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Select LLPs may get 49% FDI

Foreign investors may soon be able to set up Limited Liability Partnerships, or LLPs, in India, as the government is all set to allow foreign direct investment in this new form of business organisation.

Initially, FDI up to 49% may be allowed in LLPs in select sectors such as manufacturing, a DIPP official told ET.

This could help make this form of business organisation more popular. So far, only 914 LLPs have been registered in the country. “We are ready with a discussion paper on the FDI framework for LLP,” the official, who did not wish to be named, said. The current thinking within the government is to allow FDI in LLP selectively and cap it at 49% even in sectors where companies can have 100% foreign investment, he added.

LLPs are business entities that are a hybrid between companies and partnership firms. As the name suggests, partners’ liability is limited to the extent of their stake in the LLP.

Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners. Besides, LLPs are not burdened with cumbersome compliance such as meetings and maintenance of statutory records. The DIPP will soon call a joint meeting with other ministries, departments and regulators including the RBI to discuss the paper and finalise the foreign investment regime for LLPs.

“Any move to ensure that LLPs have a level playing field will help the structure takeoff,” said Aseem Chawla, partner, Amarchand & Mangaldas adding that it was important that regulators in various services industry recognised this structure.

However, Akash Gupt, executive director, PwC felt more was needed for this structure to take off. “While allowing FDI in LLPs there is also a need to address sector regulatory issues that prohibit these entities from carrying on a particular activity,” he added. LLPs, for instance, cannot bid for a road project as per guidelines of the National Highway Authority of India.

Currently, FDI is not permitted in partnerships firms, but is allowed in companies subject to sectoral caps. In a number of manufacturing sectors 100% FDI is allowed through the automatic route.

Sole proprietorship firms can also get non-resident investment on a non-repatriable basis. Many countries allow 100% foreign investment in LLPs though they may not be allowed to undertake certain sectoral activities. The official said the 49% cap on FDI will ensure that control in LLP rests in Indian hands.

RBI had written to the finance ministry and the DIPP that FDI should be allowed in all sectors for LLPs but capped at 49%. It had also favoured mandatory Foreign Investment Promotion Board clearance for any FDI in LLPs.

The government had notified the LLP Act on April 1, 2009. But the taxation of LLPs, which is akin to partnership firms, could be clarified only in the July budget 2009-10. The budget for 2010-11 proposes to exempt capital gains on account of transfer of assets from on conversion of a company into an LLP from tax if the total sales, turnover or gross receipts of the company does not exceed Rs 60 lakh in any three preceding years.

Economic Times, New Delhi, 11-03-2010