Foreign investment policy for LLP firms under review

Written by Neha Pal | New Delhi | Updated: Jul 29 2009, 04:34am hrs
The government has decided to clarify the foreign investment rules under the new limited liability partnership (LLP) framework. An official confirmed to FE that the ministry of corporate affairs has urged the department of industrial policy & promotion to work out the necessary guidelines as foreign investors are asking for clarity. The haste follows clearance of the tax treatment for LLPs in Budget 2009-10.

There is need for the government to introduce FDI norms for foreign investors who want to invest in LLPs. There are changes required in sector-specific norms. There is need for amendments to legislation covering professionals, like the Chartered Accountant Act, Company Secretary Act and Advocate Act, as they will need to recognise LLPs, said Rajan Gupta, a partner with corporate law firm FoxMandal Little.

Recognising the potential of the framework, industry chamber Ficci has asked for LLP legislation to be aligned with other economic legislation, as well as for appropriate amendments to be made to FDI guidelines and the Foreign Exchange Management Act.

According to the ministry official, Foreign investors want clarity on the FDI norms. They want to know how much foreign investment can be channeled into an LLP depending upon the different sectors. Since most of the seed capital for new ventures will come from abroad, the foreign investment guidelines are important, the official added.

The official said that LLPs would soon become an important route for many international investors in areas such as accounting, auditing and taxation services, and therefore are expected to attract large foreign investments to India. The LLP framework overcomes difficulties faced by global investors in building business relations and offers the advantage of limited liability wherein one partner will not be held accountable for the actions of another partner.

Experts are of the view that any changes will have to be made in sector-specific FDI norms. For instance, foreign firms cannot currently carry out audits in India. But a foreign investor would be able to invest in an LLP that provides auditing services provided the necessary changes are made to the Chartered Accountant Act.

The government, therefore, needs to specify the sectors where FDI would be allowed. At present, partnership firms are not allowed to carry out banking or insurance business, either. The government also needs to make clear what the FDI cap would be and how it would be computed.

There are at present 63 LLPs listed with the registrar of companies. However, with the new tax structure unveiled in the Budget and once FDI guidelines are announced, that number is expected to rise manifold.