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Status of Statutory dues under IBC – Operational or Financial creditors – Who decides?

In the Insolvency Resolution Process for Corporate Persons, an issue is generally discussed as to the status of statutory dues payable by the Corporate Person – whether the same will qualify as a financial debt or operational debt. To understand the issue, it would be useful to first know the definitions of certain terms defined under The Insolvency and Bankruptcy Code, 2016 (“IBC).

Some of the relevant definitions are discussed below:

  • “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.
  • “Debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.
  • “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
  • “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes –
  • money borrowed against the payment of interest;
  • any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent ……………………………….
  • “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
  • “operational debt” means a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

If we analyse the above definitions closely, statutory dues shall not fall either under the definition of “financial creditor” or “operational creditor” since the same cannot be said to have become due on account of disbursement of debt or supply of goods or services, etc..

The treatment of statutory dues shall be as per resolution plan approved by the Committee of Creditors. Once, the resolution plan, as approved by the Committee of Creditors, is approved by the Adjudicating Authority the same shall be binding on all stakeholders involved in the resolution plan including government authorities to whom statutory dues are payable. Therefore, the fate of statutory dues payable to government authorities will be initially decided by the Committee of Creditors and thereafter by the Adjudicating Authority when it considers the resolution plan.

“NANDINI” versus “NANDHINI” – ‘NOT’ deceptively similar trademarks

Sonil Singhania & Sana Singh


30/7/2018  

The use of deceptively similar trademarks was allowable for goods or services falling under different classes and it never became a major issue of concern. For instance, the trademark MARUTI for cars also exists for tissue papers, hosiery products and also hardware items. Such independent existence of the same or similar trademark was acceptable and has been in use for products falling under different classes and do not pose any conflict or overlap between the relevant consumers. However, the courts maintained a consistent view that existence of deceptively similar trademarks were not permissible for goods or services falling under the same class.

But now, post the recent judgment of Nandhini Deluxe v. Karnataka Co-Operative Milk Producers Federation Ltd. Civil Appeal No. 2943-2944 of 2018; same or deceptively similar trademark can be used even for goods falling under the same class if they are visually distinct when compared. Supreme Court held that the use of similar trademarks for different goods or services, even though they might be falling under the same class, cannot be termed as infringement.

Karnataka Co-Operative Milk Producers Federation has been producing and selling milk and milk products since years and had obtained registrations for their trademark “NANDINI” along with its variants in class 29 for milk and milk products, in English as well as several other  languages, with a user date of 1985.  Nandhini Deluxe, a restaurant chain, which is in the market since the year 1989, applied for registration of their trademark “NANDHINI”, in class 29 for meat, fish, poultry, meat extracts, preserves, dried and cooked fruits and vegetables, jellies, jams, eggs, milk and milk products, edible oils and fats, salad dressings etc. This trademark application was allowed by the Registrar of trademarks post the completion of the opposition proceedings, whereas it was declined by the IPAB (Intellectual Property Appellate Board) as it disapproved of the registration of trademark “NANDHINI” as being deceptively similar to another trademark “NANDINI”, already in use prior to the adoption of the trademark “NANDHINI”, for having a similar pronunciation and only a basic difference of a single alphabet ‘H’ between the two marks. The IPAB held that the Karnataka Co-Operative Milk Producers Federation was in “regular and consistent use of the trademark “NANDINI” and it had become entrenched in the minds of the consumers and it would not be in the interest of the public to allow the restaurant chain to use the trademark “NANDHINI””. Thereafter, based on this, the High Court concurred with the above mentioned reasons as given by the IPAB and affirmed both marks to be deceptively similar, thereby disallowing the registration of the trademark “NANDHINI”. Additionally, the HC noted that Karnataka Co-Operative Milk Producers Federation was using the trademark “NANDINI” for goods like milk and milk products since 1985, whereas Nandhini Deluxe adopted the trademark “NANDHINI” for their restaurants since 1989 which proved the fact that Karnataka Co-Operative Milk Producers Federation was a prior user and adopter of the trademark “NANDINI”.

With the IPAB and the HC restraining Nandhini Deluxe, the restaurant chain, from using the “NANDHINI” trademark and considering its use to be an infringement of the well-known trademark “NANDINI”, Nadhini Deluxe further appealed against before the Supreme Court.

The Supreme Court put together a detailed comparison on the trademarks in dispute and observed that the marks in question, “NANDHINI”/”NANDINI” of Nadhini Deluxe (Appellant) and Karnataka Co-Operative Milk Producers Federation (Respondent), respectively,  cannot be claimed to be deceptively similar, and not amounting to any confusion among the general public. The Court held as follows: “Though there is a phonetic similarity insofar as the words “NANDHINI”/”NANDINI” are concerned, the trademark with logo adopted by the two parties are altogether different. The manner in which the Appellant has written “NANDHINI” in totally different font as compared to the style adopted by the respondent for its trademark “NANDINI”. Further, the Appellant has used and added the suffix ‘Deluxe’ and, thus, its trademark is “NANDHINI DELUXE”. It is followed by the words ‘the real spice of life’. There is device of lamp with the word “NANDHINI”. In contrast, the Respondent has used only one word, namely, “NANDINI” which is not prefixed or suffixed by any word. In its trademark, “NANDINI” encircled by an egg shaped circle has been placed below the ‘Cow’ logo. A bare perusal of the two trademarks would show that there is hardly any similarity of the appellant’s trademark with that of the respondent when these trademarks are seen in totality.”

The Court held, “NANDHINI”/”NANDINI” is a generic name, representing a goddess and a cow in Hindu mythology, and it is not an invented or coined word by anyone to the dispute.”

Further the Court concluded that there is no provision of law which expressly prohibits registration of a trademark which is similar to an existing trademark and used for dissimilar goods, even when they fall under the same class. It was held that no person can have exclusive right or monopoly over the entire class of goods, especially when the trademark is not being used with respect to all the goods falling under the said class. Supreme Court’s decision clearly construes that two visually distinct and different marks cannot be called deceptively similar especially when they are being used for different goods.

This in turn would be a huge relief to the trademark owners having trademarks similar to already existing trademarks for dissimilar goods falling under same class.

The complete judgment can be accessed at this link.

Annual Return on Foreign Liabilities and Assets (FLA) – Applicable on LLPs

Dipak Rao & Gunjan Gupta


6/07/2018  

The Reserve Bank of India (RBI) vide Notification No. FEMA 20(R)/2017-RB dated November 07, 2017 replaced Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000 by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (Regulations 2017).

Regulations 2017, inter-alia, provides that the Limited Liability Partnership (LLP) which has received investment by way of capital contribution from foreign investors in the previous financial year(s) including the current financial year, should submit Excel based FLA return with the RBI on or before the 15th day of July of each year.

Although Regulations 2017 casts a mandatory obligation on the LLP(s) having foreign investment to file the Excel based FLA return with the RBI within the prescribed timeline, the format of the Excel based FLA return relates only to a company. No amendment has been carried out in the format of the Excel based FLA return to suit the LLP requirements, which creates the misperception that the same is not applicable to LLP(s) at all.

The first page of Excel based FLA return requires the corporate identification number (CIN) to be filled up, which contains 21 alphanumeric digits. Whereas limited liability partnership identification number (LLP-IN) contains only 7 alphanumeric digits. Therefore, to enable LLP(s) to file the Excel based FLA return they are required to obtain a dummy CIN by sending a request e-mail to surveyfla@rbi.org.in (RBI helpdesk – 022-26578662/8214). After the dummy CIN is allotted, the same will be used for future filings until the format of the Excel based FLA return is amended to meet the LLP requirements.

It is pertinent to note that non-submission or delay in submission of Excel based FLA return by LLP(s) is a compoundable offence in terms of the Master Direction on Compounding of Contraventions under the FEMA, 1999 issued by the RBI on January 01, 2016.

The “Appropriate Courts” in Foreign Seated Arbitration: An Indian Perspective

Arbitration has slowly gained ground as the most preferred mode of dispute resolution with a high focus on speedy dispute resolution, preference to party autonomy and minimal intervention of Courts. Although the law related to domestic arbitration is clear as to which courts would have jurisdiction to supervise these arbitrations, there is still some amount of ambiguity as far as International Commercial Arbitrations1 are concerned.

As far as the procedural law of Arbitration is concerned, it is often said that Parties to the agreement make their own law owing to the preference to party autonomy given in these circumstances. However, this does not mean that International Commercial Arbitrations take place in a vacuum. Even rules decided by Parties need the sanction of law if they are to be enforceable. In this context it is important to understand that the relevant law which governs the procedural and curial aspects of Arbitrations is  known as the law of the seat or place of arbitration and is called the “lex arbitri”.

