Investment Activities By The Limited Liability Partnership

The Limited Liability Partnership Act, 2008 (LLP Act) has truly transformed how businesses operate in India, offering the best of both worlds by combining the benefits of companies and partnership firms. One fantastic feature of the LLP Act is its broad definition of “business”.

According to section 2(e) of the LLP Act, “Business” covers every trade, profession, service, and occupation, except for those activities the Central Government specifically excludes through notifications. This expansive definition shows off just how flexible and adaptable the Limited Liability Partnership (LLP) structure is, making it a great fit for all sorts of business activities.

But hey, setting up an LLP comes with its own set of rules, especially for certain sectors. If you’re in banking, insurance, venture capital, mutual funds, stock exchanges, asset management, architecture, merchant banking, securitization and reconstruction, chit funds, or non-banking financial activities, you gotta get that in-principle approval from the relevant regulatory authority.

Investment activities fall under non-banking financial activities, so if an LLP wants to jump into the investment game, it needs the thumbs up from the Reserve Bank of India (RBI).

What counts as an Investment Activity under Indian law

Investment activity, in the context of Indian financial regulation, means the acquisition of shares, stock, bonds, debentures, or securities issued by a government, local authority, or other marketable securities of a like nature. This definition comes directly from section 45-I(c) of the Reserve Bank of India Act, 1934, which lists the financial activities that qualify an institution as a “financial institution.”

The regulatory concern is not whether an entity holds investments. The concern is whether investment is that entity’s principal business, and whether the entity is accepting deposits from the public or lending money. These two factors together are what pull an entity into the NBFC regulatory perimeter. An entity that deploys its own capital, accepts no third-party deposits, and does no lending is in a very different position from one that raises money from investors or lenders to deploy on their behalf.

The wide definition of “business” under section 2(e) of the LLP Act does not override sector-specific regulations. Where a separate statute, such as the RBI Act, requires a specific entity type, that requirement governs.

LLP registration and the NIC-2004 code requirement

Every LLP, at the time of incorporation, is required to select an industrial code under the National Industrial Classification 2004 (NIC-2004) in Form 2, the Incorporation Document and Subscriber’s Statement filed with the Registrar of Companies (ROC).

Form 2 specifically notes that where business activities involve banking, insurance, venture capital, mutual funds, stock exchanges, asset management, architecture, merchant banking, securitisation and reconstruction, chit funds, or non-banking financial activities, a copy of the in-principle approval from the relevant regulatory authority must be attached.

Two compliance implications follow from this:

• An LLP that selects an investment or non-banking financial activity code at incorporation needs RBI in-principle approval before it can commence operations.
• Once an industrial code is filed and the business activity is furnished to the ROC, the LLP cannot carry on any other activity without a prior alteration of the LLP agreement and ROC approval for the change.

This creates a practical trap for founders who initially register an LLP for a different purpose and later want to pivot into investment activities. A fresh alteration process, including ROC filing and possible regulatory approval, will be required.

RBI’s Stance on LLPs Engaging in Investment Business Activities

The RBI, the big boss of financial and banking operations in India, keeps a close eye on non-banking financial activities to make sure they play by the rules and keep the financial system rock solid.

When it comes to setting up entities with a main gig in investment, India has some pretty tight regulations, all under the watchful eye of the RBI.

This is super important for Limited Liability Partnerships (LLPs) looking to jump into the investment game. The RBI’s guidelines, along with the Reserve Bank Act, 1934, lay down the law on who can get in and what they need to do to stay legit in the world of non-banking financial activities, including investment business.

