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Un-layering the Complexity: Round Tripping and Layered Structures under 2024 Share Swap Amendment

  • Jigyasa Bohra, Pranjal Kushwaha
  • Jun 19
  • 6 min read

[Jigyasa and Pranjal are students at National Law Institute University Bhopal.]


India has been a preferred destination for cross-border M&A in the past few years. The growing number of start-ups and the changing outlook of the government towards foreign investment is a catalyst for building an efficient regime for international deals. With a bid to enhance the ease of doing business both with and within India, the government issued the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules 2024 (Amended Rules) which simplify the share swap regime in India. The amendment introduces Rule 9A to the Non-Debt Instruments Rules 2019 (NDI Rules), which permits both secondary share swaps as well as swaps with foreign entities. 


Despite this long-awaited liberalization, certain critical gaps remain unaddressed, potentially creating operational difficulties for both businesses and the regulators alike. Structural concerns, especially in multi-jurisdictional transactions have become more pronounced. The absence of clarity in this regard may inadvertently facilitate round-tripping and layered investment structures. This article undertakes an analysis of whether such apprehension are substantiated and examines the prospective steps that could be taken to avert any risks. 


The 2024 FEMA NDI Amendment: What Changed?


Until early 2024, the NDI Rules had placed stringent restrictions on share-swap transactions. The core issue was that share swaps where Indian companies could swap with shares of a foreign company were not allowed. Further, secondary share swaps were not permitted either. In August 2024, the Ministry of Finance amended the NDI Rules, introducing two pivotal changes. First, it inserted clause (iv) to paragraph 1(d) of Schedule I of the NDI Rules which expanded the scope of consideration that could be given with respect to the issuance of equity instruments by an Indian company.  Now, Indian companies can issue equity instruments against equity instruments of other Indian company as well as the equity capital of a foreign company. This has enabled Indian companies to issue their own shares in return for acquiring foreign shares, thereby enabling outbound share swaps. Second, the amendment has introduced Rule 9A. This rule expressly permits the transfer of equity instruments between residents and non-residents in the form of:


(i) Swap of equity instruments of an Indian company for those of another Indian company, and

(ii) Swap of equity instruments for the equity capital of a foreign company. 


This rule provides a framework facilitating diverse configurations of share swap transactions, including primary and secondary share swaps, and transfers involving both inbound and outbound equity components. 


Thus, the deal structures that are now permitted could be broadly categorized as follows: 


1. An Indian company can acquire the equity capital of a foreign company held by a non-resident investor and in consideration, issue its own equity instruments to the investor. 

2. An Indian company can acquire the equity instruments of another Indian company held by a non-resident investor and in consideration transfer the equity instruments of another Indian company to the non-resident investor.

3. An Indian company can acquire the equity capital of a foreign company and in consideration transfer the equity instruments of another Indian company to the foreign company.

4. An Indian company can acquire the equity capital of a foreign company held by a non-resident investor and in consideration transfer the equity instruments of another Indian company to the investor.

5. An Indian company can acquire the equity instruments of another Indian company held by a non-resident investor and in consideration transfer the equity capital of a foreign company to the investor. 


These structures reflect a broader policy shift – from a rigid control-based model to a transactional parity framework, bringing India closer to international norms. This amendment has been brought to simplify the rules and regulations for foreign direct and overseas investment. It is a significant stride towards simplification of cross-border share swaps and facilitates the issuance or transfer of the equity instruments of an Indian company in exchange for foreign equity capital. 


While this is a landmark step towards liberalization of cross-border M&A, it still leaves several structural, legal and practical challenges unresolved. Some lacunae continue to pose significant difficulty, hampering regulatory efficiency. One of the biggest concerns is its silence on transactions, involving multiple jurisdictions, indirect ownership, and intermediate holding structures. 


Round-Tripping and Layered Transactions: The Regulatory Grey Area


Round-tripping refers to a kind of transaction where an entity in one country invests its funds in another country from where they are re-invested in the home country. This is often done for several tax and fiscal benefits which are available to foreign direct investments in liberalized economies. The RBI seeks to prevent round tripping under the overseas investment regime by prohibiting investment by residents in foreign entities that have already invested in India leading to a structure with more than two layers of subsidiaries. Layered or multi-jurisdictional transactions are an integral part of cross-border deals, which often involve holding and subsidiary companies, special purpose vehicles, group-level entities and the like. The presence of such entities is more often than not, commercially viable – to access financing, achieve tax efficiency, or comply with foreign regulations. However, such layers are also one of the most used methods for money laundering and pose a substantial compliance challenge. 