Foreign Seated Arbitration

To understand what a Foreign Seat is and what the implication of a foreign seat is, it is important to understand the different systems of law which govern an agreement. In any arbitration containing a foreign element, there are three different systems of law which govern the arbitration2:

  1. The law governing the substantive law of the contract3 – this is the law which governs the substantive issues in dispute in the contract. Also referred to as “applicable law”, “governing law”, “proper law of the contract” or “substantive law”.
  2. The law governing the existence and proceedings of the arbitral tribunal4 – This is the law in which the arbitration proceedings have to be conducted and is also referred to as the “curial law”. This is the law which is derived from the seat of arbitration.
  3. The law governing the recognition and enforcement of the award5 – This is the law which governs the enforcement, as well as filing or setting aside of the award and is also the law which governs the arbitrability of the dispute.

Furthermore, in absence of any other stipulation in the contract, proper law is the law applicable to the arbitral tribunal itself6. Furthermore, the lex arbitri and the law governing the recognition and enforcement of the award are also one and the same in absence of an intention/stipulation to the contrary7. Thus the place of the arbitration generally specified in a contract determines the seat of arbitration unless contrary intention is apparent from the contract. In other words the seat of arbitration is dependent on several factors and is that which has the closest and most real connection with the agreement to arbitrate8.

Therefore, any arbitration where the seat of arbitration is outside India is a foreign seated arbitration. From the above discussion, it is evident that it is important to gather the seat of arbitration from the agreement between the parties, as it has an implication of determining the curial law and the lex arbitri of the arbitration. This in turn has an impact on determining which courts can be approached for which remedy in case of a Foreign Seated Arbitration.

The Applicability of Part I to a Foreign Seated Arbitration

As far as Indian law is concerned, it is now well settled, that the seat of arbitration is governed by the following factors:

  1. The place of arbitration is usually determinative of the seat of arbitration, i.e. the courts having supervisory jurisdiction empowered to give interim reliefs.
  2. The place of arbitration can be different from the seat of arbitration, if a different intention appears from the intention of the parties. In such a case, the seat of arbitration would be the jurisdiction which would have the closest and most real connection with the arbitration agreement9.
  3. Part I of the Arbitration and Conciliation Act, 1996 (hereinafter called “the Act”), which is the curial law in India, is excluded for Foreign Seated Arbitrations barring the exception provided in Section 2(2) of the Act which would be discussed in the latter part of this Article.

Interim Relief from Court

In India, the Section which governs interim relief in cases containing an arbitration clause is Section 9 of the Act. Article 9 of the UNCITRAL Model Law10 on which the Act is based, deals with the power of courts to grant interim measures of protection. where a party is permitted to apply to Court for certain interim measures, before, during or after making of the award by the Tribunal. A recent amendment has taken place in the Act11, which has substantially changed this position regarding seeking of interim relief from Court.

Before the amendment of 2015, the law with regard to the applicability of Part I was governed by the judgment of BALCO12BALCO laid down prospectively (from 06.09.2012), that in a foreign seated arbitration neither Section 9 nor any other provision of Part I would be applicable. Prior to BALCO, the law laid was as laid down in Bhatia International13 Bhatia International laid down, that the provisions of Part I would apply even to arbitrations held outside India, unless it was expressly or impliedly excluded by parties. It is pertinent to note, that Bhatia International still continues to govern the law as far as arbitration agreements pre-dating BALCO are concerned.

The Amendment of 2015, in effect, nullifies the law laid down in BALCO to some extent and holds that even in an International Commercial Arbitration having a foreign seat, a party can approach Indian courts under Section 9 and get appropriate relief, provided there is no agreement to the contrary, thus reviving the law of Bhatia International to a limited extent.

Therefore as far as Interim Measures from Court are concerned, the parties are allowed to approach Indian Courts, even in Foreign Seated arbitrations. This is particularly helpful in cases where assets of Indian Parties are located in India and there is a fear of disposal. Similarly, the Appeal against an Order passed in a Petition filed under Section 9 would also lie to Indian Courts only as per the amendment14.

