FDI in LLPs to be freed from seeking government nod

The RBI wants the LLP to furnish the undertaking and the CA’s certificate.

Foreign direct investments in limited liability partnerships would soon be freed from seeking government nod. All that an LLP would need to do is submit an undertaking from its partners and a certificate from a chartered accountant on the extent of foreign control in it.

Department of Industrial Policy & Promotion — after consulting Reserve Bank of India and Department of Economic Affairs — has concluded that in sectors or activities where 100 per cent FDI is allowed under the automatic route, the foreign investor would not require government approval.

“This would free the FIPB (Foreign Investment Promotion Board) from the burden of dealing with all cases of foreign investment in LLP without any substantive issue,” the RBI said while giving ‘no objection’ for automatic route sectors.

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In sectors where FDI is restricted to below 100 per cent but under the automatic route, the RBI wants the LLP to furnish the undertaking and the CA’s certificate before being allowed to take the FDI through automatic route.

That is because of the basic difficulty inherent in the nature of governance of an LLP where the degree of control does not depend on the capital of profit share of the investors but on the “qualitative provisions of the partnership agreement”.

“Thus, both for FIPB as well as for RBI, it will be difficult to assess whether the degree of foreign control agrees with that defined for companies (24, 49 or 74 per cent) which reflects the comfort of regulators on how much foreign control can be ceded in a given sector considered strategically important,” RBI said.

After certification, the proposed norms would provide the LLPs, existing or new, the same FDI status as available to Indian companies through automatic route in sectors with cap on investments. The new rules, mooted last April, were sent to Ministry of Corporate Affairs on September 25 for concurrence.

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They would be an improvement over existing rules whereby LLPs have a restricted regime as any FDI or any form of foreign investment in LLP, direct or indirect, needs prior FIPB. FDI in LLP is not permitted in sectors with caps.

Restrictions would continue in sectors that are eligible to accept 100 percent FDI under automatic route but are subject to FDI-linked performance related conditions; sectors eligible to accept FDI under government approval route; agricultural/plantation activity and print media; and, prohibited sectors not eligible to accept FDI.

LLPs have become the globally-preferred vehicle of business to overcome tax issues and red tape that otherwise dog foreign investors. Owing to flexibility in its structure and operation, it would be useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular.