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  • Sakshi Garg

Winning Entry: The New OI Regime: An Opportunity for Round Tripping

[The following post has been authored by Sakshi Garg, student at Campus Law Centre, University of Delhi, and winner of IRCCL Blog Writing Competition 2022-23.]

22 August 2022 saw the moment much awaited when RBI finally came out with the new framework for Overseas Investment. The draft for this structure was released around the same time last year and after much deliberation, Central Government finally notified FEMA (Overseas Investment) Rules 2022 (New Rules). Following that, even the Reserve Bank of India (RBI) notified the FEMA (Overseas Investment) Regulations 2022 and the FEMA (Overseas Investment) Directions 2022. All these new laws act in sync to facilitate ease of doing business in India. The changes are multi-dimensional and affect a plethora of areas. Each of the changes is worthy of deep perusal and critical analysis. However, in this article, the focus would be on one such change i.e. round-tripping. The article shall examine the background for such change and the effect of new rules while also commenting upon the gap created.

Understanding Round Tripping

Complex business structures are a common phenomenon in the corporate domain. Despite the negative tax evasion attribute that comes with them, these structures are often designed for ease of control, separation of business, or easier legal compliance. However, the first thought for each structure is tax evasion and money laundering. In this light, we have a plethora of laws like transfer pricing requirements, both domestically and internationally to ensure that the structures don’t misuse any loopholes.

Since these structures can manipulate the origin of investment and create fictional characters, it is often avoided by the government. In the same vein, before the new framework, an Indian investor could not indirectly invest in India. In simpler terms, the investor was not allowed to invest in any company incorporated outside India that has invested or would invest in India. This ensured that the company did not re-invest the money by flowing it through foreign companies. This kind of transaction is referred to as round tripping.


Before the change, round-tripping was not addressed explicitly under any specific laws. The only piece of guidance that was available was among the FAQs issued by RBI. The FAQ number 64 of the FAQs that were available on RBI’s website provided some clarity over the issue. In the answer to a related query, RBI clarified that an Indian party can’t set up an Indian subsidiary via any foreign wholly-owned subsidiary (WoS) or joint venture (JV) directly or indirectly, whether such foreign WoS or JV was already created or was being established for any such purpose. Only in exceptional cases after prior approval was taken from RBI facilitated through AD banks could such setups be permitted. It was not considered a bona fide activity even as per FEMA. The reason for RBI’s dislike here was simple – tax evasion. In the absence of a clear prohibition, it became a trend to incorporate companies in tax havens like Mauritius and through them route the money back to India. In an attempt to discourage this, the restriction through FAQ was imposed. However, such strict prohibition became a hindrance to investment and global competition and thus a high-level advisory group set up by the Ministry of Finance recommended regulated allowance.

The problem of government against the round tripping is twin fold. Firstly, such investment comes with suspicion of routing black money, the intent of tax evasion, and frivolous investments. Secondly, such investment can’t be considered an actual foreign investment in the country with no increase in globalization for the country. On the other hand, these structures may be essential for securing global tenders, or the prohibition on the same could unnecessarily restrict investment opportunities abroad or even in India. Investment through these structures could also create more employment opportunities, development opportunities, etc. in India. In light of the strong arguments on both sides, a balanced approach through adaptive and relaxation regulations was required. Some changes were recommended by the high-level group while some were discussed in the draft rules. However, the new framework and related new rules that have now finally been made are somehow away from both.

The Change

As per the New Rules, such round-tripping structures are permitted without any specific approval requirements. However, the structure must be limited to two layers as prohibition still applies to structures with more than two layers. For example, an Indian resident A can now invest in a foreign entity B even if such entity B has invested or would invest in India. Rule 19(3) of the New Rules prohibits financial commitment which would result in any such structure that would have more than two layers of the subsidiary. This means that A would not be able to invest in B if B invests in C which would further invest in India thus creating three layers of subsidiaries. This change can be understood along the lines of exemptions of layered structures that are provided to banking companies, insurance companies, etc. via the Companies (Restriction on Number of Layers) Rules 2017. This is now paved the way for re-investment in India and has contributed to enhancing the ease of business. Even though such change is positive and well appreciated, there might be some issues that require a re-consideration.


