Foreign Direct Investment in FDI

CS Executive Ankit Parikh (Sr. Associate) (284 Points)

13 May 2011  
The cabinet committee on economic affairs on s Wednesday approved foreign direct investment (FDI) in limited liability part- nership (LLP) firms with some riders.

LLP is a business structure that is between a partnership firm and a corporate body, combining the limited liability benefits of a company with the flexibility of a partnership.

The concept was notified by the government in 2009 through an Act of Parliament.
The Act allows both partner- ship firms and companies to convert to LLPs.

As of 2 May, 4,679 LLPs have been formed, government data show.

FDI in LLPs will be imple- mented in a calibrated man- ner, beginning with the open sectors where monitoring is not required, subject to certain conditions, according to a press statement issued by the government.

Accordingly, FDI in LLPs will apply in sectors where 100% FDI is allowed through the au- tomatic route. LLPs with FDI will not be allowed to make any downstream investments. Besides, the statement said LLPs with FDI will not be al- lowed in agriculture, planta- tion, media and real estate businesses.

This announcement will fa- cilitate LLPs to raise foreign funds, according to Pavan Ku- mar Vijay, managing director, Corporate Professionals group, which helps professionals and companies form and convert to LLPs through its Internet venture

“Besides, international LLPs wanting to do business in In- dia through partnerships will get encouragement,“ Vijay said.

“This will allow several LLPs in the areas of manufacturing, IT, hospitality, consultancy, tourism etc to raise foreign di- rect investment.“ said Akash Gupt, executive director at au- dit firm PricewaterhouseCoop- ers.

He added that the cabinet announcement has provided another window. “It not only allows foreign investors to set up new LLPs, but also allows the restructuring of the exist- ing investments in joint ven- tures and wholly owned sub- sidiaries to convert to LLPs,“ Gupt said.

However, professionals such as char- tered account- ants (CAs), company sec- retaries and lawyers will have to wait a while to reap the benefits.
For their part- nership firms to become LLPs, the respective laws such as the chartered ac- countants Act or company sec- retaries Act have to be amend- ed. These are pending before Parliament for passage.

The amendments will not only allow chartered account- ants to form LLPs with any number of partners, but will also enable them to form multidisciplinary LLPs with cost and works accountants, company secretaries and law- yers as well as chartered engi- neers.

Harinderjit Singh, partner at Price Waterhouse, an audit firm affiliated to Pricewater- houseCoopers (PwC), said PwC's advisory and tax servic- es are currently conducted through a private limited company and its auditing serv- ices through partnership firms. “The two can func- tion as one en- tity once the amendment to the CA Act is passed in the same manner as PwC funcas PwC func- tions in the US as an LLP,“ he said.

“The CCEA's approval will benefit the Indian economy by attracting greater FDI, creating employment and bringing in international best practices and latest technologies in the country,“ the government said in its release.