In this article, Dibyendu Roy pursuingDiploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata,discusses whether an Indian or a foreign company can be a partner in an LLP or not.
To give a satisfactory reply to the question we need to know about Limited Liability Partnership (LLP), how it can be incorporated and the role of partners in an LLP.
By definition, a Limited Liability Partnership is a body corporate formed and incorporated under The Limited Liability Partnership Act, 2008 and is a legal entity separate from that of its partners. An LLP is having a perpetual succession and any change in partners does not affect the existence, rights or liabilities of LLPs. [1]
Every LLP needs to have at least two partners and the partners could be an individual or a body corporate as per the Limited Liability Partnership Act 2008. An LLP should have two designated partners, one of them should be a person resident in India. In case of a body corporate as a partner of LLP, the designated partner would be a nominee of the body corporate. Thus, an Indian company incorporated under the Companies Act 2013 or the previous version of 1956 can be a partner of an LLP and is required to be incorporated under the Limited Liability Partnership Act 2008.
Incorporation of an LLP
Incorporation of an LLP is to include name of two or more persons associated for conducting a lawful business with a view of profit. It is to be registered in the state in which its registered office is situated. A statement of an advocate or Chartered Accountant or a Company Secretary is required stating all requirement of the LLP Act 2008 and Rules has been duly adhered to. On incorporation of an LLP the persons who subscribed their names in the incorporation document shall become partners.
The following elements are required during incorporation of an LLP-
- Name of the limited liability partnership;
- Proposed business of the limited liability partnership;
- Address of the registered office of the limited liability partnership;
- Name and address of each of the persons who are to be partners of the limited liability partnership on incorporation;
- Name and address of the persons who are to be designated partners of the limited liability partnership on incorporation;
- Contain such other information concerning the proposed limited liability partnership as may be prescribed.
Partners’ agreement
Generally, after incorporation of an LLP a Partnership agreement is made among the subscribers, who become partners of the LLP and they are bound by the agreement made. New partners shall be admitted as per the Provisions of LLP agreement. The mutual rights and duties of the partners of LLP and the mutual rights and duties of LLP and its partners shall be governed by LLP agreement between the partners or between LLP and its partners.
In the absence of such agreement relationship of Partners and LLP would be governed as per Schedule 1 of LLP Act, 2008.
Extent and Limitation of LLP and Partners
Responsibility and limitations of Partners and LLP has been described in the Limited Liability Partnership Act 2008 and salient points are discussed below:
- Partner is the agent of the LLP and not of the partners;
- LLP is not bound by the acts of partners if the partner has no authority to act for LLP;
- LLP is liable if a partner is liable to any person because of wrongful act or omission on his part during the business of LLP or with its authority;
- Obligations of LLP shall be solely obligation of LLP and not the obligation partners;
- Partner is not personally liable, directly or indirectly for an obligation of the limited liability partnership whether arising in contract or otherwise; and
- Unlimited liability of LLP and Partners in case of fraud.
It can be noted that the regulation refers to two terms ‘Person’ and “person resident in India. Let us elaborate who is a ‘Person’ and what does it mean “person resident in India”. There is a definition available for ‘Person’ in the Section 2(u) of the Foreign Exchange Management Act, 1999 which includes: (i) an individual, (ii) a Hindu undivided family, (iii) a company, and (iv) a firm,
“Person resident in India” means—a person residing in India for more than one hundred and eighty-two days during the preceding financial year but does not include a person who has gone out of India or who stays outside India for employment or business etc. A person who has come to or stays in India for or on taking up employment or business in India is not eligible as ‘person.
Any person or body corporate registered or incorporated in India is considered “person resident in India”. Also, an office, branch or agency in India owned or controlled by a person resident outside India or an office, branch or agency outside India owned or controlled by a person resident in India is considered as “person resident in India”.
It can be inferred that a foreigner can be a partner or even a designated partner in a Limited Liability Partnership, and this includes foreign companies as well. A person resident outside India or an entity incorporated outside India shall be an eligible investor of foreign investment in Limited Liability Partnership. However, the following persons shall not be eligible to invest in an Indian LLP:
- A citizen/entity of Pakistan or Bangladesh;
- A SEBI registered Foreign Institutional Investor (FII)
- A SEBI registered Foreign Venture Capital Investor (FVCI);
- A SEBI registered Qualified Foreign Investor (QFI) and
- A Foreign Portfolio Investor registered in accordance with Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (RFPI).
Eligibility of an LLP for Foreign Investment
Foreign Direct Investment (FDI) in LLP was first permitted in Indian Foreign Investment Regulations in 2011. However, such FDI was limited with many restrictions such as needing prior Government approval for investment into LLP or conversion of an existing FDI invested company to LLP, prohibition on downstream investments or on availing External Commercial Borrowings (ECBs or Foreign Loans), requirement to have a resident designated partner, etc.
In November 2015, the regulation was relaxed to bring FDI in LLP under the automatic route in sectors where 100% FDI is allowed and where there are no FDI-linked performance conditions. Further, it also permitted downstream investments by a LLP having FDI into another Company / LLP, in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance related conditions (for example, minimum capitalisation norms applicable to ‘Non-Banking Finance Companies’ or development of townships, housing, built-up infrastructure and construction-related projects). Also, LLPs with FDI will not be allowed to operate in agricultural or plantation activity, print media or real estate business.
Per the latest Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 Foreign Direct Investment in LLPs is permitted, subject to the following conditions: An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions. FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.
Designated Partner
A designated partner(DP) is mandatory requirement in an LLP under the LLP Act, 2008, however such DP could be an individual or other person such as another LLP, Company, Trust etc. The erstwhile FEMA 20 permitted a designated partner which was a Company registered in India under the provisions of the Companies Act, as applicable and did not permit such DP to be any other body such as a Trust or a LLP. Further, it was necessary that if an individual was appointed a DP he also needed to be a ‘person resident in India’ under FEMA.
These conditions have now been relaxed and now a Foreign Company can also be a designated partner. Further, if an individual is appointed as DP, he need not satisfy the residency test under FEMA. Such DPs would however continue to need to comply with conditions prescribed for them under the LLP Act, 2008.
External Commercial Borrowings by LLP with Foreign Investment
Schedule 9 of FEMA 20 earlier restricted any LLP with FDI to avail External Commercial Borrowings (ECB). This has reduced the potential of FDI in an LLP and so in the revised schedule it has been taken care of. In the Revised Schedule 9 of FEMA 20, this provision has been omitted, which means that ECB is permitted in an LLP where FDI is there. It is now expected that Reserve bank of India will now amend External Commercial Borrowings regulations to permit LLP with Foreign investment to avail External Commercial Borrowings.
Reporting requirements
The revised Schedule 9 does not currently prescribe detailed reporting requirements. It is expected that Reserve Bank of India may issue an AP DIR Circular prescribing reporting requirements of foreign investment in LLPs and disinvestment / transfer of capital contribution or profit shares between a resident and a non-resident in LLPs.
