FOREIGN DIRECT INVESTMENT IN LIMITED LIABILITY PARTNERSHIPs (LLPs) IN INDIA AND SUITABILTY OF LLP STRUCTURE IN INDIA
FDI IN LLPs IN INDIA AND SUITABILTY OF
LLP STRUCTURE IN INDIA
Limited Liability Partnership (“LLP”) is a developing form of corporate
structure in India for doing business in India. It is a mix form of a limited
liability company and a partnership firm. It has both the limited liability
benefit, perpetual succession with partnership structure lies in its soul. This
structure has been introduced by the Government of India in 2008 by passing LLP
Act 2008.
Since LLP form of business is very popular
in foreign countries, it became necessary for the Government to clear its stand
on allowing FDI in LLPs considering the present global economic and business development
and status of India as a destination of foreign investment. To address the
issue of FDI in LLP firms in India Cabinet Committee on Economic Affairs
(‘CCEA’) issued a press release on 11th May 2011, proposing the regulatory
outline permitting FDI in LLP. Subsequent to the proposal, the Government of India has allowed FDI in LLPs and
decided to permit FDI in LLP firms, subject to specified conditions. Accordingly,
the provisions were made in ‘Circular 1 of 2011-Consolidated FDI Policy’, which
became effective from April 1, 2011.
The latest
provisions related to foreign direct investment in LLP’s in India is contained
in the the consolidated FDI policy (“Policy”) dated April 10, 2012 effective
from April 10, 2012 issued by the DIPP, Ministry of Commerce and Industry,
Government of India (“the FDI Policy”). The provisions are briefly discussed
below:
As per para 3.2.5 (a) FDI policy FDI in
LLP’s will be allowed only through Government approval route. Further FDI in
LLP would be allowed only in those sectors where 100% FDI is permitted under
automatic route.
FDI
in LLP in Trading Business
The FDI Policy specifically states that 100
% FDI is allowed under automatic route in Cash & Carry Wholesale Trading/
Wholesale Trading business and also clarifies that Cash & Carry Wholesale
trading/Wholesale trading, would mean sale of goods/merchandise to retailers,
industrial, commercial, institutional or other professional business users or to
other wholesalers and related subordinated service providers. Further wholesale
trading would include resale, processing and thereafter sale, bulk imports with
ex-port/ex-bonded warehouse business sales and B2B e-Commerce.
Further,
in terms of the Policy the followings are the guidelines for carry on whole
sale trading:
a) Acts/Regulations/Rules/Orders
of the State Government/Government Body/Government Authority/Local
Self-Government Body under that State Government should be obtained;
b)
sales made by the wholesaler shall be to
the valid business customers;
c)
full records indicating all the details of
such sales like name of entity, kind of entity, registration/license/permit
etc. number, amount of sale etc. should be maintained on a day to day basis.
d)
whole sale trade of goods would be
permitted among companies of the same group. However, such WT to group
companies taken together should not exceed 25% of the total turnover of the
wholesale venture
e) whole sale trade can be undertaken as per
normal business practice, including extending credit facilities subject to
applicable regulations.
f) a wholesale/cash & carry trader cannot
open retail shops to sell to the consumer directly.
Thus, if the proposed trading activity is whole sale trading, it is allowed under
automatic route up to 100% and no approval will be required. Though 100% FDI is allowed in LLP’s in case of wholesale trading that will require prior Government approval.
LIMITATIONS OF LLP FORM OF
BUSINES WITH FOREIGN INVESTMENT
As per para 3.2.5 (a) of the FDI Policy FDI in LLP
is allowed only through Government route. Further FDI in LLP through Government
route is allowed to only those sectors where 100% FDI is allowed under
automatic route under FDI policy. That is a foreign company or individual can
invest in LLP in India but it requires prior Government approval.
Further,
in terms of para 3.2.5 (c) of FDI
Policy, an Indian company, having FDI, will be permitted to make downstream
investment in a LLP only if both-the company, as well as the LLP- are operating
in sectors where 100% FDI is allowed, through the automatic route and there are
no FDI-linked performance conditions.
Further,
in terms of para 3.2.5 (d) of the
FDI Policy LLPs with FDI will not be eligible to make any downstream
investments. (Downstream investments refers to further investment by LLP in
which there is already foreign direct investment is there into other companies
or LLP)
Further,
in terms of para 3.2.5 (e) of the
FDI Policy foreign Capital participation in LLPs will be allowed only by way of
cash consideration. It refers that contribution in any other form than cash is
not allowed.
Further,
in terms of para 3.2.5 (e) of the
FDI Policy investment in LLPs by Foreign Institutional Investors (FIls) and Foreign
Venture Capital Investors (FVCIs) will not be permitted.
