Foreign Investment in a limited liability partnership (“LLP”) by a person resident outside India, as a subject is regulated under Foreign Exchange Management Act, 1999 (“FEMA”). Considering that LLP has become an internationally accepted business vehicle since enactment of Limited Liability Partnership Act, 2008, foreign investment through LLP is considered as one of the viable options, since it provides benefits of corporate structure and flexibility of partnership form.
Foreign Direct Investment (‘FDI’) in LLP was first permitted in Indian Foreign Investment Regulations in 2011. However, such FDI was circumscribed with many restrictions such as needing prior Government approval for investment into LLP or conversion of an existing FDI invested company to LLP, prohibition on downstream investments or on availing External Commercial Borrowings (ECBs or Foreign Loans), requirement to have a resident designated partner, etc.
In November, 2015, the Government vide Press Note 12, relaxed regulations to bring FDI in LLP under the automatic route in sectors where 100% FDI is allowed through the automatic route and where there are no FDI-linked performance conditions. Further, it also permitted downstream investments by a LLP having FDI into another Company / LLP, in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.
Following this, the Reserve Bank of India issued Notification No. 362/2016-RB on 15 February 2016, amending the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20’). This gave a statutory framework under the Foreign Exchange Management Act, 1999 (FEMA) to these Government relaxations.
Investment in equity capital of a LLP is in the nature of capital account transaction under the FEMA. Any citizen / entity incorporated in a country which shares land border with India is allowed to invest only if approval from Government of India is obtained, even if investment is made under an automatic route.
Investment as above can be made in a LLP in the form of capital contribution or transfer of profit share.
Investment in a LLP can be classified in following two baskets:
- Investment on a non-repatriable basis by NRI / PIO;
- Investment on a repatriation basis by a person resident outside India.
Let’s understand above provisions in details:
- Investment on a non-repatriable basis by NRI / PIO:
Any foreign investment in a LLP, if made by NRI / PIO on a non-repatriable basis, it is considered as akin to domestic investment and accordingly, such investment would no longer hold colour of a foreign investment. Accordingly, in such cases, FEMA provisions would not apply so far as pricing norms and limit restrictions are concerned.
Also, if say a resident Indian who was holding capital contribution in a LLP, later on shifts his / her place of resident and becomes NRI, such a capital contribution would also be considered as investment on a non-repatriable basis as original investment was made domestically.
Such investment can be transferred without any FEMA implications to another resident Indian or person resident outside India on a non-repatriable basis. It can also be transferred by way of gift to another NRI / OCI, subject to same being held on a non-repatriation basis. Such investment can be transferred to another non- resident on a repatriation basis, subject to sectoral cap, pricing guidelines and compliance requirements.
However, sale proceed of such interest in LLP needs to be transferred to NRO account only and can only be repatriable under USD 1 million scheme. Remittance of salary, interest on capital can be made on a regular basis without any conditions.
- Investment on a repatriation basis by person resident outside India:
Any foreign investment in a LLP by a person resident outside India on a repatriable basis is considered as foreign direct investment (“FDI”). Eligible investors for this purpose include individuals who are person resident outside India, including NRI, PIO and legal entities such as company, LLP, partnership firm and any legal entity form recognised, incorporated in a country outside India, except Foreign Portfolio Investor (“FPI”) or a Foreign Venture Capital Investor (“FVCI”). Further, contribution to the capital of a LLP is allowed only in operating sectors or activities where foreign investment upto 100% is permitted under automatic route and there are no FDI linked performance conditions.
Investment on a repatriation basis would mean an investment, the sale/ maturity proceeds of which are (net of taxes) eligible to be repatriated outside India.
A company having foreign investment, engaged in a sector where foreign investment up to 100 percent is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into a LLP under the automatic route.
Particulars | Pricing norms |
Acquisition of interest in capital contribution / profit share from i. a person resident in India; or ii. NRI / OCI, holding on a non-repatriable basis or Admission into LLP as partner by a person resident outside India | Valuation must not be less than, the fair price of capital contribution or profit share of a LLP, worked out as per any valuation norm which is internationally accepted or adopted as per market practice 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. |
Acquisition of interest in capital contribution / profit share from i. A person resident outside India; or ii. NRI / OCI, holding such interest on a repatriable basis | Pricing norms are not applicable, as transfer taking place outside India |
Transfer of interest in capital contribution / profit share to i. A person resident in India; or ii. NRI / OCI, acquiring such interest on a non-repatriable basis | Valuation must not be more than, the fair price of capital contribution or profit share of a LLP, worked out as per any valuation norm which is internationally accepted or adopted as per market practice 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. |
Transfer of equity instruments to i. A person resident outside India; or ii. NRI / OCI, holding such interest on a repatriable basis | Pricing norms are not applicable, as transfer taking place outside India |
Further, considering that any foreign investment into LLP in the form of capital contribution is not foreign direct investment, LLPs are not allowed to raise External commercial borrowings.
Above are the provisions under FEMA for any listed company issuing equity instruments to a non-resident whether on a repatriable or non-repatriable basis.
For more detailed discussion on the above subject, please do not hesitate to connect at contact@devadhaantu.in