FDI in India; LLP or Company?

It has been nearly a decade since the Government of India (GoI) introduced the Limited Liability Partnership Act, 2008 (LLP Act) to facilitate formation of limited liability partnerships (LLP) for various businesses. The LLP was considered an alternative to the limited liability company and envisaged to be used by professionals and smaller businesses. The GoI offered certain advantages to an LLP over a traditional company. However, under the then prevailing foreign direct investment (FDI) policy an LLP was not eligible for investment by foreign investors (FIs). In the year 2011, the GoI partially liberalised the FDI regime and allowed FIs to invest in LLPs under the government approval route. Thereafter, over the years, the GoI steadily liberalised the FDI regime for investment in LLPs. In this article, we will discuss the FDI regime with respect to LLPs and the advantages an LLP has over traditional companies. We will also assess the benefits and some shortcomings of the LLP under the current legal regime, for FIs looking to operate in India.


Initially FDI in LLPs was permitted under the government approval route, with a restriction on downstream investments. However, in 2015, the government introduced reforms to liberalise FDI in LLPs and has subsequently further liberalised its position, in phases. FDI is now allowed under the automatic route in LLPs operating in sectors where 100% FDI is allowed under the automatic route with no FDI-linked performance conditions. Existing companies with FDI do not need any government approval to convert into an LLP provided they satisfy the requirements for an LLP to receive FDI.

Who can Invest?

A person resident outside India or an entity incorporated outside India (other than an entity/citizen in Pakistan or Bangladesh) can invest in an Indian LLP. However, foreign portfolio investors / foreign institutional investors / foreign venture capital investors registered in accordance with SEBI guidelines are not eligible to invest in LLPs. FDI is allowed either by way of capital contribution or by way of acquisition/transfer of profit shares. Hence, an investor can either become a partner of an LLP by contributing to its capital or by acquiring a partnership share from an existing partner. The pricing norms for acquisition or sale of partnership share in an LLP, between residents and non-residents, is akin to the norms for transfer of a company’s shares. The valuation for the transaction is required to be certified by a chartered accountant, practicing cost accountant or by an approved valuer.

Partners in an LLP

In an LLP, the designated partners are responsible for the management and execution of all acts including compliance of various provisions such as filing of documents/returns/statements as required by the LLP Act. As per the LLP Act, there should be minimum two designated partners who are individuals and at least one of them should be a resident Indian. Previously, an LLP with FDI seeking to appoint a body corporate as a designated partner, was mandated to ensure that such body corporate was an Indian company. However, this provision has been deleted and any kind of body corporate, resident or foreign, can be a designated partner in an LLP. Further, individuals being appointed as designated partners are no longer required to satisfy the residency test under FEMA to be designated partners. At present an LLP with FDI is required to comply with the provisions under the LLP Act and has no additional obligations under FDI policy with respect to designated partners.

Permissible Sectors 

Due to the restriction that an LLP receiving FDI cannot be engaged in a sector which has any FDI linked conditions, certain sectors are not open for investment by FIs using an LLP. However, under the FDI route most services (other than certain kinds like aviation, financial services etc) can be operated under the LLP form. Hence, services, tourism, hospitals, hotels and restaurants etc., can all be operated in an LLP and can avail FDI. Strategic FIs looking to set up a base in India in these sectors can utilise this opportunity to set shop as an LLP. The LLP can offer strategic FIs a great avenue to increase the quantum of their repatriation from India, due to beneficial tax treatment that LLPs have with respect to distribution of profits.

Direct Tax Benefits

LLPs enjoy a beneficial direct tax regime compared to Indian companies since a dividend distribution tax (DDT) is not applicable on distributions made by an LLP to its partners. This is close to 20% savings when compared with the applicability of the DDT regime on companies. Hence, the LLP can be an efficient model for strategic FIs, looking to set up a wholly owned subsidiary in India. If the proposed activity of the FI is within a sector which has no FDI linked restrictions, an LLP is an extremely tax efficient vehicle for such investments. Another aspect that is of utility to domestic investors, but not available to FIs currently, is the ability of partners to lend and borrow to the LLP freely without additional compliances or tax implications. In case of a company, loans extended by a company from its surplus funds to its shareholders could be taxed as deemed dividends. Apart from these tax benefits, the LLP is subjected to a broadly similar regime for corporate tax and other applicable direct and indirect taxes compared to a company.

Structuring of Investments

Investors have generally approached the LLP model with caution on the assumption that LLPs have limited scope for structuring investments in the form of preferential instruments. While FIs may not be able to structure compulsorily convertible debt into LLPs, they could certainly give effect to preferential structures. The law governing LLPs allows the partners to contractually determine their ownership and profit shares irrespective of the quantum of each of their contribution. While a foreign partner cannot provide debt financing to an LLP under prevailing exchange control laws, it can structure its voting and profit share rights based on the commercial agreement. Hence, the contractual agreement can be drafted to provide the investor with preferential returns, contingent voting rights, liquidation preferences etc.

