Stakeholders including small and medium enterprises (SMEs) and professional services firms are now worse off with a half-hearted approach of the government allowing foreign direct investment (FDI) in limited liability partnerships (LLPs) in a piecemeal measure, while also withdrawing the advantages enshrined in the LLP Act, 2009.  This has raised more questions than answers about the fate of the LLPs regime in India which is still to take off the ground despite the LLP Act.

In a much awaited action, the Department of Industrial Policy & Promotion (DIPP) recently allowed FDI in LLPs vide press note no.1 of 2011. FDI in LLPs is now permitted through the government approval route in sectors/activities which are otherwise open to 100 percent FDI through automatic route.

While an LLP with FDI cannot make any downstream investment, a company with FDI can make downstream investment into an LLP provided both are operating in sectors/activities which are presently otherwise open to 100 percent FDI through automatic route. The press note provides FDI in LLP to be  only be by way of cash consideration, received by inward remittance through normal banking channels. An LLP will not be allowed to take any external commercial borrowing (ECB) and FIIS and venture capital funds will not be allowed to invest in LLPs.

The LLP Act was promulgated to enable businesses and services like SMEs and professional services firms to increase their global competitiveness by (i) limiting the personal liabilities of partners, (ii) pooling in the resources of technology, capital, expertise etc. of a larger group of partners (iii) work with minimal regulation and maximum freedom to partners and (iv) working with low capital requirement.

The present press note appears to be at cross purposes with the existing LLP regime in India and has thus raised more questions than answers to the way forward for an enabling environment for LLPs in India.

While the LLP Act permits partners to decide on equity, control and contribution on the basis of pooling in of all the partners resources in technology, capital, expertise etc, the new press note takes away the possibility of  a foreign entity contributing only be bring in (much needed) technology or expertise  in SMEs or professional services firms. The yardstick otherwise applicable to larger businesses has been simply applied to SMEs without realising that it could be the technology or expertise which is required from a partner and not the capital in a low capital intensive business or service.

Further, LLPs have been subjected to a government approval for FDI in sectors/activities which are presently otherwise open to 100 percent FDI through automatic route in case of companies under the Companies Act, 1956. This by itself is enough to derail the possibility of foreign funds coming into LLPs due to increased red tape.

While on one hand blocking the technology or know-how contribution by a foreign entity into an LLP, the press note blocks all avenues of recourse to foreign funds to LLPS by prohibiting ECBs by LLPs on the one hand and not allowing FIIs and venture capital funds from investing in LLPs.
The FDI policy in India and the related rules and regulation under Foreign Exchange Management Act (FEMA) have evolved over a considerable period of time in relation to companies. A multitude of these rules and regulation would either need to be notified for LLP or could apply ipso facto on LLPs such as i.e. valuation guidelines, definition of control and ownership, procedure & forms etc. The present press note merely creates and outline and does not deal with all applicable rules and regulations thus resulting in vagueness and confusion which is also likely to adversely affect FDI in LLPs.

Most professional services in India require recognition and/or licence from Indian professional services regulatory bodies. Merely permitting FDI in LLPs without addressing the concerns around the legal framework impacting the ability of LLPs (including those with FDI) in professional services to be able to operate in India, would be of little consequence to professional services sector.

Without a comprehensive view and action on all issues concerning SMEs and professional services firms taking the advantage of the benefits of the LLP Act, the present ad-hoc and piecemeal initiative of the government has raised more questions than answers and left all stakeholders in a state of fix about what to do with this press note.