Key Provisions of the Reserve Bank Act, 1934

Defining: Business of Non-Banking Financial Institution:

Section 45-I (a) of the RBI Act, 1934	“Business of a Non-Banking Financial Institution” means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);

Defining: Non-Banking Institution and Financial Institution

Section 45-I (e) of the RBI Act, 1934

Non-Banking Institution has been defined as a “Company, Corporation, or Co-Operative Society”

Section 45-I (c) of the RBI Act, 1934

Financial Institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely: — The financing, whether by way of making loans or advances or otherwise, of any activity other than its own; The acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of a like nature; *The definition is very exhaustive so we have kept it limited to our topic

Defining: “Non-Banking Financial Company”

Section 45-I (f) of the RBI Act, 1934

”Non-Banking Financial Company” Means– (i) A financial institution which is a company; (ii) A non-banking institution which is a company, and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) Such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the central government and by notification in the official gazette, specify;

The definition of “company” under the RBI Act: why LLPs are structurally excluded

This is the precise point where an LLP’s path to NBFC registration closes. Section 45-I(aa) of the RBI Act, 1934 defines “company” as a company as defined in section 3 of the Companies Act, 1956, now replaced by section 2(20) of the Companies Act, 2013. An LLP, formed and registered under the LLP Act, 2008, does not satisfy this definition and therefore cannot enter the NBFC regulatory perimeter at all.

Definition of “company”: RBI Act vs Companies Act, 2013

Parameter	RBI Act, section 45-I(aa)	Companies Act, 2013, section 2(20)	Does it cover LLPs?
Governing section	45-I(aa), RBI Act	Section 2(20), Companies Act	—
Definition	A company as defined in section 3 of the Companies Act, 1956 (now Companies Act, 2013), including a foreign company	A company incorporated under the Companies Act or under any previous company law	No
Covers Co-operative Societies?	No	No	—
Covers Foreign Companies?	Yes (expressly)	Yes (via definition of foreign company)	—

Because every limb of the NBFC definition under section 45-I(f) requires a “company,” and because an LLP does not meet that definition, the NBFC framework simply does not apply to LLPs. This is not a regulatory gap or a grey area. It is a structural exclusion baked into the RBI Act’s own definitions.

Mandates by the RBI

Section 45-IA of the RBI Act, 1934	This section mandates that no non-banking financial company shall commence or carry on business without: Obtaining a certificate of registration from the RBI. Maintaining a net owned fund of at least twenty-five lakh rupees or as specified by the RBI, up to two hundred lakh rupees.

The principal business criteria: what is the 50-50 test?

The 50-50 test is the RBI’s numerical benchmark for determining whether a company’s principal business is financial activity. It was introduced through an RBI press release dated 08/04/1999. Both conditions must be satisfied simultaneously based on the last audited balance sheet:

1. Financial assets constitute more than 50% of the total assets of the entity (net of intangible assets and accumulated losses).
2. Income from financial assets constitutes more than 50% of the gross income of the entity.

A company meeting both thresholds is required to register as an NBFC with the RBI. An entity that does not satisfy both limbs is not an NBFC by this test.

How the 50-50 test works: an illustration

Parameter	Entity A (passes both limbs)	Entity B (fails second limb)
Total assets	₹100 crore	₹100 crore
Financial assets	₹60 crore (60%)	₹40 crore (40%)
Gross income	₹10 crore	₹10 crore
Income from financial assets	₹6 crore (60%)	₹3 crore (30%)
Both limbs satisfied?	Yes	No
NBFC registration required (if a company)?	Yes	No

Two important clarifications from RBI:

• Fixed deposits placed with banks are not treated as financial assets for this test. Interest income on such FDs is excluded from “income from financial assets.” FDs represent temporary parking of idle funds, not financial business activity.
• The 50-50 test applies to companies. Because an LLP cannot become an NBFC regardless of its financial profile, this test does not grant an LLP any ability to run investment business as a commercial activity.

