India government likely to consent to foreigners setting up limited liability partnerships (LLPs) in sectors where 100% foreign investment is allowed

The Indian government said it may soon be allowing overseas investors to set up limited liability partnerships in sectors that permit 100% foreign investment. The announcement comes after a lot of dilly dallying with regard to financing regulations for this type of business organization favored worldwide for its flexibility. The move therefore marks a decisive step on the part of the Indian government towards encouraging this type of business in the country.

The Indian department of industrial policy and promotion (DIPP) reported that it had written to the Finance Ministry outlining a number of aspects of the proposed foreign investment policy. The Department of Industrial Policy and Promotion is India’s watchdog for foreign investments in the country, and formulates policy for FDI.

DIPP reiterated that it had written to the Finance Ministry over the proposed foreign investment structure for Limited Liability Partnerships. The DIPP suggested that overseas investments be permitted in Limited Liability Partnerships with prior approval.  According to analysts, the move will give foreign investors the flexibility to run their investments in an environment that is simpler, with least compliances but tax efficient as well.

A government official said a discussion paper will be tabled to the public soon. The discussion paper to be released comes as the third release from the Department of Industrial Policy and Promotion. The first two discussion papers targeted the defense, production and multi brand retail sectors. When the discussions first came up over FDI with regard to Limited Liability Partnership, the DIPP had been opposed to the move early this year.

During the preliminary discussions early this year, the Reserve Bank of India had favored a maximum of 49% FDI in the LLPs sectors, while the finance ministry was in favor of a more liberal regime, but with prior approval. The FDI policy proposed by the DIPP forbids foreigners from establishing LLPs in sectors such as real estate in which conditions such as minimum capitalization and lock-in period are applicable. It also bars foreigners in sectors where FDI is prohibited or restricted with caps on investment.

Indian companies having foreign investments will not be eligible to make investments in LLPs. Similarly, LLPs having foreign investment will not be allowed to make downstream investments or raise overseas debt, said a senior government official.

26 Aug 2010.