity incorporated in Bangladesh and Pakistan

  3. Foreign Portfolio Investor (FPI)

  4. Foreign Venture Capital Investor (FVCI)

What mandatory conditions to comply?

  1. LLP must be operating in sectors or activities where foreign investment up to 100% is permitted under automatic route and there are no FDI linked performance conditions

  2. Profit share shall mean reinvestment of earning

  3. Compliance of Limited Liability Partnership Act, 2008

  4. Conditions specified such as mode of payment or maturity proceeds etc. by Reserve Bank of India (RBI).

What is the prescribed method of valuation of Capital contribution?

Investment in LLP shall not be less than the fair price calculated on internationally accepted norms or adopted as per market practice such as Discounted Free Cash Flow Method (DCF), Net Asset Value Method (NAV), and Earning Capitalization Approach.

All the above methods can be used to appropriately value the capital contribution to reach a fair valuation.

Who can provide the Valuation Certificate?

Valuation certificate shall be given by Chartered Accountant or by a practising Cost Accountant or by an approved valuer from the panel maintained by Central Government.

What are the permitted mode of payment towards capital contribution?

  1. Payment by an investor towards capital contribution of an LLP shall be made by way of an inward remittance through banking channel or out of an funds held in NRE account or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016

  2. Only cash through inward remittance

  3. Non-cash/ intangible contribution only with prior approval of Government of India.

What are the important reporting obligations prescribed by RBI?

<span “color=#2554C7”>Sr No. <span “color=#2554C7”> Form <span “color=#2554C7”>Particulars <span “color=#2554C7”>Timeline
<span “color=#2554C7”>1. <span “color=#2554C7”>LLP (I) <span “color=#2554C7”>

To report receipt of capital contribution and acquisition of profit shares

 

<span “color=#2554C7”>Within 30 days of receipt of the amount of contribution
<span “color=#2554C7”>2. <span “color=#2554C7”>LLP (II) <span “color=#2554C7”>

To report disinvestment/ transfer of capital contribution or profit share between resident and a non-resident and vice-versa

 

<span “color=#2554C7”>Within 60 days of receipt of funds
<span “color=#2554C7”>3. <span “color=#2554C7”>FLA
(annual reporting)
<span “color=#2554C7”>

Every LLP has to file Foreign Liabilities and Assets Return (FLA) if it has outstanding Foreign Direct Investment or Overseas Direct Investment in its Balance sheet

 

<span “color=#2554C7”>Before 15th July of every year

Can a LLP be converted into a Company and Vice-versa?

Ministry of Corporate Affairs (MCA) in the year 2016 has allowed the conversion of a LLP into a company. Further FEMA regulations also provides few conditions for a Company/LLP having foreign investment to be converted into LLP/Company under automatic route, if both the conditions are complied with:

  • ➢The Company/LLP is engaged in a sector where 100% foreign investment is permitted under automatic route and;

  • ➢There are no FDI linked performance conditions prescribed.

What is Downstream Investment and is it permitted in LLP?

The concept of downstream investment is earlier allowed only for Companies and not for LLP. But among other reforms, how can downstream investments be left behind? When one Indian Company/LLP which has already received Foreign Direct Investment (FDI) invests in other Indian Company/LLP, it is termed as downstream investment.

Now, the question arises whether downstream investment be made in LLP?

The answer to which is yes, downstream investment under automatic route can be made by such LLPs in a company or another LLP operating in sectors in which 100% foreign investment is permitted through automatic route. Consequently, conditions applicable in case of downstream investments by companies have accordingly been extended to downstream investments by LLPs.

Why taxation of LLP is a deterrent?

In spite of all these amendments w.r.t FDI in LLP, taxation plays a very crucial aspect. In India the LLP’s are taxed at flat 30% whereas companies are taxed at 25%. There is a big gap and we fail to understand why the Government decided a differential taxation.

Conclusion:

According to the data available in the Annual Report 2019-2020 of Reserve Bank of India (RBI) Singapore and Mauritius are the top two countries which brought highest FDI in India. Further Manufacturing, Communication Services and retail & Wholesale Trade has been the sectors which received most of the FDI.

  • The Intent and Objectives of the FDI Policy clearly states that: “It is the policy of the Government of India to attract and promote productive FDI in activities which significantly contribute to industrialization and socio-economic development. FDI supplements domestic capital and technology.”

  • If the Government really wants to see the results of liberalising FDI norms in LLP, it should consider streamlining the tax rates and bring it at par with the companies.

5 comments

  1. Hey Team,

    Just wanted to know that whether a valuation certificate is mandatory with respect to the capital contribution received from a foreign individual partner of the LLP, the LLP completed 2 months from its inception and no revenue is being generated. If yes, then who shall issue the valuation certificate PCA, Registered Valuer or a merchant banker and what justification will be there in the report. If possible kindly share the contact details of such valuer for the same.

    1. As per Foreign Exchange Management (Non-debt Instruments) Rules, 2019: Investment in a LLP, by a person resident outside India or an entity incorporated outside India, either by way of capital contribution or by way of acquisition or transfer of profit shares, should not be less than the fair price worked out as per any valuation norm which is internationally accepted or adopted as per market practice (i.e. “fair price of capital contribution or profit share of a LLP”) and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practising Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

  2. Conversion of LLP into Private Limited is prescribed under Chapter XXl – Companies Authorized to register under under this Act of Companies Act, 2013. Kindly inform me if I am wrong.

    1. Yes, as per Section 366(1) of Chapter XXI of the Companies Act, 2013 as mentioned by you, the word “company” includes LLP as well .i.e. LLP is authorised to register under the Companies Act, 2013.

      Further, LLP shall also comply with Chapter XXI Part-I of the Companies Act 2013 and Companies (Authorised to Register) Rules, 2014.

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