Wednesday, September 29, 2010

Proposal for FDI in Limited Liability Partnerships

Limited liability partnerships (LLPs), which are a relatively novel concept to India, have been recognised since April 1, 2009. LLPs are different from general partnerships in several ways, but there are two prominent differences. First, partners in LLPs carry limited liability for acts of the firm. Second, the partnership firm possesses separate legal personality and to that extent it has distinct existence from its owners/partners. In that sense, an LLP is a hybrid entity. While it has the key features of a limited liability company, it has the flexibility of management and operations, small size and tax status similar to a general partnership.

Although LLPs have been in existence for over a year now, the FDI policy has not provided for separate treatment for foreign investment in LLPs. The Consolidated FDI Circular issued on April 1, 2010 permits non-resident Indians and persons of Indian origin to invest in partnership firms and proprietary concerns. Under relevant RBI guidelines, other foreign investors are required to obtain prior approval of the RBI to invest in partnership firms. The absence of specific treatment of LLPs in the FDI policy makes it unsuitable to attract foreign investment in those entities.

In this background, the Government yesterday issued a discussion paper on foreign investment in LLPs. Although the paper does not set out any specific position, it seeks views from the public on various aspects starting from whether FDI should be permitted at all in LLPs to what factors are to be considered while permitting FDI (such as issues of ownership, control, downstream investments, valuation, and the like).

The LLP as a business entity is yet to drum up the impetus it was expected to generate when the LLP Act was passed and later notified in 2009. It appears that the number of LLPs being registered is growing at a slow pace, and the present effort is an additional step to confer benefits on that entity so as to attract more entrepreneurs and professionals to utilise it as a vehicle to carry on their business or profession.

At a more general level, the practice of the Department of Industrial Policy and Promotion (DIPP) in issuing discussion papers on various topics is welcome. It makes the policy-making process transparent and inclusive. The use of policy arguments, the comparative study of position in other similarly situated countries, and in some cases the reference to empirical evidence certainly enhances the quality of policy-making. It is hoped that these discussion papers will be taken to their logical conclusion with a definition pronouncement made one way or the other. Failing this, there is a risk that it will only cause greater ambiguity and confusion in the minds of foreign investors and the Indian recipients of such investment.


A Curious Associate said...

Dear Mr. Umakanth,

In addition to the existing provisions of the Consolidated FDI Policy, which you have captured herein-above, Para 3.3.4 of the Consolidated FDI Policy states that “FDI in resident entities other than those mentioned above (i.e. company, proprietary concern, firm (partnership) and trust), is not permitted”. This prohibition was always understood to apply to FDI in LLP’s.

On a separate point, are you aware whether an LLP incorporated under the LLP Act is permitted to undertake "investment activity" and whether RBI has raised any concerns on this?

A Curious Associate

V. Umakanth said...

@ Curious Associate. Thanks for the comments. I am not aware of RBI's position regarding "investment activity".

V. Umakanth said...

Update: The Economic Times has a report indicating RBI's concerns regarding investment activity carried out through LLPs (