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RBI liberalizes FDI conditions for LLPs

March 16, 2017[2017] 79 taxmann.com 167 (Article)
288 Views

Vignesh Iyer

 

Introduction

1. The Reserve Bank of India (RBI) vide its notification1 dated March 03, 2017 (Present Notification) has amended Schedule 9 of the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 (Regulations, 2000).The present notification was published in the official gazette2 on the even date.

2. The salient features of the revised Schedule 9:-

  The 'Other Conditions' clause has been completely omitted which makes way for the following changes:
  Prohibition on body corporates other than companies incorporated under the provisions of the Companies Act from acting as Designated Partner of an LLP has been removed;
  Permission granted to companies having foreign investment and engaged in a sector where FDI upto 100 percent is permitted under automatic route and there are no FDI linked performance conditions to convert into LLP;
  The express bar on LLPs from availing of External Commercial Borrowings(ECB) has been done away with in line with the extant Consolidated FDI Policy, 2016 (Policy, 2016);
  The responsibility of compliance of the FDI conditions for LLPs which was vested in the shoulders of the Designated Partners has been omitted completely without any corresponding insertion in the revised Schedule 9;
  Removal of the term Qualified Foreign Investor(QFI) from the list of non-eligible investors as the concept of QFI no longer exists;
  Reporting of foreign investment in LLPs and disinvestment/transfer of capital contribution or profit shares between a resident and a non-resident have been mandated in accordance write the manner in which the RBI specifies from time-to-time and the form FOREIGN DIRECT INVESTMENT-LLP(I) has been removed.

The salient features of the amendment as provided above reflect the vast liberalization of the FDI conditions for LLPs in the country.

The Department of Industrial Policy & Promotion (DIPP) vide its Press Note 123 dated 24 November 2015 had amended Para 3.2.5 of the Consolidated FDI Policy, 2015(Policy, 2015) which laid down the conditions under which FDI was permitted in LLPs.

Para 3.2.5(f) of the Policy, 20154 expressly prohibited LLPs from availing of ECB. Press Note 12 amended Para 3.2.5 thereby removing the prohibition. However, the parallel provisions of the Regulations, 2000, i.e., Schedule 9 to Para 3.2.5 of the Policy, 2015 was pending amendment in line with the amendments brought out by Press Note 12.

Meanwhile, DIPP issued the Policy, 2016 dated 07 June 2016 with the same provisions of Policy, 2015, as far as FDI in LLPs was concerned. It is also pertinent to note that as per Para 1.1.2 of the Consolidated FDI Policy, 2016 (Policy, 2016), in case of conflicts between the Press Notes of DIPP and FEMA Notifications, the relevant FEMA notifications shall prevail. Consequently, until Schedule 9 is amended the provisions of the Policy, 2016 permitting the LLPs to avail of ECBs may not be possible to be complied with.

After about 3 months post- the Press Note 12, the RBI had issued a notification dated February 15, 20165 amending Para 4 of Schedule 9 dealing with the entry routes and deleting Para 8 dealing with downstream investments.

The Present Notification has gone a step further by deleting the 'Other Conditions' stated in Para 9 and by streamlining the provisions of the Regulations, 2000 with the provisions of the extant Policy, 2016. A comparative table of the erstwhile and the revised Schedule is provided as an Annexure.

The permission granted to the existing companies having foreign investment and operating in sector where FDI up to 100 percent is permitted under automatic route. There are no FDI linked performance conditions for conversion to LLPs which is a massive reform introduced by the RBI. With the existing requirements of compliance for the company form of business, this may prove to be a vital boon for them to think of switching themselves to the LLP structure.

Additionally, now the provisions with regard to availing of ECB by LLPs being streamlined with that of the provisions of the Policy, 2016, LLPs may have got a substantiate source for raising funds in order to expand their operations.