Application for Appointment of Arbitrators

Section 11 of the Act governs the provisions for appointment of Arbitrators in India, Article 11 being the concomitant provision of the UNCITRAL Model Law. As regards the appointment of Arbitrators, in a Foreign Seated Arbitration, Part I of the Arbitration Act has no application and there is no exception carved out in the act itself. However, in certain cases, where even though the place of Arbitration has been named to be outside India, the closest and most real connection of the agreement lies in India. For instance in the case of Enercon15.

Apart from this exception, the application for Appointment of Arbitrators, failing the agreement of parties would inevitably lie in the Country where the seat of Arbitration is located.

Application for challenging/enforcement of the Award

Parties can approach India for enforcement of an Award in two scenarios which are described as under:

  1. Scenario 1 – Where the seat/place of Arbitration and award is outside India and where the real most close connection of the agreement also lies in the same place.
  2. Scenario 2 – Where the seat/place of Arbitration and award is outside India but where the real and closest connection of the agreement lies in India.

Scenario 1

In Scenario 1, despite the seat being outside India, the parties could want to come to India for enforcement owing to the fact that the assets of the Indian party might be located in India etc. For this purpose if the award is passed in a territory which is signatory to the New York Convention, and with which a reciprocal arrangement has been made by the Indian Central Government, then such an award is enforceable in accordance with Part II of the Act16. Any challenge to the award would lie under Section 48, Part II of the Act. Out of the 196 countries in the world only 48 countries have been notified by the Central Government as reciprocating countries, with the most recent addition being Mauritius17.

However, if the award is made in a territory which is either not a party to the New York Convention, or India does not have a reciprocal arrangement with  that territory, or if both conditions are not fulfilled then the following would have to be considered:

  1. Where the award passed in the territory concerned, is considered to be the decree of that Court, then parties can come to India directly. In case the award is not automatically a decree in the concerned territory, then the parties would need to first make the award a rule of Court in the concerned territory, and then only can they approach India for execution of the award as a Foreign Decree.
  2. Once the award is considered to be a Foreign Decree then Section 44 of the Code of Civil Procedure, 1906 (Hereinafter called the CPC) would become applicable. Section 2(2) of the CPC defines foreign judgment as “the judgment of a foreign Court”. Parties can approach Indian Courts for enforcement under Section 44.
  3. Next it needs to be checked whether the award to be enforced has been passed in a reciprocating territory18. In case the territory is a reciprocating territory then directly an Execution Petition can be filed in India and the award can be executed as a decree of a foreign Court.
  4. However, if the country in which the foreign decree/award has been passed is not a reciprocating country, then a further complication arises, wherein a fresh suit would have to be filed in India to get the foreign decree/award enforced. This is basically a fresh adjudication and time consuming process.

Scenario 2

Where the seat/place of Arbitration and award is outside India but where the real and closest connection of the agreement lies in India, then in such a case, Part I of the Act would become applicable and an application for execution can be directly filed in India. Any party intending to object to the award would also have to approach Court under Part I, Section 34 of the Act and not under Part II, Section 48 of the Act.

Appeals arising from orders of Interim Reliefs or orders of enforcement of foreign awards

In accordance with the discussion above, in case an interim relief is given under Section 9 or enforcement of foreign award is made as per Part I, then automatically an appeal against such Orders would lie to Indian Courts under Part I, Section 37 of the Act. Similarly, in case an order of an Indian Court in respect of a challenge to a foreign award under Part II, needs to be appealed, Section 50 of Act would become applicable and again the Appeal would lie in India.

However, in a scenario, where neither Part I of the Act is applicable, nor Indian Courts have been approached for execution/enforcement/challenge from the Foreign Award, then Indian Courts would not have any role to play in the appeal process either.

Denouement

To conclude it may be said, that different courts play different roles in Foreign Seated Arbitrations. Firstly, it needs to be determined which is the seat of arbitration, after which the closest and most real connection needs to be analysed. Thereafter for different remedies, different Courts can be approached. Moreover, the 2015 amendment has given more leeway to Indian Courts as far as Interim reliefs are concerned, thus providing additional protection to foreign investors vis-s-a-vis Indian players. In view of the above, India is fast becoming an arbitration and foreign investor friendly country.


Section 2(f) of the Arbitration and Conciliation Act, 1996 (the Act) defines “International commercial arbitration” as “an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is- (i) An individual who is a national of, or habitually resident in, any country other than India; or (ii) A body corporate which is in corporate in any  country other than India; or (iii) An association or a body of individuals whose central management and control is exercised in any country other than India; or (iv). The Government of a foreign country;”

 

3 Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.

