© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Reserve Bank of India includes provisions permitting foreign investments in Limited Liability Partnership in FEMA

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In 2011, the Government of India (GoI) allowed foreign investments in Limited Liability Partnership (LLP) with prior approval of the Foreign Investment Promotion Board, however these changes were not incorporated under the Foreign Exchange Management Act, 1999 (FEMA). The above dichotomy between the Foreign Direct Investment (FDI) policy and FEMA (being the underlining statute governing foreign investments in India), lead to uncertainty amongst foreign investors in setting up LLP in India for their business operations.

The Reserve Bank of India has now amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated 3 May, 2000) (regulations) vide Notification dated 13 March 2014, to incorporate the provisions relating to FDI in LLP in FEMA.

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Transcript of "Reserve Bank of India includes provisions permitting foreign investments in Limited Liability Partnership in FEMA"

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Reserve Bank of India includes provisions permitting foreign investments in Limited Liability Partnership in FEMA 10 April 2014 B Background The Government of India (GoI) enacted the Limited Liability Partnership (LLP) Act in year 2008, aimed at creating a hybrid legal structure that combines the flexibility of a partnership, advantages of limited liability of a corporate structure and also extends flexibility to members to organise their internal management on contractual basis, as opposed to any law/statute. In view of above inherent commercial advantages, operational flexibility with minimal compliances and direct tax benefits of LLP structure in comparison to a corporate structure, over the last 3-4 years, LLP has become preferred operating vehicle for small and medium enterprises/domestic entrepreneurs, more particularly in services sector. In 2011, the GoI allowed foreign investments in LLP 2 with prior approval of the Foreign Investment Promotion Board (FIPB), however these changes were not incorporated under the Foreign Exchange Management Act, 1999 (FEMA). The above dichotomy between the Foreign Direct Investment (FD) policy and FEMA (being the underlining statute governing foreign investments in India), ________________ 1 Press Note No. 1 (2011 series) lead to uncertainty amongst foreign investors in setting up LLP in India for their business operations. The Reserve Bank of India (RBI) has now amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated 3rd May, 2000) (regulations) vide Notification dated 13 March 2014, to incorporate the provisions relating to FDI in LLP in FEMA. Key features of the above Notification (effective from 20 May 2011) are encapsulated below: - A. Eligible Investors A person resident /entity incorporated outside India shall be an eligible investor for the purposes of FDI in LLP. However, the following persons shall not be eligible to invest in LLP’s:  citizen/entity of Pakistan and Bangladesh; or
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Securities and Exchange Board of India (SEBI) registered Foreign Institutional Investor, Foreign Venture Capital Investor, Qualified Foreign Investor;  Foreign Portfolio Investor registered in accordance with Securities Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. B. Eligibility of LLP for accepting Foreign Investment  A LLP, existing or new, operating in sectors/activities where 100 per cent FDI is allowed under the automatic route would be eligible to receive FDI.  FDI’s in LLP engaged in sectors eligible to accept 100 per cent FDI under automatic route but are subject to 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-development projects', etc.) would not be allowed.  Any form of foreign investment in LLP, direct or indirect (regardless of nature of ownership or control of Indian company) would require government approval. C. Eligible investment  Contribution to the capital of a LLP (only as a cash consideration) would be an eligible investment. Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings. D. Pricing Guidelines  FDI in LLP, either by way of capital contribution or by way of acquisition of shares/transfer of profit shares, would have to be more than or equal to the fair price as worked out with any valuation which is internationally accepted/adopted as per market practice (fair price valuation). The fair price valuation is required to be supported by valuation certificate from a Chartered Accountant/Practicing Cost Accountant/approved valuer.  In case of transfer of capital contribution/ profit share from a Resident (R) to Non-Resident (NR), the consideration for such transfer shall be more than/equal to fair price valuation. Vice-versa, in case of transfer of capital contribution/ profit share from a NR to R, the consideration for such transfer shall be less than/equal to fair price valuation. E. Reporting  LLPs shall report to RBI, the details of receipt of consideration for capital contribution/profit shares in Form FDI-LLP(I) as specified by RBI from time to time, along with the following documents (within 30 days from date of receipt of consideration): − Valuation certificate (as mentioned above); − Copy/ies of FIRC/s evidencing the receipt of such remittance; and − KYC report on the non-resident investor.  Disinvestment/transfer of capital contribution or profit share between R and NR (or vice versa) is to be reported within 60 days from the date of receipt of funds in Form FOREIGN DIRECT INVESTMENT-LLP(II) as specified by RBI from time to time.  LLP’s which have received foreign investment between 20 May 2011 and till the date of issuance of the notification shall comply with the reporting requirement in respect of FDI within 30 or 60 days, as applicable, from the date of issuance of above notification. F. Downstream investment  An Indian company, having foreign investment (direct or indirect, irrespective of percentage of such foreign investment) will be permitted to make downstream investment in an LLP only if both, the company as well as the LLP, are operating in sectors where 100 per cent FDI is allowed under the automatic route and there are no FDI- linked performance related conditions.  LLP with FDI will not be eligible to make any downstream investments in any entity in India.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. G. Other conditions  In case an LLP with FDI has a body corporate as a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the provisions of the Companies Act, as applicable and not any other body, such as an LLP or a Trust.  The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.  Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations (except the stipulation as regards mode of payment) are met and with the prior approval of FIPB/Government.  LLPs shall not be permitted to avail External Commercial Borrowings (ECBs). Our comments The above step to notify the provisions relating to foreign investments in LLP is certainly a welcome move, and would pave way for foreign investors/ multinational companies in establishing LLP’s for undertaking business operations in India. The Notification is effective 20 May 2011 and hence ratifies any past foreign investments made in LLP’s. In the recent Bi-Monthly Monetary Policy Statement, the RBI indicated its intent to withdraw pricing norms of financial instruments (viz. shares and debentures) both at the time of initial investment as well as at the time of the exit. The move permitting foreign investment/ divestment in LLP on basis of internationally accepted valuation norms/ market practice clearly supports and furthers the above intent of the RBI, and would provide flexibility to foreign investors in structuring their investments in Indian LLPs. In case of LLP’s profit extraction by partners does not attract any distribution tax unlike a corporate structure wherein dividends attracts dividend distribution tax, and hence LLP structure clearly offers conducive direct tax regime. The notification does not specifically addresses the issue withdrawal of partner’s contribution and payment of interest on partner’s contribution, and more clarity on these issues is expected from the RBI. In summary, the above notification is certainly a step in the right direction to bolster foreign investor sentiment in the Indian economy and providing them greater flexibility in structuring their Indian operations.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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