LLP is not allowed to raise External
Commercial Borrowing (“ECB”). Thus
LLP can not take commercial loans from its foreign partners, FII’s, banks from
outside India, any financial institution outside India or any other entity
outside India.
As per section 27 of the Limited Liability
Partnership Act 2008 the limited liability partnership is liable if a partner
of a limited liability partnership is liable to any person as a result of a
wrongful act or omission on his part in the course of the business of the
limited liability partnership or with its authority.
Partners Liability is unlimited for his personal acts.
LLP is more recognized for services sector.
A note by the Ministry of Corporate Affairs on LLP as available on LLP website (www.llp.gov.in) recommend and describes the suitability
only for the services sectors and professionals as follows:
+ Persons providing services of any kind
+ Enterprises in new
knowledge and technology based fields where the corporate form is not suited.
+ For professionals such as Chartered Accountants
(CAs), Cost and Works Accountants (CWAs), Company Secretaries (css) and
Advocates, etc.
+ Venture capital funds where risk
capital combines with knowledge and expertise
+ Professionals and enterprises engaged
in any scientific, technical or artistic discipline, for any activity relating
to research production, design and provision of services.
+ Small Sector Enterprises (including
Micro, Small and Medium Enterprises)
+ Producer Companies in Handloom,
Handicrafts sector
REPATRIATION
OF PROCEEDS AND PROFITS
The
FDI policy is silent about the repatriation of profits/ winding up proceeds of
the LLP. Since FDI in LLP is allowed under Government route, repatriation and
remittance matters may be subject to the discussion and approval while
considering approval FDI in proposed LLP. Thus repatriation may or may not be
allowed. The Government may come up with certain policies/provisions on the
repatriation/ remittance of the proceeds of LLP, but nothing can be commented
right now. Thus please note that remittance/ repatriation may be subject to the
consideration or conditions as may be imposed upon by the Government while
granting approval.
Thus
in the light of this, it can be said that repatriation of profit or other
proceeds depends upon the conditions as may be imposed upon by the Government
while granting approval for FDI. Hence, nothing can be commented on
repatriation of the proceeds under LLP form.
EXIT OPTION
Exit under LLP form is possible in the following
manners:
a) Sale of partner’s interest to one of the party subject to
condition of minimum two members.
b) Winding up of LLP
Please
note that sale of Partner’s interest by one party (partner) to another or to
any third party in LLP is Governed by the LLP agreement, as LLP act does not restrict transfer of partner’s
interest. Hence any party is allowed to transfer its interest in LLP subject to
LLP agreement.
It is to be further noted that repatriation of the amount of out exit proceeds is not
specifically allowed under the FDI policy and no clear guidelines have been issued
in this regard. So repatriation may be subject to the conditions as may be
imposed upon by the Government while granting approval. Further the Government
may come up with certain specific provisions for repatriations of proceeds of
LLP which may or may not allow repatriation.
TAXATION
Tax
structure on LLP’s is as follows:
Tax
on Profits: 30%
Education
cess: 3 % on
income-tax (inclusive of surcharge, if any)
Minimum Alternative Tax
MAT
is levied @ 18.5 percent of the adjusted book profits in the case of those LLP’s
where income-tax payable on the
taxable income according to the normal provisions of the Income-tax Act, 1961
(the Act), is less than 18.5 percent of the adjusted book profit.
Further
education cess is applicable @ 3 percent on income-tax (inclusive of surcharge,
if any)
Note:
1.
No surcharge is applicable
2. No tax is applicable on distribution of
profits amongst the partners. However the salary and remuneration as paid by
the LLP to the partners is taxable in the hands of partners.
From
taxation point of view LLP may be an economic structure as compared to a
company as there is no dividend distribution charge on the profits distribution
of LLP. Further if the profit exceeds the above mentioned limited LLP will also
save 10% surcharge. The LLP can be said to have two tax advantage over company
i. e. saving of dividend distribution tax and surcharge.
However
the Government may consider for imposition of taxes on distributed profits of
LLP like dividend distribution tax as in company. No such proposal is available
till now but there may be possibilities and a provision of such tax may come in
future.
To
conclude, it can be said that LLP is a new concept in India and hence, most of
the laws (e. g. labour laws, environmental laws, corporate laws) are not clear
about its applicability on this form, which may or may not be applicable
depending upon the Government clarification from time to time, also which may
be favourable or unfavourable for LLP, while company is a well established form
and specific and clear provisions are provided in various statues, so no
question of disputes. Therefore, Government still need to bring more clarity in
the laws regulating LLP and FDI related provisions in the LLP form of business.
Note:
the views of the author are personal and do not constitute any kind of opinion.
