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    Overview Of Converting Companies Having FDI INTO LLPS

    In continuation of its thrust on liberalizing the economy, bringing more funds into India and creating employment, the Central Government has announced key amendments in the FDI policy by Press Release dated 12th November, 2015 followed by Press Note No. 12/2015, dated 24th November, 2015 (“Press Note”)[Please refer detailed coverage of Press Note No. 12/2015 published in our Wiki for December 2015 (Volume No. 17)] 

    Post issue of the said Press Note, the necessary amendments have been carried in Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2000 (Notification No. 20/2000, dated 3rd May, 2000), (“FDI Regulations”) vide Notification No. FEMA 361/2016-RB, dated 15th February, 2016 

    In continuation of the above, the RBI vide AP (DIR Series) Circular No. 6, dated 20th October, 2016 has advised all the Authorised Dealers to take note of the changes made in the Principal Regulations, inter alia, permitting the Foreign Direct Investment into Limited Liability Partnership Firms under Automatic Route subject to the conditions stated in the Regulations.

     

    In view of series of changes made the author has made an attempt to summarise the extant provisions of Foreign Direct Investment into the LLPs and also conversion of Companies into LLP as per revised Schedule 9 of FDI Regulations

     

    1. Eligible Investors:

     

    All Individuals and entities registered outside India are eligible to invest into LLP, except citizen/ entity of Pakistan and Bangladesh or a SEBI Registered FII/ FVCI/QFI or RFPI

     

    1. Eligibility of LLP for accepting FDI

     

    LLP is eligible for accepting FDI under automatic route only if the entity is operating in sector where the FDI is not prohibited and also the sector is eligible for 100% FDI under automatic route and without any FDI linked performance conditions and it is not in Agricultural, Plantation and print media activities.

     

    At present the following sectors are having restrictions:

     

    1. Agriculture & Animal Husbandry (except specified categories of Agriculture activities)
    2. Plantation (except specified categories of Plantation activities)
    • Mining of specified categories
    1. Petroleum and Natural Gas
    2. Defence
    3. Broadcasting
    • Print Media
    • Civil Aviation of various categories prescribed therein
    • Construction Development: Township, Housing, Built-up Infrastructure
    • Industrial Parks
    • Satellites – Establishment and operation
    • Private Security Agencies
    • Telecom Services
    • Trading (various forms)
    • Financial Services of various forms
    • Pharmaceuticals
    • Railway Infrastructure (other than prescribed forms of railway infrastructure)
    1. Eligible Investment

     

    LLP is eligible to receive the contribution by way of capital contribution only and cannot receive any loan in foreign currency (including loans from Non Resident partners)

     

    1. Downstream Investments by LLP

     

    As per extant FDI regulations, now LLPs are permitted to make down stream investments into either Indian Companies / LLPs subject to complying with all applicable FDI regulations.

     

    1. Pricing of capital contribution or profit share

     

    As per the extant FDI regulations, the pricing for subscription to the partnership deed/ acquisition or transfer of profit share, the pricing guidelines as per internationally recognized method of valuation need to be followed.

     

    In case of transfer of profit share from Resident to Non Resident, the minimum amount paid by the Non Resident shall not be less than fair value and in other cases it shall not be more than the fair value.

     

    1. Mode of Payment by an eligible investor

     

    As per the extant FDI regulations, the permitted mode of payment by the Non Resident Investor is only by way of cash contribution (Convertible Foreign Exchange or debit to NRE/NRO/FCNR(B) account etc.,) and other modes of contribution are not permitted (e.g., Consideration other than cash)

     

    1. Reporting

     

    The LLP receiving the FDI shall report RBI about the receipt of contribution/ acquisition of profit share by the Non Resident Investors by prescribed forms within 30 days of such receipt/ acquisition

     

    In case of disinvestment by the Non Resident Investor or transfer of profit share between Resident and Non-Resident shall be reported to RBI within 60 days of such transaction.

     

    In both cases the Authorised Dealer shall obtain KYC of the Non Resident Investor and shall report to the RBI accordingly

    1. Conversion of the existing Company having FDI into LLP

     

    The company (both Private Company and unlisted Public Company) which is engaged into sectors wherein the FDI is permitted upto 100% under automatic and not having FDI-linked performance conditions can itself get converted into LLP, subject to obtaining prior approval from FIPB and after complying with procedure laid down under Companies Act, 2013 and LLP Act, 2008

     

    In view of the recent amendments, now the companies are encouraged to get converted into LLP, since largely the requirement of obtaining FIPB/ Government approval for receiving future FDI is done away with and also the LLP offers more flexibility and tax benefits to the investors.

     

    1. Detailed steps and Procedure for conversion of Company into LLP

     

    We have made humble attempt to cover detailed procedure and aspects related to conversion of Company into LLP, tax impact for such conversion and other related mattersin our Wiki for November, 2014 (Volume No. 4) http://sbsandco.com/wp-content/uploads/2014/08/Nov2014-e-Journal.pdf

     

    [Please refer Page No. 4 to 10] and request the readers to refer the respective volume of Wiki and get familiarize the process.

     

    Conclusion

     

    With the above amendments now India has enabled another vehicle for carrying business as part of its initiatives of “Ease of doing business” and “Make in India” and it paves long way for thrust in Indian Economy

     

    We expect that many of the existing Indian Companies/ MNCs opt for converting the closely held companies into LLPs after weighing the pros and cons of doing it.

     

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