Rule 9A of the NDI Rules does not provide any clarity on whether share swaps involving group-level entities or step-down subsidiaries are permissible or not. Pertinent questions such as whether an Indian company can issue shares to a foreign group entity when the target company is a step-down subsidiary or would these transactions be treated as disguised round-tripping structures continue to plague the regulatory regime. There exists no framework to differentiate between legitimate commercial layering from impermissible round-tripping in transactions involving cross border share swaps. 


Additionally, the aspect of attribution of beneficial ownership and its implications for FDI compliance remain unaddressed under the amendment. The rules do not provide any guidance on how beneficial ownership is to be determined especially when equity instruments are issued to foreign group entities that may not be the ultimate beneficial owner of the underlying asset or company in India. Such ambiguity feeds directly into General Anti-Avoidance Rules concerns. These issues are of imminent practical and legal consequences that could lead to regulatory delays and potential business losses and non-compliance. Some of these consequences are highlighted in the next section.


Legal and Practical Consequences


The regulatory gaps aforementioned could open a pandora’s box of legal and practical consequences. Legal advisors would find it difficult to assess the permissibility of layered share swaps under FEMA, in the absence of any RBI guidance on the same. Deal timelines would be unnecessarily stretched due to the need for a case-by-case analysis or approval. Moreover share swaps routed through offshore HoldCos risk attracting GAAR if deemed impermissible avoidance arrangements. The absence of statutory safe harbour provisions or disclosure-based exemptions as seen in jurisdictions like the USA or the UK exacerbates this problem. 


In the USA, Section 351 Internal Revenue Code allows for non-recognition of gain or loss when property is transferred to a corporation solely in exchange for its stock, and the transferors collectively obtain the control of the corporation. If cash or other property is received in addition to stock, gain (but not loss) is recognized only to the extent of that non-stock consideration. Section 135 of the Taxation of Chargeable Gains Act 1992 in the UK provides for capital gains tax deferral when a person exchanges shares or debentures in one company for those in another company, provided the latter gains sufficient control over the former. The transaction is treated as a share reorganization.


Valuation presents yet another area of concern. Divergence between Indian discounted cash flow valuation norms and fair market valuation standards complicates compliance with both Foreign Exchange Management Act 1999 (FEMA) and Income-tax Act 1961, particularly in multi-layered transactions. These consequences, pose a real and significant risk to the flexibility that is sought to be achieved through the amendment.


The Need for Clarity: What Should Regulators Do?


The legal challenges have the potential of turning counter-productive to the sought aim of the government to liberalize cross border transactions and the ease of doing business in India. There is a need for Reserve Bank of India and Department for Promotion of Industry and Internal Trade to issue clarificatory guidelines, permitting layered swaps where the commercial purpose is genuine and traceable. Structures involving legitimate HoldCos should be excluded from round-tripping restrictions, provided disclosure norms are met. A disclosure-based approach, akin to the frameworks followed in other jurisdictions like the UK or Singapore, could strike a balance between regulatory vigilance and business flexibility. The harmonization of FEMA rules with tax and company law is much needed. An explanatory note or safe-harbour clause in Rule 9A for layered transactions should be included for the purposes of clarification, reducing the chances of ambiguity and potential commercial loss to business entities. 


Conclusion


The 2024 amendment is undoubtedly a step in the right direction for cross-border M&A in India. However, the continued ambiguity surrounding round-tripping and layered transactions limits its potential. Without a clear regulatory framework that accommodated the commercial realities of international deal-making, Indian companies may remain hesitant to leverage the full benefits of the liberalized share swap regime. A failure to clarify these aspects may lead to either underutilization of the rule or overreliance on risky structuring. It is imperative that the next phase of reform bridges these gaps and brings India’s cross border investment norms closer to global best practices.


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©2025 by The Indian Review of Corporate and Commercial Laws.

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