Conclusion

3. The Present Notification has widened the scope for LLPs to thrive in the country, obtain FDI and be preferred over companies. However, one of the alarming omissions vide the Present Notification is the removal of the responsibility of compliance of the conditions of FDI from the shoulders of the Designated Partners of an LLP. This clearly puts up the question of 'If not them, then who?' Designated Partners of an LLP stand on the same footing of that of the Directors of a Company and consequently, the responsibility of overall governance and compliance may not be vested upon any other persons apart from them. Hope, RBI may either provide clarity on the rationale behind such an omission or may have to come up with yet another notification to put this in order.

Annexure

The table of comparison between the erstwhile and new Schedule table is as below:

Particulars Erstwhile Schedule 9 Revised Schedule 9
Eligible Investors A person resident outside India or an entity incorporated outside India shall be eligible investor for the purpose of FDIin LLPs. However, the following persons shall not be eligible to invest in LLPs:
(i)   a citizen/entity of Pakistan and Bangladesh, or
(ii)   a SEBI registered Foreign Institutional Investor (FII), or
(iii)   a SEBI registered Foreign Venture Capital Investor (FVCI), or
(iv)   a SEBI registered Qualified Foreign Investor (QFI), or
(v)   a Foreign Portfolio Investor registered in accordance with Securities Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (RFPI).
A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity in Pakistan or Bangladesh), not being a Foreign Portfolio Investor or Foreign Institutional Investor or Foreign Venture Capital Investor registered in accordance with the SEBI guidelines, may contribute foreign capital either by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP.
Eligible investment Contribution to the capital of an LLP would be an eligible investment under the scheme.

Note: Investment by way of 'profit share' will fall under the category of reinvestment of earnings

Contribution to the capital of an LLP would be an eligible investment under the scheme.

Note: Investment by way of 'profit share' will fall under the category of reinvestment of earnings

Entry route FDI in LLPs is permitted, subject to the following conditions:
(i)   FDI is permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions.
(ii)   An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. Onus shall be on the Indian company/ LLP accepting downstream investment to ensure compliance with the above conditions.
(iii)   FDI in LLP is subject to the compliance of the conditions of the LLP Act, 2008.
(Clubbed below)
Eligibility of a LLP
(i)   A LLP, existing or new, operating in sectors/activities where 100% FDI is allowed under the automatic route of FDI Scheme would be eligible to receive FDI. For ascertaining such sectors, reference shall be made to Annex B to Schedule 1 of Notification No. FEMA. 20/2000-RB dated 3rd May, 2000 as amended from time-to-time.
(ii)   A LLP engaged in following sectors/activities shall not be eligible to accept (FDI):
(a)   Sectors are eligible to accept 100% FDI under automatic route but are subject to FDI-linked performance related conditions (for example, minimum capitalization norms applicable to 'Non- Banking Finance Companies' or 'Development of Townships, Housing, Built-up infrastructure and Construction-development projects', etc.); or
(b)   Sectors eligible to accept less than 100% FDI under automatic route; or
(c)   Sectors eligible to accept FDI under Government Approval route; or
(d)   Agricultural/plantation activity and print media; or
(e)   Sectors ineligible to accept FDI, i.e., any sector which is prohibited under extant FDI policy (Annex A to Schedule 1 to Notification No. FEMA 20/2000-RB dated 3rd May 2000) as well as sectors/activities prohibited in terms of Regulation 4(b) to Notification No. FEMA 1/2000-RB dated 3rd May, 2000 as amended from time-to-time
FDI in LLPs is permitted, subject to the following conditions:
(i)   FDI is permitted under the automatic route in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions.
  For ascertaining such sectors, reference shall be made to Annex B to Schedule 1 of these Regulations
(ii)   An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions.
(iii)   FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.
(iv)   A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment upto 100 percent is permitted under automatic route and there are no FDI linked performance conditions.
Pricing FDI in a 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 as worked out with any valuation norm which is internationally accepted/adopted as per market practice (hereinafter referred to as "fair price of capital contribution/profit share of an LLP") and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

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 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

FDI in a 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 as worked out with any valuation norm which is internationally accepted / adopted as per market practice (hereinafter referred to as "fair price of capital contribution / profit share of an LLP") and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

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 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.

