Eligibility and Approval Requirements
Unlike LLPs and companies, traditional partnership firms require prior government approval for foreign investment.

• FDI in partnership firms is not allowed under the automatic route
  
• Prior approval must be obtained from the RBI and DPIIT
  
• FDI is permitted only in certain sectors and under specified conditions
  
• The Indian firm must be engaged in permitted activities
  
• Foreign investors must be non-resident individuals or entities
  

Permitted Investors and Investment Mode
Only specific categories of foreign individuals and entities are allowed to invest, and investments must be made in a prescribed manner.

• Only non-resident Indians (NRIs) or persons of Indian origin (PIOs) may invest under automatic conditions in some sectors
  
• Other foreign investors (non-NRIs/PIOs) need prior government permission
  
• Investment must be made via capital contribution (not loans or equity)
  
• The investment must comply with FEMA guidelines on valuation and reporting
  
• Profit sharing must be based on the terms agreed in the partnership deed
  

Conditions and Restrictions
The partnership must comply with the RBI’s conditions regarding structure, operations, and repatriation of profits.

• The firm must not engage in activities prohibited for foreign investment (e.g., real estate, agriculture)
  
• No guarantee can be issued in favor of the foreign investor by any Indian entity
  
• Changes in structure, capital, or activities must be reported to the RBI
  
• Repatriation of profits is allowed, subject to taxation and compliance
  
• Exit or winding up requires prior permission from the RBI
  

Alternative Route: LLP Structure
For ease of compliance, many businesses prefer forming a Limited Liability Partnership (LLP) over a traditional partnership firm.

• FDI in LLPs is permitted under the automatic route in sectors with 100% FDI and no performance-linked conditions
  
• LLPs offer limited liability protection unlike traditional firms
  
• Easier repatriation and exit options under LLP format
  
• Less regulatory friction and clear taxation framework
  
• Professionals and investors prefer LLPs for joint ventures
  

Reporting and Compliance with RBI
Once approved, the investment and ongoing activities must be reported and monitored by the RBI and other relevant authorities.

• Form FC-TRS and FC-GPR may apply depending on the transaction
  
• Annual filing of compliance reports with the RBI may be required
  
• Partnership deeds and amendments must be disclosed
  
• Transaction documents should be filed through authorized dealer banks
  
• Taxation and audit compliance must align with Income Tax and FEMA rules