4 Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.and Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (1998) 1 SCC 305

5 Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (1998) 1 SCC 305

6 Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. (2012) 12 SCC 359

7  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552; Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. (2014) 5 SCC 1

8; Roger Shashoua v. Mukesh Sharma, Supreme Court, decided on 4th July, 2017; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552; Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. (2014) 5 SCC 1

9 An example of such a scenario is the judgment of Enercon – where despite the venue being specifically provided as London, the seat was held to be India. This was because, after taking various factors into consideration including applicable law as the Indian Arbitration Act, 1996 and all three laws i.e., Law governing Contract, Law governing Arbitration Agreement, Law governing Curial Laws/ Lex Arbitri were Indian, the real and closest connection of the Agreement was held to be that with India.

10 United Nations Commission of International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, 1985.

11 Arbitration and Conciliation (Amendment) Act, 2015

12 Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (2012) 9 SCC 552.

13 Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105.

14 Section 2(2) of the Act makes the appeal provision of Section 37 also applicable to International Commercial Arbitrations, even if the place of arbitration is outside India.

15  Refer Footnote 9

16 Section 49 of the Act.

17 Australia; Austria; Belgium; Botswana; Bulgaria; Central African Republic; Chile; China (including Hong Kong and Macau) Cuba; Czechoslovak Socialist Republic; Denmark; Ecuador; Federal Republic of Germany; Finland; France; German Democratic Republic; Ghana; Greece; Hungary; Italy; Japan; Kuwait; Mauritius, Malagasy Republic; Malaysia; Mexico; Morocco; Nigeria; Norway; Philippines; Poland; Republic of Korea; Romania; Russia; San Marino; Singapore; Spain; Sweden; Switzerland; Syrian Arab Republic; Thailand; The Arab Republic of Egypt; The Netherlands; Trinidad and Tobago; Tunisia; United Kingdom; United Republic of Tanzania and United States of America.

18 “Reciprocating territory” means any country or territory outside India which the Central Government may, by notification in the Official Gazette, declare to be a reciprocating territory for the purposes of Section 44A of the Civil Procedure Code. Countries which have been officially recognized as “reciprocating countries” by the Central Government of India include:- Aden; Bangladesh; Federation of Malaya; Fiji Colony; Hong Kong; New Zealand; Cook Islands and Western Samoa; Papua New Guinea; Republic of Singapore; Trinidad and Tobago; United Kingdom of Great Britain and Northern Ireland; and Victoria.

Forex Management in Cross-Border Mergers

The Indian companies law currently allows Indian companies to merge with foreign companies and vica- versa (Cross Border Mergers/Merger). Further, on March 20th, 2018, the government notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulation) which attempt to provide clarity regarding Cross Border Mergers from a foreign exchange law perspective. In this background this article examines the key aspects of the Merger Regulation and its implications.

 

For-EX management in Cross-border Mergers

INBOUND MERGERS

Inbound Merger means when an Indian company (IC) acquires assets and liabilities of a foreign company consequent to a Cross Border Merger. In this regard, the Merger Regulations are allowing transfer of securities to a foreign shareholder, subject to compliances applicable to a foreign investor under the foreign direct investment regulations (FDI Regs). This effectively means that such Cross Border Mergers cannot result in any contravention of any restriction applicable to foreign direct investment into India, per the FDI Regs. Illustratively, an IC cannot issue shares, as result of a Cross Border Merger, to a person resident outside India if such IC is engaged in a sector prohibited for investment under the FDI Regs.  Similarly, the Merger Regulations have stated that a Cross Border Merger resulting in transfer of securities of a joint venture (JV) or a wholly owned subsidiary (WS) of an IC, situated in a foreign jurisdiction, shall be subject to compliances such as pricing of shares in a specified manner, any outstanding’s owed to the IC being clear prior to such transfer, etc.  set out under the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004) (ODI Regulation). Further, the Merger Regulations mandates that if the Cross Border Merger results in acquisition of a stepdown subsidiary (situated in a foreign jurisdiction) of the JV/WOS, by an IC, then certain additional conditions laid down in the ODI Regulations will need to be complied with. One such conditions requires inter-alia the IC to (a) be regulated by a financial sector regulator (b) have earned net profit during the preceding three financial years from the financial services activities; if such stepdown subsidiary (situated in a foreign jurisdiction) is engaged in the financial sector.

