FDI Policy (Contd.)

Besides the changes mentioned in my previous post, there are a couple of changes in the FDI Policy as follows: 

• The FDI policy has ruled out in-built options of any type on equity

DIPP states that instruments with in-built option of any type will not qualify as an eligible instrument of FDI. The pertinent clause in Circular No 2 of 2011 reads:

3.3.2.1 Only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI.   Equity instruments issued/transferred to nonresidents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines.

However DIPP has not provided any specific definition or explanation for the term “options”. This provision may result in an adverse impact on foreign investors as put option is one of the most widely adopted mode of exit.

• FDI in Limited Liability Partnerships (LLPs)

The previous FDI Policy (Click here to view) had stated that allowing FDI in LLPs is under consideration of the Government as a foot note to Para. 3.3.5. Pursuant to this the DIPP vide press note No. 1 (2011) (Click here to view) introduced FDI in LLP. The current FDI policy has consolidated this. Presently FDI is permitted in LLPs, subject to the following conditions:

(a)    In sectors where 100% FDI is allowed in automatic route, LLPs can avail FDI through the through the Government approval route

(b)    LLPs with FDI cannot operate in agricultural/plantation activity, print media or real estate business.

(c)    For an Indian company having FDI to make downstream investment in an LLP, both the company and the LLP has to be operating in sectors where 100% FDI is allowed, through the automatic route.

(d)    LLPs with FDI cannot make any downstream investments.

(e) Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank.

(f)    Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) are not permitted to invest in LLPs. LLPs cannot avail External Commercial Borrowings (ECBs).

(g)    If an LLP with FDI, has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate can only be a company registered in India under the Companies Act, 1956 and not any other body.

(h)    For such LLPs, the designated partner "resident in India", as defined under the’ Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.

(i) The designated partners have to ensure the compliance with all the above conditions and they will also be liable for all penalties imposed on the LLP for their contravention.

(j)  All the conditions mentioned above have to be met for conversion of a company with FDI, into an LLP, and that too with the prior approval of FIPB/Government.