Reduced Compliance Burden

Another significant advantage that an LLP has over a company is the reduced level of compliances under the LLP Act. This is in stark comparison to the plethora of compliances that even a private limited company must undertake under the company law regime. The recently amended company law regime has complicated life for smaller and closely held private companies by unnecessarily subjecting them to compliances meant for listed or large public companies. For e.g. a private company is required to obtain shareholder approval by 3/4th majority for; issuing shares by private placement, extending loans to subsidiaries beyond a certain limit etc. A private company is prohibited from providing loans to its director or to entities in which directors may have an interest. These restrictions adversely impact the ability of closely held companies to manage inter-corporate finance and conduct their operations. Further, all companies are required to maintain various statutory registers, file annual returns among other compliances. Most important actions by a company need to be authorised through resolutions, passed at validly conducted board and shareholder meetings. There are detailed procedures prescribed under law for conducting board and shareholder meetings. An LLP on the other hand has much fewer compliances such as; filing the agreement between partners within 30 days of its incorporation, filing an annual return and a statement of account and solvency each year. It also must report any change in partners. Reporting of foreign investments in LLPs must be done in a manner as prescribed by RBI. Barring few material compliances, the LLP has significant freedom to determine its operations in accordance with the agreement between its partners.

Inability to List on Exchanges

One significant drawback of operating as an LLP is that investors looking for an exit through the stock markets may not be able to achieve such an exit through the LLP vehicle. Further, an LLP cannot raise domestic debt on any public platform. As per a clarification provided by SEBI in 2015, an LLP is not eligible to issue debt instruments to the public under the SEBI (Issue and Listing of Debt Securities) Regulations, 2000. An LLP does not fall within the definition of ‘issuer’ or qualify as an ‘issuer’ under various SEBI regulations for issue of listed instruments. Hence, while listed companies can raise capital / debt by issuing securities, an LLP is unable to do the same. The inability to list can be a stumbling block for financial investors seeking to avail the LLP route. However, with adequate planning this hurdle can be overcome since an LLP, with minimum seven partners, can be converted into a company under the current company law regime. Further, the rule for minimum seven partners is sought to be relaxed according to the Companies (Amendment) Bill, 2016 which provides for a firm with two or more partners to be registered as a company. Applicable income tax laws also recognize conversion of an LLP into a company, providing tax exemption for such conversions, subject to certain conditions. Currently, LLPs with FDI may need government approval for any mergers since it may necessitate offering profit shares to foreign partners of the merging LLP. The FDI regime is yet to provide for some of the enabling provisions to allow LLPs to freely conduct mergers and demergers involving foreign partners.

International tax Concerns 

Although Indian tax laws consider the LLP as a separate legal entity, in certain jurisdictions, an LLP is considered as a pass-through vehicle for tax purposes. Due to this, a direct investment in an Indian LLP by an FI located in such jurisdictions may create an unfavourable tax incidence for them. Due to the FI’s home jurisdiction tax laws, a portion of the income accrued by an Indian LLP proportionate to the FI’s partnership, may be taxable as the income of the FI. To avoid such concerns, FIs should assess the tax implications in their home jurisdiction and preferably invest through a special purpose vehicle in a jurisdiction that offers better tax protection.

Limited Liability – Practical Concerns 

Becoming a partner in an LLP may expose the FI to certain claims in case of a litigation against the LLP. While the law on LLPs is clear that the liability of its partners is limited to the extent of their capital contribution, certain other statutes in India impose liabilities on the management of corporate entities. Any litigations under such statues or by any third party could name the FI as a party because of its status as a partner in the LLP. However, if the FI is not in control of operations or participating actively in management, these claims should be rebuttable. Unfortunately, the jurisprudence around these issues is still developing.

Beneficial Vehicle for Some Types of Investors

To sum up; while LLPs may not be the desired vehicle of investment for most financial investors, it can certainly be an instrument of use for certain financial and strategic investors in sectors such as services (other than certain kinds like aviation, financial services etc), tourism, hotels, hospitals etc. The reduced compliance burden along with the prevailing DDT benefits make this a very attractive option for FIs in these sectors. Many MNCs with Indian operations are uncomfortable with the idea of losing close to 50% of the profits from Indian operations, while repatriating the same to the parent company. These MNCs could certainly view the LLP as a vehicle to comfort them from such troubles.

Ajay Joseph

Partner, Veyrah Law

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.


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