Implications for LLPs

Given the definitions and requirements stipulated by the Reserve Bank Act, it becomes clear that the RBI’s regulatory framework is tailored to companies as defined under the Companies Act, 2013. This specific requirement means that only entities registered as companies under the Companies Act, 2013, are eligible for registration with the RBI to conduct non-banking financial activities, including investment businesses. Here are some of the reasons as to why the LLPs are in-eligible for carrying on the business of Investment Activities:

• Legal Structure: LLPs, while flexible and beneficial for many business activities, are distinct from companies in their legal structure and registration under the LLP Act, 2008.
• Regulatory Compliance: The RBI’s regulatory provisions explicitly require the registration of non-banking financial companies (NBFCs) to be entities formed under the Companies Act. This ensures that such entities adhere to the rigorous compliance, reporting, and governance standards applicable to companies.
• Notification and Specificity: The RBI, through its notifications and the provisions of the Reserve Bank Act, explicitly delineates the types of entities that can engage in non-banking financial activities. LLPs do not meet these criteria due to their differing legal status and operational framework.

What investment activities can an LLP legally undertake?

The RBI Act does not contain a provision that specifically prohibits an LLP from investing in the stock market or in listed securities using its own funds. The restriction is on carrying on the business of a non-banking financial institution, which requires entity registration as a company and, in practice, principal business of deposit-taking or lending. An LLP investing its own surplus funds in marketable securities, without accepting third-party deposits and without lending, is in a different regulatory position.

Summary: what an LLP can and cannot do on investment

Activity	Permitted for LLP?	Basis
Investing own surplus funds in listed securities or mutual funds	Yes, with care	RBI Act does not specifically prohibit; no deposit-taking or lending involved
Receiving dividends or capital gains on own investments	Yes	Passive income on own capital; not NBFC activity
Holding investments in subsidiary or group companies	Yes, if not principal business	Permissible if investment is ancillary, not the core commercial activity
Accepting deposits from partners or public to invest	No	Section 45-S RBI Act; non-company entities cannot accept deposits if investment is part of their business
Lending money to third parties	No	NBFC registration (company form) required
Carrying on investment business as principal commercial activity	No	Cannot register as NBFC; LLP excluded from RBI Act definition of “company”
Managing third-party funds for a fee	No	SEBI authorisation required; not permissible without SEBI registration

The practical distinction is this: an LLP that generates dividend income or capital gains from investments made with its own contributed capital is not running an investment business in the regulatory sense. The moment it begins accepting funds from others to invest, or begins lending, it has crossed into NBFC territory and cannot proceed without restructuring.

On the deposit restriction: any person, firm, or unincorporated association of individuals whose business wholly or partly includes loan, investment, hire-purchase, or leasing activity cannot accept deposits except by way of loan from relatives. This restriction under the RBI Act applies broadly to all non-company entities, including LLPs.

Financial activities an LLP cannot undertake: regulatory overview

Beyond NBFC and investment business, several other regulated financial activities are also unavailable to LLPs under Indian law.

Regulated financial activities: can an LLP participate?

Activity	Regulator	Can LLP do it?	Reason
Banking business	RBI	No	Banking Regulation Act requires a company incorporated under Companies Act
NBFC (investment, lending, hire-purchase as principal business)	RBI	No	RBI Act defines NBFC as requiring company form
Mutual fund AMC operations	SEBI	No	SEBI (Mutual Funds) Regulations, 1996 require AMC to be a company
Portfolio management services	SEBI	No	SEBI (Portfolio Managers) Regulations, 2020 require company registration
Insurance business	IRDAI	No	Insurance Act, 1938 requires company form
AIF vehicle (pooled fund)	SEBI	Yes (with SEBI registration)	SEBI AIF Regulations, 2012 permit LLP as an AIF vehicle; Category I, II, or III
External Commercial Borrowings	RBI	No	LLPs are not eligible borrowers under the RBI ECB framework
Chit fund operations	State / RBI	No	Chit Funds Act, 1982 requires company form for certain operations

The AIF route is worth noting separately: SEBI AIF Regulations, 2012 permit an AIF to be constituted as a trust, company, LLP, or body corporate. An LLP can serve as the vehicle for a registered AIF, provided it is registered with SEBI. This is a SEBI-regulated fund structure, not an RBI-regulated NBFC. If the goal is to pool third-party capital and deploy it in a structured and compliant manner, an AIF registered with SEBI is the correct vehicle.

