LLPs with FDI may not get to float arms

Limited Liability Partnerships (LLPs) that seek foreign investment will not be allowed to set up subsidiaries to invest in other sectors. This is to ensure that the LLP structure is not used to circumvent restrictions on foreign direct investment. The government is considering allowing 49% FDI in LLPs. 

The Department of Industrial Policy and Promotion (DIPP), which is preparing a note on the foreign direct investment framework for LLPs, thinks that allowing downstream investments by these entities will be difficult to track and sectoral limits on FDI could be breached. 

“LLPs with foreign investment will not be allowed to create a subsidiary structure to route their investments,” a DIPP official told ET. 

Experts say the restrictions will make the regime very restrictive for LLPs, a new form of business that combines best of partnerships and corporate structure. 

“This would make LLPs’ onward investments very restricted and prevent them from entering into strategic alliances. Foreign investors will also need to set up a parallel separate LLP for each investment activity that they propose to undertake,” said Girish Vanvari , executive director, KPMG. 

LLPs are business entities that are a hybrid between companies and partnership firms and provide a flexible tax regime having a lower rate of tax of 17% as against 30%(plus cess and surcharge) applicable for companies. 

Besides, partners’ liability is limited in these entities to the extent of their stake in the entity. Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners and do not have to meet compliances related to meetings and maintenance of huge statutory records. 

The new FDI guidelines issued by the DIPP—Press Notes 2,3, 4 will not apply to LLPs. Earlier, the RBI had written to the finance ministry suggesting that FDI be allowed in LLPs in all sectors up to 49% but with prior approval. Globally, LLPs enjoy a greater flexibility with regard to their investments though they are restrictions on investing in select sectors such as aviation in some countries. 

Economic Times, New Delhi, 16-03-2010.