Government Nod to FDI in LLPs

(The following post is contributed by Rohan Bagai)

The Cabinet Committee on Economic Affairs (CCEA) recently approved foreign direct investment (FDI) in limited liability partnership (LLP) firms whilst setting out a few disclaimers in its press release dated May 11, 2011. This follows from a consultation process initiated last year pursuant to a discussion paper.

As such, an LLP is a crossbreed business structure, which fuses the characteristics of a partnership firm with that of a corporate entity. Besides, it bestows the pluses of a company and elasticity of a partnership.

The LLP model was first introduced in India through the Limited Liability Partnership Act, 2008 (LLP Act) that was notified on March 31, 2009. Later, the LLP Act was amended to clear way for companies and firms to convert into LLPs. As per the Government website for LLPs, as on May 2, 2011, 4,670 LLPs have been registered in India.

According to the cabinet announcement, FDI in LLPs, “will be implemented in a calibrated manner, beginning with the ‘open’ sectors where monitoring is not required, subject to certain stipulations”. In view of the same, FDI in LLPs would be permissible through the Government route i.e. Foreign Investment Promotion Board (FIPB) approval, in those sectors/activities where 100% FDI is allowed.

That said, FDI in LLPs would not be allowed in agricultural/plantation activity, print media and real estate businesses. In addition, such FDI funded LLPs would not be eligible to make any downstream investments or avail external commercial borrowings (ECBs). Other restrictions are that FDI will be allowed only against cash consideration, and that foreign institutional investors (FIIs) and venture capital investors (FVCIs) cannot invest in LLPs.

Interestingly, even foreign investors with existing investments by means of joint ventures and wholly owned subsidiaries can now restructure and convert themselves to LLP as long as they meet the pre-requisites provided for in the said release.

“This approval will benefit the Indian economy by attracting greater FDI, creating employment and bringing in best international practices and latest technologies in the country”, the government acknowledged in its release.

However, given the wide array of restrictions, it is unlikely that a wave of FDI will flow into the sector. But, if the initial experience is smooth, it may provide justification for gradual withdrawal of some of the restrictions that may then make a meaningful impact on the growth of LLPs.

- Rohan Bagai

The 2nd IJLT-CIS Lecture Series

(The following announcement is from the Indian Journal of Law and Technology)

The Indian Journal of Law and Technology and the Centre for Internet and Society, present the 2nd IJLT- CIS Lecture Series, an event comprised of an intensive series of lectures by luminaries with expertise in law and technology to give students, professionals and anyone interested a comprehensive idea about the theme, “Privacy, Cloud Computing and Social Networking”.

The focus will be on contemporary sub-issues of critical relevance such as:

• The Unique Identification Project and Challenges to Privacy

• Cloud Computing and Behavioural Tracking

• The State and Privacy: Electronic Surveillance

Venue: National Law School of India University, Nagarbhavi, Bangalore

Dates: 21st and 22nd May, 2011-05-02

Admission will not charged but in order to enable us to ensure adequate seating, do register by the 18th of May by email at editorialboard@ijlt.in.

Certificates of completion will be given to participants who attend every lecture in the series.

Updates regarding the conference will be posted on http://www.ijlt.in/.

The Supreme Court Declines an Invitation to Extend Bhatia International

The cases we have discussed on implied exclusion of Part I of the Indian Arbitration Act are composed of three variants – first, the contract designates a foreign proper law but no seat of arbitration (for example Indtel Technical Services v WS Atkins and Citation Infowares v Equinox Corporation), secondly, the contract designates a foreign seat of arbitration but no proper law, and thirdly the contract designates a foreign proper law and a foreign seat of arbitration (Dozco v Doosan). The courts had found that the first type falls short of an “implied exclusion” of Part I, but Dozco affirmed that the third suffices. The Supreme Court’s decision today in Videocon Industries v Union of India involves a fourth variant – Indian proper law, foreign seat of arbitration and foreign arbitration law*, and a Division Bench has held that the Indian courts have no jurisdiction under Part I in those circumstances.