Mode of payment Payment by an eligible investor towards capital contribution of LLPs will be allowed only by way of cash consideration to be received -
(i)   by way of inward remittance through normal banking channels; or
(ii)   by debit to NRE/FCNR(B) account of the person concerned, maintained with an AD Category - I bank.
Payment by an investor towards capital contribution in LLPs shall be made:
(i)   by way of inward remittance through banking channels; or
(ii)   by debit to NRE/FCNR(B) account of the person concerned, maintained with an AD Category-I bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time-to-time.
Reporting
(i)   LLPs shall report to the Regional Office concerned of the Reserve Bank, the details of the receipt of the amount of consideration for capital contribution and 'profit shares' Form FOREIGN DIRECT INVESTMENT-LLP(I) as specified by the Reserve Bank from time-to-time, together with a copy/ies of the FIRC/s evidencing the receipt of the remittance along with the KYC report on the non-resident investor, through an AD Category – I bank and valuation certificate (as per paragraph 4 above) as regards pricing at the earliest but not later than 30 days from the date of receipt of the amount of consideration. The report would be acknowledged by the Regional Office concerned, which would allot a Unique Identification Number (UIN) for the amount reported.
(ii)   The AD Category – I bank in India, receiving the remittance should obtain a KYC report in respect of the foreign investor from the overseas bank remitting the amount.
(iii)   Disinvestment /transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) shall required to be reported within 60 days from the date of receipt of funds Form FOREIGN DIRECT INVESTMENT-LLP(II) as specified by the Reserve Bank from time-to-time.
6(iv)   All LLPs which have received Foreign Direct Investment in the previous year(s) including the current year shall submit to the Reserve Bank of India, on or before the 15th day of July of each year, a report titled 'Annual Return on Foreign Liabilities and Assets' as specified by the Reserve Bank from time-to-time"
(i)   Reporting of foreign investment in LLPs and disinvestment/transfer of capital contribution or profit shares between a resident and a non-resident may be made in a manner as prescribed by Reserve Bank of India from time to time.
(ii)   All LLPs which have received Foreign Direct Investment in the previous year(s) including the current year shall submit to the Reserve Bank of India, on or before the 15th day of July of each year, a report titled 'Annual Return on Foreign Liabilities and Assets' as specified by the Reserve Bank from time-to-time
Other Conditions
(i)   In case an LLP with FDI has a body corporate as a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the Limited Liability Partnership Act, 2008, such a body corporate should only be a company registered in India under the provisions of the Companies Act, as applicable and not any other body, such as an LLP or a Trust. For such LLPs, the designated partner "resident in India", as defined under the 'Explanation' to Section 7(1) of the Limited Liability Partnership Act, 2008, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.
(ii)   The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.
(iii)   Conversion of a company with FDI, into an LLP will be allowed only if the above stipulations (except the stipulation as regards mode of payment) are met and with the prior approval of FIPB/Government.
(iv)   LLPs shall not be permitted to avail of External Commercial Borrowings (ECBs).
 
  The LLP which have received foreign investment between May 20, 2011 to the date of issuance of instructions issued in this regard by the Reserve Bank shall comply with the reporting requirement in respect of FDI within 30 or 60 days, as applicable from the date of issuance of these instructions.  

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1. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10876&Mode=0

2. http://egazette.nic.in/WriteReadData/2017/174606.pdf

3. http://dipp.gov.in/English/acts_rules/Press_Notes/pn12_2015.pdf

4. http://dipp.gov.in/English/Policies/FDI_Circular_2015.pdf

5. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10289&Mode=0

6. Inserted vide Notification No. FEMA.351/2015 RB dated September 30, 2015

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