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3/16/2017 RBI Further Liberalises FDI In LLPs Corporate/Commercial Law India
http://www.mondaq.com/india/x/577196/Corporate+Governance/RBI+Further+Liberalises+FDI+In+LLPs 1/2
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Last Updated: 15 March 2017Article by Kalpana Unadkat and Jyoti KakatkarKhaitan & Co
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India: RBI Further Liberalises FDI In LLPs
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On 3 March 2017, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Transfer or Issue of Securityby a Person Resident outside India) (Second Amendment) Regulations 2017 (RBI Amendment), which shall come into effectfrom date of its notification in the Official Gazette.
In November 2015, the RBI partially liberalised foreign direct investment (FDI) in limited liability partnerships (LLPs) bypermitting investment under the automatic route only in sectors where (a) 100% FDI was permitted under the automatic route,and (b) there were no FDI linked performance conditions. The RBI, in consultation with the Government, has attempted tofurther liberalise the FDI in LLPs regime by amending Regulation 5(9) and substituting Schedule 9 of FEMA 20, which listconditions pursuant to which FDI in LLPs is permitted.
Key Changes
The key amendments are as follows:
No Government Approval for conversion of certain Companies to LLPs
Previously, converting a company operating in sectors where FDI was permitted in an LLP under the automatic route,required prior Government approval.
This requirement has been removed and conversion of such companies into LLPs has been brought under the automaticroute.
Availing of ECBs
LLPs were explicitly barred from availing external commercial borrowings (ECBs), including masala bonds. The RBIAmendment has deleted such explicit prohibition on LLPs availing ECBs.
However, the extant ECB guidelines are yet to be amended to include LLPs under the 'Eligible Borrowers' category.
Designated Partners
A designated partner of an LLP with FDI had to satisfy the requirement of being a "person resident in India", as definedunder the Foreign Exchange Management Act 1999, in addition to satisfying the requirement of being "resident in India"as provided under the Limited Liability Partnership Act 2008 (LLP Act). Separately, the language of the old provisionrequired that only a company registered in India under the Companies Act could be appointed as a designated partner.
The RBI Amendment has deleted the above provision. Accordingly, one needs to look at only the LLP Act provisions withrespect to requirements of a designated partner.
Khaitan Comment
While the RBI Amendment has simplified compliance requirements and broadened financing options for LLPs, FDI in LLPsunder the automatic route is restricted to a limited number of sectors. Further, the Government has not issued any guidelines toclarify which conditions, under the FDI policy, qualify as FDI linked performance conditions.
The LLP is a hybrid structure which allows entrepreneurs to retain the simplified governance structure of a partnership firm,while retaining the advantages of limited liability available to companies. If the Government provides appropriate clarificationsin relation to FDI linked performance conditions, and increases the number of sectors in which FDI in LLPs will be permitted,entrepreneurs may have more opportunities to take advantage of the LLP structure, and consequently giving impetus to foreigninvestment.
3/16/2017 RBI Further Liberalises FDI In LLPs Corporate/Commercial Law India
http://www.mondaq.com/india/x/577196/Corporate+Governance/RBI+Further+Liberalises+FDI+In+LLPs 2/2
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