The Limited Liability Partnership Act, 2008 (the “LLP Act”), which came into effect on March 31, 2009, gave form to the theoretically proposed structure of LLPs by the Seventh Law Commission in 1957.
An LLP, with its inherent flexibility and tax efficient structure, is essentially a hybrid between a limited liability company (“company”) and a partnership. Receiving the best of both worlds, it embodies limited liability for its partners, just like a company, and taxation benefits of a partnership firm. Some advantages of using an LLP structure are:
Foreign Direct Investment (“FDI”) in LLPs
Since their inception, LLPs in India have been riddled with obtaining prior government approval for receiving FDI and facing blanket restrictions on downstream investments. However, on November 24, 2015, in line with the Indian Government’s “ease of doing business in India” campaign, the Department of Industrial Policy and Promotion (“DIPP”) issued Press Note 12 of 2015 to relax FDI investments in LPPs in the following two ways:
Both 1. and 2. are permitted, provided there are no FDI-linked performance conditions. This essentially means that in sectors where 100% FDI is allowed under automatic route and which have prescribed conditions, such as minimum capitalization, LLPs will not be allowed to bring FDI in such sectors without prior governmental approval.
Further, downstream investments by LLPs have the following compliance requirements:
Despite the allowance of FDI, the LLP structures in India still face some restrictions. Foreign Capital participation in LLPs is allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account (maintained with an authorized dealer/authorized bank) of the person concerned. Further, prior governmental permission is required to make non-cash/intangible contribution towards the capital of an LLP. The government has also not permitted Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) to invest in LLPs. LLPs are also not permitted to avail External Commercial Borrowings (ECBs).
LLP structures have long been in use globally and have proven to be specifically advantageous for professionals to come together under its umbrella and work seamlessly without being burdened with the compliance requirements of a company or the personal exposure involved in a partnership firm. By allowing FDI investments into LLPs, India has taken a bold step in the right direction. However, to bring Indian LLPs at par with the global LLP structures, the government will soon have to address the above stated shortcomings.
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