Path forward: converting an LLP to a private limited company

Section 366 of the Companies Act, 2013, read with the Companies (Authorised to Register) Rules, 2014, allows an LLP to convert into a private or public limited company. This is the standard path for an LLP whose founders determine that investment business as a principal activity is the objective.

Key conditions for conversion under section 366:

• At least two partners in the LLP (for private limited company conversion)
• Unanimous approval of all partners
• Publication of notice in Form URC-2 in two newspapers (one in local vernacular language, one in English) giving 21 clear days for public objections
• No Objection Certificate (NOC) from the ROC where the LLP is registered
• NOC from all secured creditors
• Statement of accounts certified by an auditor, not older than 15 days before the application date
• Filing of Forms SPICe+, URC-1, INC-33, INC-34, and INC-9 (where applicable) with the ROC

Tax treatment on conversion:

Transfer of assets from the LLP to the newly incorporated company does not attract capital gains tax, provided: all assets and liabilities of the LLP transfer to the company, and partners become shareholders in the same proportion as their capital contribution and do not collectively hold less than 50% of the voting power for five years from the date of conversion. If either condition is not met, or if the business is separately transferred to a new company rather than converted, capital gains tax applies on the transfer.

Post-conversion, the company can apply to the RBI for NBFC registration, subject to the minimum Net Owned Fund requirement (currently ₹10 crore for most standard NBFC categories under RBI notifications) and other fit-and-proper conditions.

Foreign investment in an LLP: the FEMA and RBI framework

While an LLP cannot operate as an NBFC, it can receive foreign investment subject to the Foreign Exchange Management Act, 1999 (FEMA) and the RBI’s FDI policy. Investment into an LLP can be made in two modes.

Investment on non-repatriation basis

An NRI or OCI, including a company, trust, or partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, may invest in an LLP on non-repatriation basis by way of capital contribution without any monetary limit.

Key features:

• No pricing or reporting requirement. Such investment is treated as domestic investment at par with resident investment.
• Sectoral caps and FDI-linked conditions do not apply.
• Consideration must be paid as inward remittance through banking channels, or from NRE, FCNR(B), or NRO accounts.
• Disinvestment proceeds are credited only to the NRO account of the investor, regardless of the account from which the original consideration was paid.
• Capital appreciation on the investment cannot be repatriated abroad.

Sectors not open even for non-repatriation investment in an LLP:

• Nidhi company
• Agricultural or plantation activities
• Construction of farm houses
• Dealing in transfer of development rights
• Real estate business (excluding development of townships, construction of residential or commercial premises, roads, bridges, and SEBI-registered REITs under SEBI (REITs) Regulations, 2014)

Investment on repatriation basis

Eligibility of investor:

A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than one incorporated in Pakistan or Bangladesh) is eligible. The following are specifically not eligible to invest in LLPs:

• Foreign Venture Capital Investors (FVCIs)
• Foreign Portfolio Investors (FPIs)

Eligibility of the LLP:

An LLP is eligible to receive foreign investment on repatriation basis only if it operates in a sector where 100% FDI is permitted under the automatic route and there are no FDI-linked performance conditions. LLPs in the following categories are not eligible:

• Sectors that allow 100% FDI under the automatic route but subject to FDI-linked performance conditions
• Sectors that allow less than 100% FDI under the automatic route
• Sectors requiring FDI under the government approval route
• Sectors entirely ineligible for FDI

Pricing guidelines:

Investment by way of capital contribution or acquisition or transfer of profit shares must be at or above the fair price determined by any internationally accepted valuation norm or market practice. A valuation certificate must be obtained from a Chartered Accountant, a practising Cost Accountant, or an approved valuer from the Central Government panel.

Transfer value rules for LLP capital contribution or profit share:

From	To	Transfer value
Resident	Non-resident	Equal to or more than fair price of capital contribution or profit share
Non-resident	Resident	Not more than fair price of capital contribution or profit share

Funding and payment:

• Capital contribution must be paid by inward remittance through banking channels, or from NRE or FCNR(B) account funds.
• Disinvestment proceeds may be remitted abroad or credited to NRE or FCNR(B) accounts.
• An LLP is not eligible to obtain External Commercial Borrowings (ECBs). This is confirmed under RBI FAQ 5 on External Commercial Borrowings.

