Selective opening up of LLPs

Anil Talreja Urmi Rambhia | Updated on June 07, 2011 Published on June 02, 2011


Foreign investment in limited liability partnerships has been allowed only in select sectors, and that too with conditions; other investors will still have to wait and watch.

The concept of ‘Limited Liability Partnership' (LLP) was propounded as an alternative corporate business vehicle that would give the benefits of limited liability but allows its members the flexibility of organising their internal structure as a partnership based on an agreement.

Setting up a LLP is comparatively easy and quick; an LLP has some key tax advantages over a company viz. there is no Dividend Distribution Tax (DDT). Further, they have a comparatively lenient regime as regards Minimum Alternate tax. With a view to operationalising such LLPs, the Limited Liability Partnership Act was introduced in 2009. This also necessitated changes in many other corporate laws to give more teeth to this new vehicle.

Given that Foreign Direct Investment (FDI) is not allowed in entities other than companies, it was necessary to amend the FDI laws to permit investment in this vehicle. In September 2010, the Government released a discussion paper on allowing FDI in LLPs. Finally on May 20, 2011, the Government amended the consolidated FDI policy with a view to permitting FDI in LLP in a calibrated manner.

Policy changes

As per the recent policy changes, FDI in LLPs will be allowed in sectors where investment is available under the automatic route and there are no FDI-Linked performance-related conditions.

Thus, FDI in LLPs will not be available in sectors such as non-banking finance companies, housing, built-up infrastructure and construction-development projects, agricultural/plantation, print media or real estate business. Though, opening the doors for foreign investment in LLPs is a welcome change as a first step, currently since only select sectors have been opened and that too with conditions, other investors would still have to wait and watch.

While Indian companies having FDI are being permitted to make downstream investments in LLPs subject to conditions, LLPs with FDI will not be eligible to make any downstream investments.

The policy provides for the conversion of an existing company with FDI to an LLP, subject to prior approval of the Foreign Investment Promotion Board/Government. In addition, the option of conversion of existing companies into LLP may be challenging from an Indian tax perspective as well.

The foreign capital participation in LLPs shall be only for cash consideration and foreign institutional investors and foreign venture capital investors (FII, FVCI) would not be permitted to invest in LLPs. LLPs will also not be permitted to avail external commercial borrowings. These restraints would restrict the flow of investment of FDI into LLPs

Further, in case an LLP has a body corporate as a Designated Partner, the body corporate would have to be a company registered under the Companies Act.

Alternatively, an individual can be nominated to be the designated partner provided that he is a resident in India in terms of the exchange control regulations.

Investors who are looking to acquire Indian businesses in the permitted sectors could consider structuring their acquisition through a LLP, especially when they are looking acquisition in the form of assets deals in India given the tax advantages as highlighted earlier.

The changes could provide additional options for structuring acquisitions in India though subject to certain conditions which may or may not be commercially feasible to comply with.

One would have to see how the FDI policy matures over time to facilitate cross border M&A activities across sectors.

(The authors are Partner and Deputy Manager respectively of Deloitte Haskins & Sells.)

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Published on June 02, 2011
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