(a) Should FDI be permitted in LLP at all ? Can it be argued that given its limited attractiveness for large investments, allowing FDI in LLP will not significantly accelerate FDI into the country while disproportionately increasing the regulatory burden ? Does the present uncertainty on how this business model will proceed as well its yet un-established case law, magnify these concerns?
(i) LLP is internationally a very often used business structure due to its lower cost, greater flexibility in operations, better control over management, limited liability and easy exit route.
In view of recessionary conditions in major economies of the world other than India & China, India is being looked upon as a very important investment destination. Accordingly, it is strongly suggested that FDI should be permitted in LLPs (a structure familiar to major investors outside India) as it would be a great facilitator of bringing in FDI in India.
(ii) In our considered view, the regulatory concerns expressed in the discussion paper are not insurmountable. With incorporation of adequate safeguards in the FDI policy relating to LLPs, permitting FDI in LLPs would not disproportionately increase the regulatory burden. The regulatory concerns could be addressed with minimal and well considered modifications in the existing regulatory provisions.
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(iii) The LLP Act, 2008 is similar to the UK & Singapore LLP statutes which are successfully in operation for more than a decade. In addition, the provisions of LLP Act, 2008 which have been framed after considerable thought and debate by an expert committee, take care of the various concerns expressed in the discussion paper.
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(iv) Therefore, in our view, there is strong basis to assume that with adequate safeguards built into the FDI policy the LLP business model would successfully proceed to achieve its desired objectives.
(v) The LLP form of business structure is extremely popular, time tested and oft-used structure in various developed countries of the world. Concerns about the absence of judicial precedents are, thus, unfounded.
(b) What should be the definition of ‘person resident in India’ ? The definition provided in the LLP Act or the definition provided in FEMA ?
(i) The definition of ‘person resident in India’ in the FDI policy is important from the point of view of control of the LLPs. Since we are concerned with FDI in LLPs, it is felt that the definition of ‘person resident in India’ provided in the LLP Act would be more relevant.
(ii) Furthermore, the definition of ‘person resident in India’ given in the LLP Act does not contain the exceptions given in S. 2(v)(B) of the Foreign Exchange Management Act, 1999 (FEMA) whereby a person who comes to and stays in India, in either case for carrying on in India a business or vocation in India, is considered to be a person in resident in India, irrespective of his no. of days stay in India in the previous year. As per the definition in the LLP Act, a person who comes to India for doing business in India or for taking up employment in India would not immediately become a person resident in India. From a ‘Control’ perspective, the LLP would still need a person resident in India to be one of the ‘designated partners’ until the non-resident becomes a person resident in India as per the definition given in the LLP Act.
(c) Given the complexity of some of the issues raised in S. 5, would it be preferable to adopt a calibrated approach to the induction of FDI in LLPs? Initially, should FDI in LLP be restricted to sectors without caps, conditionalities or entry route restrictions? Should FDI be allowed up to 100% in these sectors or should there necessarily be an Indian partner? Should such approval be confined to the Government Route?
(i) In our view, with incorporation of adequate regulatory safeguards [refer our comments on (g) below], majority of the issues raised in S. 5 of the discussion paper can be properly addressed. Thus, there may not be a need to have a calibrated approach to the induction of FDI in LLPs. However, in order to gain the implementation experience and problems faced in the process of implementation, initially, FDI in LLP could be restricted to all those sectors which do not have caps, conditionalities or entry route restrictions.
(ii) As per the provisions of S. 7(1) of the LLP Act (as mentioned in para 5.4.5 of the Discussion paper) every LLP shall have at least two designated partners who are individuals and at least one of them shall be a ‘person resident in India’. Since this a primary requirement mentioned in the LLP Act, an Indian Partner will be required. The FDI policy on investment in LLPs may specify that compliance with this requirement is necessary even if 100% investment is permitted under the FDI policy.
(iii) FDI in LLPs should not be confined to the Government Route. On the contrary it should be under Automatic Route. The policy should be exception-based. As long as the prescribed criteria are met, investment must be under the Automatic Route. Where, however, there are deviations, than prior approval from FIPB must be prescribed.
(d) Should LLP be mandated not to make downstream investment and should foreign-owned or controlled Indian companies be barred from investing downstream in LLP ? Should investment by FII/ FVCI or ECB be prohibited for LLP?
(i) In view of the issues raised and concerns expressed in respect of ownership and control of LLPs, initially LLPs should not be permitted to make downstream investments and FDI should be allowed in operating LLPs only.
(ii) In respect of investment by FII/FVCI, the same policy as is applicable for FDI in Indian companies should be adopted. The same norms of ECB policy as is presently applicable in case of corporates should be made applicable to ECBs for LLPs. If any additional funds are required, the partner(s) must bring in the same by way of capital contribution.
(e) Following the Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations 2000, should it be mandated that foreign participation in the capital structure of LLP should be on a percentage basis, received only by way of cash consideration by inward remittances through normal banking channels, or by debit to the NRE/FCNR account of the person concerned maintained by an authorised dealer? Should it be mandated that foreign investments in LLP engaged in agricultural/plantation activity or real estate are prohibited?
