Coupon Accepted Successfully!

Business structures and sectors in which FDI is permitted

FDI is allowed up to 100% in most sectors or activities. FDI in private and public limited Indian companies is the most common. The discussion below explains regulation of FDI in different business structures.

Which structure is optimal for receiving foreign investment inan Indian business?

Incorporating a private limited company is normally the optimal choice for an entrepreneur who wishes to select a structure that is suitable for receiving foreign investment. Investors are usually more comfortable with investing in companies than in other structures such as LLPs. If the objective is to raise foreign investment at some point of time – incorporating a company for the venture is ideal. Foreign investment in other structures such as sole proprietorships, partnerships and LLPs or trusts either requires approval of the Reserve Bank of India (RBI) / Foreign Investment Promotion Board (FIPB) or is prohibited (as discussed in the next section).


FDI in different business structures is discussed in detail below:

a. FDI in Limited Liability Partnerships (LLP)

Although FDI in LLPs is permitted, the conditions on which it is allowed are restrictive compared to the conditions for FDI in a company. LLPs require regulatory approval for receipt of FDI, they cannot make investments into other ventures and cannot take foreign loans – hence, it is advisable to structure a business as a company if FDI is contemplated.


The key features of FDI into an LLP, compared to a company are given below:
  1. FDI is allowed in LLPs only through the approval route. The sectors must also satisfy both of the following criteria:
    1. 100% FDI must be allowed in that sector for a company-structure without government approval under the FDI policy (see discussion below to understand which sectors are under automatic route), and
    2. There should be no ‘performance-related’ conditions in the FDI policy. For certain sectors such as construction development, the FDI policy stipulates minimum amount of investment, or there is a lock-in period prescribed before which the investor cannot exit from the venture. In such sectors FDI is not permitted.
There is no method by which FDI can be made in LLPs without government approval.
  1. LLP's with FDI are not eligible to make downstream investments.
  2. Foreign capital participation is allowed only by way of cash consideration. (In case of a company, foreign capital can also be injected in form of import of capital goods or technology.)
  3. LLPs are also not eligible to avail external commercial borrowings i.e., to raise overseas debt.
  4. LLPs cannot seek investment from FIIs and FVCIs.

b.FDI in Trusts
FDI is not permitted in trusts, other than venture capital funds which are registered with SEBI. FDI in a venture capital fund structured as a trust requires approval of the Foreign Investment Promotion Board (FIPB). However, FDI investment into a venture capital fund structured as a company is permitted under the automatic route.

Opting for LLP or trust structure is very rare as it results in delay in investment and over-regulation. Companies are the most convenient vehicles for FDI. Provisions for FDI into a company are described below.

c. FDI in Companies
As explained earlier, in order to prevent cumbersome scrutiny of the venture by Indian regulators and to establish operations faster, it may be advisable to avoid an LLP or trust structure and opt for a company. 

Test Your Skills Now!
Take a Quiz now
Reviewer Name