On 3 March 2017, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations 2017 (RBI Amendment), which shall come into effect from date of its notification in the Official Gazette.

In November 2015, the RBI partially liberalised foreign direct investment (FDI) in limited liability partnerships (LLPs) by permitting investment under the automatic route only in sectors where (a) 100% FDI was permitted under the automatic route, and (b) there were no FDI linked performance conditions. The RBI, in consultation with the Government, has attempted to further liberalise the FDI in LLPs regime by amending Regulation 5(9) and substituting Schedule 9 of FEMA 20, which list conditions pursuant to which FDI in LLPs is permitted.

Key Changes

The key amendments are as follows:

  • No Government Approval for conversion of certain Companies to LLPs

Previously, converting a company operating in sectors where FDI was permitted in an LLP under the automatic route, required prior Government approval.

This requirement has been removed and conversion of such companies into LLPs has been brought under the automatic route.

  • Availing of ECBs

LLPs were explicitly barred from availing external commercial borrowings (ECBs), including masala bonds. The RBI Amendment has deleted such explicit prohibition on LLPs availing ECBs.

However, the extant ECB guidelines are yet to be amended to include LLPs under the ‘Eligible Borrowers’ category.

  • Designated Partners

A designated partner of an LLP with FDI had to satisfy the requirement of being a “person resident in India”, as defined under the Foreign Exchange Management Act 1999, in addition to satisfying the requirement of being “resident in India” as provided under the Limited Liability Partnership Act 2008 (LLP Act). Separately, the language of the old provision required that only a company registered in India under the Companies Act could be appointed as a designated partner.

The RBI Amendment has deleted the above provision. Accordingly, one needs to look at only the LLP Act provisions with respect to requirements of a designated partner.

Khaitan Comment

While the RBI Amendment has simplified compliance requirements and broadened financing options for LLPs, FDI in LLPs under the automatic route is restricted to a limited number of sectors. Further, the Government has not issued any guidelines to clarify which conditions, under the FDI policy, qualify as FDI linked performance conditions.

The LLP is a hybrid structure which allows entrepreneurs to retain the simplified governance structure of a partnership firm, while retaining the advantages of limited liability available to companies. If the Government provides appropriate clarifications in relation to FDI linked performance conditions, and increases the number of sectors in which FDI in LLPs will be permitted, entrepreneurs may have more opportunities to take advantage of the LLP structure, and consequently giving impetus to foreign investment.