Conversion with foreign investment:

A company with foreign investment, operating in a sector where 100% FDI is permitted under the automatic route with no FDI-linked performance conditions, may be converted into an LLP under the automatic route. Similarly, an LLP with foreign investment meeting the same conditions may be converted into a company under the automatic route.

Reporting compliances for foreign investment in an LLP:

Filing	Form	Timeline
Receipt of capital contribution	Form FDI-LLP(I)	Within 30 days of receipt of consideration, with prescribed documents
Disinvestment or transfer of capital contribution or profit share	Form FDI-LLP(II)	Within 60 days of receipt of funds
Annual recurring filing	Annual Return on Foreign Liabilities and Foreign Assets	By 15th July every year

Conclusion

In summary, while the LLP Act, 2008, provides a robust framework for various business activities, it falls short when it comes to non-banking financial activities, specifically investment businesses. The RBI’s regulations necessitate that only companies registered under the Companies Act, 2013, are eligible for registration and approval to operate as NBFCs. Therefore, LLPs cannot be registered as NBFCs for the purpose of carrying out investment activities. This clear demarcation ensures that the financial sector remains regulated and compliant with the highest standards set forth by the RBI, maintaining the stability and integrity of the financial system.

FAQs on LLP Investments in India

Q: Can an LLP carry on investment activities in India?
A: An LLP cannot carry on investment business as its principal commercial activity, as it cannot register as an NBFC under RBI regulations. However, an LLP can invest its own surplus funds in listed securities and mutual funds, provided it does not accept deposits from third parties and does not lend money.

Q: Why can’t an LLP register as an NBFC?
A: The RBI Act, 1934, defines “non-banking financial company” as a financial institution that is a “company,” and defines “company” under section 45-I(aa) as a company under the Companies Act. An LLP is formed under the LLP Act, 2008, not the Companies Act, and is therefore structurally excluded from the NBFC framework.

Q: What is the 50-50 principal business test?
A: It is the RBI’s benchmark, introduced via press release dated 08/04/1999, to determine whether a company’s principal business is financial. Both conditions must be satisfied simultaneously: financial assets must exceed 50% of total assets (net of intangibles), and income from financial assets must exceed 50% of gross income. Fixed deposits with banks are excluded from this calculation.

Q: Does the 50-50 test apply to LLPs?
A: The 50-50 test is designed to classify companies for NBFC registration. Since an LLP cannot become an NBFC regardless of its financial profile, the test does not grant an LLP any ability to conduct investment business as a commercial activity.

Q: Can an LLP accept deposits from partners to invest in the stock market?
A: No. Under section 45-S of the RBI Act, any entity whose business wholly or partly includes investment, loan, hire-purchase, or leasing activity cannot accept deposits except by way of loan from relatives. This restriction applies to all non-company entities including LLPs.

Q: Can an LLP invest in shares of another company or group entity?
A: Yes, if it is investing its own contributed capital and the activity does not constitute the principal business of the LLP. Passive minority holdings or treasury investments from surplus capital are generally permissible.

Q: How does an LLP convert to a private limited company to pursue investment business?
A: Conversion is governed by section 366 of the Companies Act, 2013, and the Companies (Authorised to Register) Rules, 2014. The process requires all-partner approval, newspaper publication in Form URC-2 for 21 clear days, NOC from the ROC and secured creditors, and filing of Form URC-1 with SPICe+ and supporting documents. No capital gains tax applies on asset transfer if partners retain at least 50% shareholding for five years post-conversion.

Q: What is the minimum Net Owned Fund for NBFC registration after conversion?
A: Under section 45-IA of the RBI Act, the statutory ceiling the RBI can prescribe is ₹200 lakhs. Through notifications, the RBI has progressively raised the effective threshold. For most standard NBFC categories today, the minimum is ₹10 crore. Specialised categories such as NBFC-MFI, NBFC-Factor, and CIC have separately prescribed thresholds.