The Merger Regulation has also stipulated certain compliances for the IC, on overseas borrowings, to be acquired by the IC, in connection with such Cross Border Merger. One such compliance requires the IC to ensure that the overseas borrowings of the foreign company, proposed to be taken over by it, are compliant with the provisions of the overseas borrowing regulations under Indian law (Overseas Borrowing Regs) within a period of 2 years from the date of sanction of the scheme pertaining to such Cross Border Merger by the relevant authority. However, the IC cannot remit any moneys from India for repayment of such overseas borrowings, as part of ensuring compliances with Overseas Borrowing Regs, during such 2-year period. Further, it is to be noted that the Overseas Borrowing Regs inter-alia stipulate specified interest rates, maturity, end use restrictions, on borrowings, from overseas, by an Indian company (however, end use restrictions are not applicable to an IC per the Merger Regulations).

While the intent is to ensure smooth transition, it may possibly bring the relevant parties to the drawing board as the interest rates and maturity etc. stipulated in the Overseas Borrowing Regs may not tie in with the commercial intent of such borrowings. Secondly, the restriction on repayment of such overseas borrowings during the 2 year period may create hurdles for the Cross Border Merger.

OUTBOUND MERGERS

Outbound Merger is exactly the opposite of an Inbound Merger i.e. a foreign company (FC) acquiring assets and liabilities of an IC. While it is assumed that the law applicable in the jurisdiction where the FC is situated will regulate such Cross Border Merger, the Merger Regulations also stipulate certain conditions such as guarantees or outstanding borrowings of the IC which shall, as a result of such Cross Border Merger, become guarantees or borrowings of the FC. This however is subject to the FC not acquiring any such guarantee or outstanding borrowing, in rupees payable to Indian lenders, non-compliant with the relevant foreign exchange law in India (Applicable Law). Considering rupee borrowings by Indian entities from Indian lenders may not always be compliant with Applicable Law, such a restriction will need to be examined by the FC from a balance sheet perspective.

CONCLUSION

This notification will enable companies to consolidate and re-structure their business in the most efficient and business friendly manner. However, the challenges discussed above may need to be ironed out by the relevant regulators.

Foreign Direct Investment in Limited Liability Partnership

Limited Liability Partnership (“LLP”) is a hybrid entity with advantage of a company and operational flexibility of a partnership. The concept was introduced by the Ministry of Corporate Affairs through Limited Liability Partnership Act, 2008 on 9th January, 2009.

Setting up of LLP in India has various advantages. Some of the significant advantages are as follows:

  • contribution by the partners may consist of tangible, movable or immovable or intangible property or other benefit including money, promissory notes, and other agreements to contribute cash or property and contracts for services performed or to be performed.
  • No requirement of holding quarterly board meetings.
  • Distribution of profits to partners of the LLP is exempt from tax.
  • No withholding tax on distribution made to partners by LLP.
  • Non-applicability of Corporate Social Responsibility (CSR) provisions.

FOREIGN DIRECT INVESTMENT IN LLP

Foreign investment is permitted under the automatic route in LLP operating in sectors/activities where 100% Foreign Direct Investment (FDI) is allowed through the automatic route and there are no FDI-linked performance conditions. As of now, payment by an eligible foreign investor towards capital contribution/profit share of LLPs is allowed only by way of cash consideration in terms of the Foreign Exchange Management Act, 1999.

In addition to the above, LLPs receiving FDI are also allowed to make downstream investment in other limited liability company or LLP in those sectors where 100% FDI is permitted through automatic route.

REPORTING REQUIREMENTS

  • An LLP receiving FDI in the form of capital contribution shall submit a report within a period of 30 days from the date of receipt of funds in form FDI-LLP (I) through its Authorised Dealer Bank to the regional office of the Reserve Bank of India (RBI) under whose jurisdiction the registered office of the LLP is situated.
  • Any disinvestment or transfer of capital contribution or profit share between a resident and non-resident or vice versa shall be reported to RBI through Authorised Dealer Bank within a period of 60 days from the date of transfer in form FDI-LLP (II).

Though, External Commercial Borrowings are not allowed in LLP in India, however, FDI norms relating to LLP are considerably liberalised as compared to investment in Indian companies.