In a significant policy shift aimed at liberalizing India’s business environment, the central government has officially permitted Foreign Direct Investment (FDI) in select sectors through partnership firms and unincorporated entities, subject to compliance with the Foreign Exchange Management Act (FEMA) and sectoral FDI caps.

The decision, announced by the Department for Promotion of Industry and Internal Trade (DPIIT) in coordination with the Reserve Bank of India (RBI), allows foreign investors to become partners in Indian firms operating in sectors where 100% FDI is permitted under the automatic route, such as professional services, hospitality, healthcare, R&D, and consultancy.

According to the revised guidelines, foreign investment into partnership firms will be allowed without prior government approval, provided the firm is not engaged in activities restricted or prohibited under India’s FDI policy. The partnership must be registered, have a valid Partnership Deed, and maintain transparent capital contribution and profit-sharing records.

“This is a progressive step toward attracting global expertise and funding into India’s vast network of small and medium enterprises,” said a senior DPIIT official. “By opening up certain sectors to foreign partners, we aim to encourage knowledge transfer, service innovation, and job creation.”

The RBI has clarified that all such investments must be routed through banking channels, reported on the FIRMS portal, and supported by appropriate valuation certificates and KYC compliance. Profits repatriated by foreign partners will be subject to applicable tax laws and repatriation guidelines.

Legal and financial advisors have welcomed the move, calling it a “long-overdue” reform that could help small Indian firms form cross-border alliances and tap global capital without converting into private limited companies or LLPs. However, they also cautioned firms to ensure strict FEMA compliance and due diligence during partner onboarding.

This liberalization is expected to benefit high-growth areas such as legal and architectural services, financial consultancy, tourism ventures, and healthcare startups, where partnership firms are commonly used. The government is likely to review the impact of this move and consider expanding FDI permissions to more sectors in the coming fiscal year.