Q: Can a foreign investor invest in an LLP in India?
A: Yes, subject to FEMA conditions. Investment can be on repatriation basis (in sectors where 100% FDI is permitted under the automatic route with no FDI-linked conditions) or on non-repatriation basis (by NRIs or OCIs without limit and without FDI conditions). FVCIs and FPIs cannot invest in LLPs.

Q: What FEMA reporting is required when a foreign investor invests in an LLP?
A: Form FDI-LLP(I) within 30 days of receipt of consideration; Form FDI-LLP(II) within 60 days of disinvestment or transfer of capital contribution or profit share; and an Annual Return on Foreign Liabilities and Foreign Assets by 15th July every year.

Q: Can an LLP raise External Commercial Borrowings?
A: No. LLPs are not eligible borrowers under the RBI’s ECB framework, as confirmed under RBI FAQ 5 on External Commercial Borrowings.

Q: Can an LLP be used as a vehicle for an Alternative Investment Fund?
A: Yes. SEBI AIF Regulations, 2012 permit an AIF to be constituted as a trust, company, body corporate, or LLP. An LLP registered with SEBI as a Category I, II, or III AIF can pool third-party capital in a compliant manner. This route is regulated by SEBI, not the RBI, and is structurally distinct from NBFC registration.

Q: What sectors cannot receive foreign investment in an LLP even on non-repatriation basis?
A: Nidhi companies, agricultural or plantation activities, construction of farm houses, dealing in transfer of development rights, and real estate business (excluding development of townships, construction of residential or commercial premises, roads, bridges, and SEBI-registered REITs).

Q: What is the tax treatment for investment income earned by an LLP?
A: An LLP is taxed at a flat rate of 30% plus applicable surcharge and cess. Capital gains on listed securities are taxed at 15% (short-term) or 10% (long-term, above ₹1 lakh threshold), the same rates applicable to companies. Dividend income is taxable in the LLP’s hands at the applicable rate. Partners are taxed on their profit share at individual rates; the profit share is exempt from further tax in their hands under section 10(2A) of the Income Tax Act, 1961.

Regulatory references

• Limited Liability Partnership Act, 2008, section 2(e) — definition of “business”
• Reserve Bank of India Act, 1934, section 45-I(a) — business of non-banking financial institution
• Reserve Bank of India Act, 1934, section 45-I(aa) — definition of “company”
• Reserve Bank of India Act, 1934, section 45-I(c) — definition of “financial institution”
• Reserve Bank of India Act, 1934, section 45-I(e) — definition of “non-banking institution”
• Reserve Bank of India Act, 1934, section 45-I(f) — definition of “non-banking financial company”
• Reserve Bank of India Act, 1934, section 45-IA — registration and net owned fund requirement
• Reserve Bank of India Act, 1934, section 45-S — restrictions on deposits by non-company entities
• Companies Act, 2013, section 2(20) — definition of “company”
• Companies Act, 2013, sections 366 to 374 — conversion of LLP to company
• Companies (Authorised to Register) Rules, 2014
• SEBI AIF Regulations, 2012
• SEBI (Mutual Funds) Regulations, 1996
• SEBI (Portfolio Managers) Regulations, 2020
• Foreign Exchange Management Act, 1999
• RBI FDI Policy — FDI in LLP (repatriation and non-repatriation basis)
• RBI press release dated 08/04/1999 — principal business criteria (50-50 test)
• RBI FAQs on NBFCs
• RBI FAQ 5 on External Commercial Borrowings — LLP ineligibility
• NIC-2004 Industrial Classification

External sources

• rbi.org.in — FAQs on NBFCs, ECB framework, FDI in LLP policy
• mca.gov.in — LLP incorporation forms, Companies (Authorised to Register) Rules
• sebi.gov.in — AIF Regulations, 2012; Portfolio Managers Regulations, 2020