A subsequent post will set out in more detail the impact this decision has on the state of the law. This post briefly highlights the conclusions the Supreme Court reached in Videocon. The case arose out of a Production Sharing Contract executed between a consortium of four companies of the one part and the Ministry of Petroleum and Natural Gas of the other. The contract designated Indian law as the governing of the contract, Kuala Lumpur, Malaysia as the “venue” of arbitration, unless otherwise agreed, and English law as the law governing the arbitration agreement*. It so happened that the dispute between the contractors and the Ministry coincided with the outbreak of the SARS epidemic in Kuala Lumpur, and the Tribunal duly shifted hearings initially to Amsterdam and then to London. The Tribunal passed an order which recorded that the parties consented to shifting the seat of arbitration to London. An action was brought in the Delhi High Court for a declaration that the seat of arbitration was in fact Kuala Lumpur and for a direction to the Tribunal to continue hearings there. A single judge of that Court rejected an objection to the maintainability of the application, finding that India has the “closest and most real connection” to the dispute.

The Supreme Court’s first conclusion was that the seat of arbitration remains Kuala Lumpur although hearings were conducted in Amsterdam and London because the consent of all the parties to the PSC was necessary to change the seat of arbitration. The Court also followed its decision in Dozco v Doosan to the effect that it is common in international arbitration to conduct the hearing at the place most convenient to all parties, without disturbing the juridical seat of arbitration. Notably, the Court referred to provisions of the English Arbitration Act to decide this question, because of its conclusion* that this was the designated arbitration law.

However, the Court held that the Delhi High Court had no jurisdiction to adjudicate, because it was the clear intention of the parties was to (impliedly) exclude the jurisdiction of the Indian Courts. The Court approved a judgment of a single judge of the Gujarat High Court in Hardy Oil and Gas v Hindustan Oil Exploration (Indian governing law, English arbitration law) that held that the designation of a foreign arbitration law constitutes, for the purposes of Bhatia International, “implied exclusion” of Part I of the Indian Arbitration Act.

This is an important judgment on two issues that are fundamental to Indian arbitration law – the seat of arbitration and the proper scope of implied exclusion. A more detailed post will follow.

* I had previously stated, erroneously, that the arbitration clause between the parties designated English law as the law governing the arbitration. I am grateful to Mr Sumit Rai, one of our readers, for pointing out that the clause designated English law only as the law governing the arbitration agreement. The Supreme Court appears to have assumed nevertheless that it is the law governing the arbitration itself, and counsel for both parties are reported to have argued the case on that basis. If the Court had come to the conclusion that English law merely governs the arbitration agreement, it would have been a less significant factor in ascertaining whether the parties had impliedly excluded Part I of the Indian Act. It would also have made that question considerably more difficult, because none of Hardy Oil (foreign arbitration law), Dozco v Doosan and Citation Infowares would have been on all fours with this case - although Dozco also involved a foreign seat of arbitration, the parties there had also designated a foreign law to govern the contract, whereas in Videocon Indian law was chosen as the substantive law. What is clear from the Videocon judgment, however, is that (as a matter of law) Part I is impliedly excluded when parties designate a foreign arbitration law and a foreign seat of arbitration.

Mutual Fund Scheme: Change in Fundamental Attributes

The Securities Appellate Tribunal (SAT) has ruled in a matter involving the HSBC Mutual Fund. In that case, HSBC had issued a scheme with two plans, viz. a long term plan and a short term plan. The relevant investors had invested in the short-term plan. However, HSBC wound up the long-term plan, and changed the term of the short-term plan by increasing the tenure. This resulted in a fall in the net asset value (NAV) of the scheme thereby jeopardizing the interest of the investors.

SAT decided in favour of the investors in this case, and its ruling on two counts is noteworthy:

1. Such a change in the term of the plan was found to be one that affects the fundamental attributes of the scheme and modifies the interests of the unitholders. It was given effect to without notifying the unitholders and providing an exit option as set out in Reg. 18(15A) of the SEBI (Mutual Funds) Regulations, 1996; and

2. The investors here were entitled to relief from the SAT on appeal although they had sold their units previously in order to cut their losses. Going by this, investors who no longer hold their investments are entitled to relief under securities so long as they traded at a loss at the time of the exit despite recovery of the securities to a higher value subsequently (including at the time of appeal).