Limited Liability Partnerships (or LLPs) are hybrid entities with dual advantages of a corporate entity as well as flexibilities of a partnership. These entities offer (i) limited liability to promoters and a distinct legal entity status to the structure on one hand; and (ii) operational discretion, flexibility and less formal requirements of a partnership structure on the other.
It has not been even a decade since a legislation was enacted on this subject in India. Since then, entrepreneurs are increasingly looking at LLP structure with keen interest for converting their existing business structure into one or start new ventures under LLP structure.
Sensing this, the government of India initially opened up FDI in Indian LLPs in a limited way. To begin with, any FDI was subject to prior government approval. Further, any downstream investments by LLPs (with FDI) were not permitted.
The latest FDI policy, however, has made various reforms relating to FDI in LLPs.
FDI in Indian LLPs is now allowed under the automatic route (without any prior government approval) in industry / service sectors wherein up to 100% FDI is allowed under the automatic route. Thus, FDI in companies and LLPs have been put at par in these sectors.
Further, restrictions on downstream investments by LLPs (with FDI) have also been done away with, provided the recipient is also qualified to receive up to 100% FDI under the automatic route.
LLPs could emerge a popular route for FDI, inter alia, due to its flexible structure, limited liability and tax advantage (there is no dividend distribution tax).
The Government of India's latest reforms liberalising FDI in LLPs are, therefore, welcome.
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