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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.
The salient features of the revised Schedule 9:-
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.
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.
The table of comparison between the erstwhile and new Schedule table is as below:
Note: Investment by way of 'profit share' will fall under the category of reinvestment of earnings
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
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.
6. Inserted vide Notification No. FEMA.351/2015 RB dated September 30, 2015