Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)

The concept of Limited Liability Partnerships (LLP), introduced in India under the Limited Liability Partnership Act of 2008, has gained significant popularity as a business entity due to its simplified registration and maintenance processes. Unlike traditional partnership firms, LLPs offer a structured and more straightforward approach, leading many entities to transition from partnerships to LLPs. LLPs provide small and medium-sized businesses with the advantages of a separate legal entity, enhanced transferability, and limited liability protection for their promoters. Consequently, there is a growing interest among small business owners and service providers in registering their businesses as LLPs.

As India's population becomes increasingly global, there is a rising interest from foreign investors looking to establish a presence in the Indian market. This interest has sparked attention toward Foreign Direct Investment (FDI) in LLPs. Similar to FDI in Private Limited Companies, FDI in LLPs is governed by policies outlined in the annual FDI Circular issued by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry.

Foreign Direct Investment (FDI-LLP) in Limited Liability Partnerships (LLP) established under the Limited Liability Partnership Act, 2008 is regulated by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. These rules superseded the Foreign Exchange Management (Transfer by Issue of Security by a Person Resident outside India) Regulations, 2017, through Notification S.O. 3732(E) issued by the Ministry of Finance (Department of Economic Affairs).

In 2015, the FDI policy regarding LLPs was amended to eliminate the need for government approval for investments in LLPs. This means that 100% FDI is now allowed under the automatic route for LLPs operating in sectors where 100% FDI is permitted, and there are no sector-specific conditions for the investee companies.

Key points to consider regarding FDI in LLPs:

1. Eligible Investors:
FDI in LLPs is open to various categories of investors, including persons residing outside India, entities incorporated outside India, Non-Resident Indians (NRIs), and Overseas Citizens of India (OCI). Foreign Portfolio Investors (FPI) or Foreign Venture Capital Investors (FCVI) are not eligible to invest in LLPs..

2. Eligible Investment:
Capital contribution to an LLP qualifies as an eligible investment. Profit share transfers are considered reinvestments of earnings.

3. Downstream Investment: LLPs can engage in downstream investments, where eligible Indian entities with foreign investment invest in other Indian companies or LLPs in sectors allowing 100% FDI under the automatic route and without FDI-linked performance conditions.

4. Eligibility of an LLP: FDI in LLPs is subject to compliance with the conditions specified in the Limited Liability Partnership Act, 2008.

5. Pricing:
Investments in LLPs should meet fair pricing standards, with valuation certificates issued by Chartered Accountants, Cost Accountants, or approved valuers.

6. Conversion:
Conversion of a company into an LLP or vice versa is permitted under specific conditions.

7. Mode of Payment:
Capital contributions in LLPs can be made through inward remittance or debit to NRE/FCNR(B) accounts.

8. Remittance of Disinvestment Proceeds:
Disinvestment proceeds can be remitted outside India or credited to the NRE/FCNR(B) accounts, depending on the investor's status.

9. Reporting:
Regular reporting to the Reserve Bank of India is required for LLPs receiving foreign investments, including annual returns and notifications of capital contributions and profit share transfers.

In conclusion, LLP structures offer significant advantages for professionals and businesses, and the allowance of FDI investments in LLPs is a positive step for India. It provides foreign investors with an alternative business structure, fostering joint ventures, employment opportunities, and technological advancements in the country. This move aligns with the evolving global business landscape and promotes India as an attractive destination for foreign investments.

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