In-Principle Nod For FDI In Limited Liability Partnerships

As per definition, an LLP is a business set up that combines the benefits of limited liability while retaining the flexibility in operations of a partnership firm. Since the corporate affairs ministry allowed the setting up of an LLP, close to 4,000 firms have been formed.

Last year the department of industrial policy and promotion (DIPP) had circulated a note across various ministries and stakeholders including MCA and the ministry of finance to discuss the possibility of allowing FDI in LLPs. “We have to encourage financial indepence for LLP firms. Allowing FDI would help these firms grow and evolve,” a government source told FE. He said that the government had discussed the matter and the final decision would be taken by DIPP.

Managing director of Delhi-based Corporate Professionals Pavan K Vijay said, “Since the government has formed a new form of business, there is no point imposing several restrictions. It is a good move.”

In a note sent to the DIPP the Reserve Bank of India had imposed strict conditions on allowing FDI in LLPs. Some of the proposals mooted by the central bank included mandatory approval by Foreign Investment Promotion Board (FIPB), total FDI cap to be fixed at 49% and bringing in regulations on pricing. “The valuation of economic interest in an LLP in case it is transferred to non-residents in terms of the LLP Act will have to comply with the pricing guidelines,” an RBI note said, a copy of which is with FE.

In the Budget 2011-12 the government brought LLPs under the ambit of minimum alternative tax (MAT) which has posed a big threat to the business. Various experts said that one of the reasons why companies chose an LLP format over other forms of business to curtail the regulatory requirements. However the proposed move by the finance ministry could spell trouble.