- Over the years, India has progressively eased its foreign investment framework, but partnership entities still fall under a more cautious regulatory regime
- Understanding these norms is essential for NRIs/OCIs planning cross-border investments, as well as Indian firms seeking overseas capital
India continues to attract strong capital inflows from its global diaspora, with Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) increasingly exploring investments in domestic partnership firms and LLPs. While these structures offer flexibility, operational simplicity, and lower compliance burdens compared to companies, such investments are governed by the Foreign Exchange Management Act (FEMA), which lays down clear rules to ensure transparency and controlled capital movement.
- FEMA Framework for Partnership and LLP Investments
Under FEMA, investments by NRIs/OCIs in partnership firms and LLPs are permitted on a non-repatriation basis without prior approval, provided the funds come through:
- NRE/FCNR(B)/NRO accounts, or
- Inward remittances through normal banking channels
Investments on a repatriation basis, however, face additional scrutiny and typically require RBI approval, since partnership entities are not covered under the Automatic Route like companies.
Key Distinction
- Company investments fall under the FDI Policy and are widely liberalized.
- Partnership/LLP investments still operate under a separate, more restrictive FEMA framework.
- Nature of Permitted Investments
NRIs/OCIs may contribute to:
- Capital of partnership firms or LLPs
- Profit-sharing ratios
- Loan contributions (in specific permitted scenarios)
However, these contributions must comply with:
- Anti-money laundering standards
- Sector-specific restrictions
- FEMA pricing and reporting rules
- Repatriation Rules
Investment structures determine whether profits or capital can be sent back abroad:
- Non-Repatriable Investment
- Allowed freely without RBI approval
- Returns (profits/interest) can be repatriated up to USD 1 million per financial year under the Liberalised Remittance Scheme
- Capital repatriation is subject to tax compliance and documentation
- Repatriable Investment
- Requires RBI approval
- Subject to valuation norms and FEMA reporting
- Exit and repatriation need proof of source of funds, audited accounts, and compliance certificates
- Sectoral Restrictions Under FEMA
NRIs/OCIs are restricted from investing in partnership firms/LLPs engaged in:
- Agriculture/plantation activities
- Real estate business (excluding development of townships/construction projects)
- Print media
- Gambling, lottery, or similar prohibited sectors
If the sector does not allow FDI under the automatic route, NRI/OCI investment via partnership structures also becomes restricted or approval-based.
- Latest Regulatory Updates (2024–25)
Recent policy trends indicate:
- Greater emphasis on transparency and KYC compliance, especially for non-corporate entities
- Valuation norms aligned with internationally accepted pricing methods
- Stricter reporting timelines under FIRMS/SMF platforms
- Preference toward LLPs over traditional partnerships due to clearer capital structure and easier monitoring
- Increased digital monitoring of foreign remittances through the RBI’s CCIL and AD Bank systems
- Compliance and Reporting Requirements
Partnership firms/LLPs receiving NRI/OCI investment must ensure:
- Documentation
- KYC of NRI/OCI investor
- FIRC (Foreign Inward Remittance Certificate)
- Valuation report (if repatriable or RBI-approved investment)
- Capital contribution agreement
- FEMA Reporting
- Filing with AD Bank
- Annual reporting of foreign liabilities and assets (FLA) for LLPs when applicable
- Disclosure of capital structure changes
- Taxation
- TDS obligations under Section 195 for payments to NRIs
- Proof of tax compliance for repatriation
- Practical Considerations for Investors
- Non-repatriation structures are simpler, quicker, and widely preferred
- LLPs offer better clarity, limited liability protection, and smoother exit options
- Sectoral analysis is essential before committing capital
- Professional valuation is crucial for repatriable investments
- Proper agreements help avoid disputes regarding capital withdrawal or profit distribution
NRI/OCI participation in Indian partnership firms continues to be a promising avenue for cross-border investment—provided that both investors and firms understand the FEMA landscape. With regulatory reforms gradually simplifying foreign investment norms, structured compliance, transparent reporting, and sector-specific diligence remain the pillars for smooth and legally sound capital inflows.
