Reserve Bank of India Further Relaxes Rules on Foreign Direct Investment in LLPs

The RBI Second Amendment removes certain restrictions regarding LLP activities.

On 3 March 2017, the Reserve Bank of India notified the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 (RBI Second Amendment).

The RBI Second Amendment came into force with effect from 3 March 2017, the date of its publication in the Official Gazette of India. The RBI Second Amendment introduces amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20) with respect to foreign direct investment (FDI) in limited liability partnerships (LLPs) formed and registered under the Limited Liability Partnership Act, 2008.

The RBI Second Amendment amends Regulation 5(9) and substitutes Schedule 9 of FEMA 20. The new Schedule 9 sets out the conditions for foreign investment in LLPs. Key changes triggered by the RBI Second Amendment include the following:

• LLPs previously were not permitted to avail of external commercial borrowings. This restriction has now been removed.

• A company engaged in a sector where FDI is permitted up to 100% under the automatic route (i.e., without prior government approval) and that does not have any FDI-linked performance conditions can convert to an LLP under the automatic route. Prior to the RBI Second Amendment, companies with FDI and seeking to convert to an LLP were required to obtain prior government approval for such conversion.

• Prior to the RBI Second Amendment, a designated partner (being a body corporate) of an LLP with FDI was required to be a company registered in India. Further, a designated partner was required to meet the requirement of being “resident in India” under the Limited Liability Partnership Act, 2008 and a “person resident in India” under the Foreign Exchange Management Act, 1999. These provisions now have been removed. A designated partner is now only required to meet the requirements as set out under the Limited Liability Partnership Act, 2008.

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