(i) In view of the issues involved in determining FDI in LLP in accordance with the capital sharing percentage of the foreign investors, foreign participation in the capital structure of LLPs should be determined with reference to the profit sharing percentage i.e., right to the share of profits of the LLP.
(ii) Foreign participation in the capital structure of LLP should be initially received only by way of cash consideration by inward remittances through normal banking channels, or by debit to the NRE/FCNR account of the person concerned maintained by an authorised dealer. However, the policy should be reviewed in the light of final policy view taken in respect of discussion paper on issue of shares for consideration other than cash.
(iii) It should be mandated that foreign investments in LLPs engaged in agricultural/plantation activity or real estate are prohibited since these activities are prohibited under the existing FDI policy in case of FDI in Indian companies. The same rules should apply to FDI in LLPs so as to provide for a level playing field and to avoid misuse.
(f) Should FDI policy treat LLP akin to companies? In such a case, how should the issues relating to ownership, valuation, control, downstream investment and non-cash contributions, raised in S. 5 above, be addressed ? Should this be only through the Government Route?
(i) An LLP is a hybrid entity. It incorporates the features of both a company as well as a traditional partnership. It would not be advisable to treat them akin to companies for all purposes.
(ii) Ownership of an LLP be determined on the basis of the profit-sharing ratio between the partners.
(iii) Valuation be undertaken on the basis of DCF method, as is presently prescribed under FDI policy.
(iv) Control be determined by looking at the LLP agreement between the partners to determine the roles, rights and duties of each partner viz-à-viz the LLP and the other partners.
(v) An LLP should not be permitted to undertake downstream investments.
(vi) After the initial experience, a certain amount of flexibility could be given to the partners to bring in non-cash contribution and to determine the value of the non-cash consideration. This is so because non-cash contributions will have a customs duty/service tax as well as income-tax implications.
(vii) The policy should be exception-based. As long as the prescribed criteria are met, investment must be under the Automatic Route. Where, however, there are deviations, than prior approval from FIPB must be prescribed.
(g) Will treating LLP akin to companies under FDI policy demand the stipulation of certain features of the LLP agreement? Should this include unambiguous specification of profit/loss-sharing percentage; clear specification of the power to appoint Designated Partners; congruence of legal and economic ownership; timely notification of changes including conversion from and to companies/partnerships? Should it be mandated that LLP cannot have corporate bodies other than companies registered under the Companies Act as partners? Is inclusion and coverage of such issues in FDI policy warranted? Would the consequent increase in the regulatory burden be justified?
(i)Treating the LLPs in certain aspect akin to companies, may require the stipulation of certain features in the LLP agreement.
(ii) Some of the stipulations in respect of unambiguous specification of profit/loss-sharing percentage; clear specification of the power to appoint Designated Partners; congruence of legal and economic ownership; timely notification of changes including conversion from and to companies/partnerships, are statutorily required to be incorporated in the LLP agreement as per the existing provisions of the LLP Act. If any additional stipulations are required, the same can be prescribed in respect of LLP agreement and/or also by way of yearly reporting (as is presently applicable to companies) so as to obtain adequate and appropriate information.
(iii) All types of entities should be permitted to invest in LLPs under the FDI policy. This will ensure that a large number of investors can invest in LLPs and give a fillip to FDI investment by accelerating capital flows.
(iv) FDI policy should be appropriately amended so as to permit investment in LLPs by foreign nationals as well as foreign LLP/LLC/companies, etc. and inclusion and coverage of such issues in FDI policy is certainly warranted.
(v) Any additional regulatory burden will be justified provided the regulations are drafted in manner that will reduce the transaction cost, provide transparency, are easy to implement and result in increase in FDI.
(h) What additional regulatory safeguards are required to enfold LLP into the FDI policy? Are amendments to any existing regulations required? Should the responsibility for periodic monitoring of compliance with FDI stipulations be allotted to a particular agency?
(i) Certain additional regulatory safeguards, which in view are required are as under:
(a) Compulsory audit of the LLPs having FDI, by Chartered Accountants on the same lines and manner, as mandated under the Companies Act, 1956. This would ensure that LLP as a structure is not misused and reliability of the accounts and other information is ensured.
(b) LLPs desirous of having FDI, should have ‘Fixed’ and ‘Floating’ capital accounts in its capital structure. FDI should be allowed ONLY in the Fixed Capital which should be linked to the profit-sharing ratio and which should not be permitted to be withdrawn except in the same circumstances and manner in which buy back of the shares of the companies are provided.
(c) In order to prevent the probable misuse of LLP structure (which allows capital contribution and withdrawal) for free flow of funds by the non-resident partners thus by passing the ECB norms presently prescribed for companies, it is suggested that even the floating capital should have a lock in period of 3 years except that the income/profit share should be allowed to be repatriated freely.
(d) Reporting requirement — A Form similar to Form FC-GPR both at the time of introduction of capital as well as at the end of the year, should be introduced in the FDI policy.
(e) Prohibition on downstream investments by the LLPs having FDI.
(ii) Appropriate amendments to FDI policy will be required. Also new Form(s) will have to be prescribed or existing Form FC-GPR will have to be appropriately modified.
(iii) Since RBI is presently monitoring FDI as well as ODI, it would be appropriate for it to also monitor FDI in LLPs as well, since it is part of the overall FDI policy itself.
