Limited Liability Partnership: A Case For Calibrated Liberalisation Of Foreign Investment

Foreign investment in Indian limited liability partnerships (‘LLPs’) is presently permitted only in sectors where 100% foreign direct investment (‘FDI’) is allowed under the automatic route and no FDI-linked performance conditions apply, under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’). This dual requirement is asymmetrical to the conditions applicable to companies and runs counter to the broader policy objective of promoting LLPs as a flexible, low-compliance business vehicle, thereby curtailing the range of sectors that can access foreign capital through the LLP route.

The present framework on foreign investment in LLPs traces its origins to Press Note 12 of 2015, issued by the Department for Promotion of Industry and Internal Trade, which liberalised the earlier regime of requiring prior government approval for any foreign investment in LLPs. The revised framework permitted foreign investments in LLPs operating in sectors where 100% FDI is allowed under the automatic route, without any FDI-linked performance conditions. Similarly, the revised framework permitted LLPs owned and controlled by non-residents to make downstream investments in Indian companies operating in sectors where 100% FDI is allowed under the automatic route. While this liberalisation was a welcome step, the conditionalities that have persisted since then have effectively excluded LLPs from receiving foreign investment in a wide range of sectors where such investment is otherwise permitted in companies. For instance, no foreign investment is permitted in an LLP engaged in construction and development, industrial parks, or the plantation industry, as these sectors carry sectoral conditionalities. This restriction extends to indirect investments made by the LLP by way of downstream investment.

The principal justification for this restrictive treatment appears to be the perceived opaqueness of ownership and control structures in LLPs. Regulators appear to be concerned that the contractual flexibility inherent in LLPs may obscure who truly ‘controls’ an LLP receiving foreign investments, given that profit‑sharing, management rights and capital contribution obligations can be tailored extensively in the LLP agreement. However, it must be noted that control structures in companies can be equally complex. The Companies Act, 2013 expressly recognises that control may arise through shareholding, management rights, shareholder or voting agreements, or ‘in any other manner’. Accordingly, shareholding percentages in a company do not necessarily equate to control. In parallel, the NDI Rules define ‘ownership’ of an LLP with precision as contribution of more than 50% of capital coupled with a majority profit share which provides adequate clarity for foreign investment purposes. It is pertinent to note that the new draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft Foreign Investment Rules”), proposed to replace the NDI Rules, departs from this test of ownership and control and delegates the testing parameters to be set by the relevant regulator and only in the absence of such stipulations, the applicable statute under which the relevant entity is incorporated shall govern. This opens up the possibility of ownership and control being determined at a threshold lower than 50% shareholding/capital contribution. Nevertheless, the threshold principles will apply equally to both the companies and LLPs.

Perhaps the most compelling argument for reform is that performance conditions attach to the regulated activity, not to the legal vehicle through which it is undertaken. The performance conditions attached to sectors such as construction and development, industrial parks, and plantation are inherently operational, they regulate how capital is deployed in a project rather than the legal form of the investing entity. Minimum lock‑in periods, infrastructure completion requirements, project‑level compliance with local laws and approvals, minimum unit and area thresholds, and land‑use approvals are all conditions that LLPs are structurally capable of meeting on par with companies, provided the project is adequately capitalised and governed. Consequently, excluding LLPs across‑the‑board from these sectors, precisely where their contractual flexibility and reduced compliance burden are particularly valuable, operates as a blanket restriction that does not advance the underlying regulatory purpose.

A related, though analytically distinct, restriction is the exclusion of Foreign Portfolio Investors (“FPI”) and Foreign Venture Capital Investors (“FVCI”) from investing in LLPs. This restriction, unlike the others discussed above, is largely because of instrument design rather than a policy choice, as both FPIs and FVCIs are mandated to invest in equity instruments, which an LLP, by its very structure, cannot issue. Therefore, the bar on FPIs and FVCIs is more because of the structural nature of LLP.

However, there is a legitimate cause to further liberalise sectoral based exclusion for LLPs. Instead of a blanket exclusion, a calibrated framework could be adopted for LLPs operating in sectors with performance‑linked conditions. Such a framework may mandate comprehensive disclosure of the LLP agreement and management rights in foreign investment filings, identification of designated partners who exercise control, and alignment of capital contribution and profit‑share ratios beyond prescribed thresholds. These safeguards, coupled with periodic project-level reporting on lock-in compliance, infrastructure completion, and land-use approvals, would give regulators sufficient visibility while enabling foreign investment to flow through the LLP route.

The aforesaid restrictive position continues in the Draft Foreign Investment Rules. It provides that foreign investments in LLPs shall comply with the conditions prescribed in the foreign investment policy (FDI Policy), including conditions of entry routes, sectoral caps and sectoral conditions, as applicable.

Globally, foreign investors participate in partnership‑style vehicles such as LLPs, LPs and LLCs across a range of regulated sectors, with regulators relying on robust beneficial ownership disclosure and sectoral licensing rather than banning such entities from receiving foreign capital. A similar approach in India anchored in transparency and compliance rather than entity based exclusion could be adopted which would allow regulators to exercise oversight without prohibiting LLPs from accessing foreign capital in sectors where they are otherwise well suited to operate.