Lack of clarity

Even though, in general understanding, the two layers are understood as layers both in India and outside but no clarity is provided by the government for the same. In this context, confusion may arise as to whether the layers are to be computed internationally excluding the Indian layers, or in its entirety where Indian layers are to be included. Some informal talks have even suggested that the first foreign entity would be the first layer thereby not including the Indian entity while some legal enthusiasts have interpreted it to include the Indian company. It is asserted that in the light of the intent of the relaxation and ease of doing business, the former interpretation would be suitable. The first investment made outside India should ideally be considered as the first layer of investment.

The new framework also fails to provide any additional notes that illustrate the intent or interpretation of the laws. This is contrary to the Sodhi Committee’s recommendations and has been brought to light by many law enthusiasts. The recommendation of the Sodhi Committee that all complex rules and regulations should have notes for clarity has not been followed in the new framework. This gap has been criticized across the country identifying the lack of compliance with the recommendations and the creation of confusion in the absence of the same. However, it is asserted that though such a recommendation would be highly beneficial in avoiding diverse interpretations and future litigations, the framework is still new and the authorities would require time to provide clarity on every minute issue. Creating excessive pressure through high criticism thus would not help the cause. Further, only after the implementation of a policy could gaps be seen following which guidance and clarity would be required. Even though ideally some notes of clarity should have been provided, the government should be given enough scope to bring them in the future.

Vague implementation

The rules though have permitted at least two-layered structures but have failed to provide any directions for their implementation. The determination of the layers and rules related to them is still a haze. Even if the government chose to provide an exemption to certain layers and not to others, what is now expected is that the government would come up with implementation guidelines to avoid future litigation. In the absence of implementation guidelines, complex rules can be difficult to interpret. Furthermore, procedural requirements of compliance and reporting still await the word. The scope for start-ups, KYC requirements, and applicability are some of the major areas where clarity must be provided. Such procedural requirements were even suggested by the high-level advisory group which have not seen their space in the new framework but would hopefully be added by the government soon.

Limited scope

In the absence of clarity over the application, the word 'subsidiary' used in the New Rules is also vague and can lead to multiple interpretations. However, combined with the definition provided in the new framework itself, the scope of round-tripping reduces. The word 'subsidiary' in the framework is interpreted to include even those foreign entities where the 10% test is met. This interpretation, however, is evaluated in a negative light as it restricts investment beyond two layers even if there is no actual control merely based on ownership. The wider definition of 'control' in the new framework substantiates the interpretation that even 10% holding would be equivalent to control and thus would be considered a subsidiary. This would unfortunately limit the scope of investment and ease of business which would be contradictory to the object of the entire new framework. Since the definition of 'subsidiary' varies with the laws and the context, some clarity here as to which definition shall be applied could clear the air on the issue. If the definition as per the Companies Act 2013 or any other similar legislation is made applicable, it would not only serve the purpose but would also help achieve the objective. Any wider definition of the subsidiary would make the new provisions almost ineffective. It would become a relaxation given merely on the paper.

The two-layer rule

The government’s plan to provide an absolute restriction beyond two layers seems a bit inefficient. The government has allowed the freedom to invest as long as the structure is within two layers which is in line with the existing corporate laws, is considered bona fide and is often viewed as general industry practice. However, this does not guarantee as to how the objective of regulation shall be accomplished. The regulations aimed at ease of business for which disallowance of such structures is a big obstruction but the fact that these structures are often misused can’t be undermined. In light of this, in the draft rules such structures were made subject to assessment as to whether such structures are made for tax evasion. This provision is missing in the new framework which defeats the entire purpose. Irrespective of layers, the structure can have malicious intent. The possibility of tax evasion certainly increases with the number of layers but just the number of layers can’t be the sole determinant of the same.

The criteria of assessment as suggested in draft rules should have been added in the new framework without any limit of layers. Every round-tripping investment structure should have been subject to assessment following which investment could have been allowed. It may be said that this would be similar to already existing rules where RBI approval is required. However, for better implementation, a lower/separate authority could have been made responsible for the assessment. Furthermore, The factors based on which such an assessment was required to be made, the disclosures required, etc. could have been specified for more effectiveness. Such factors for determination of the authenticity of structure could have been included nevertheless in the new framework as lack of transparency plays a major role in tax evasion but they are still missing.


The new framework was indeed much required in the domain of overseas investment. However, the interpretation of the same has proven to become a task for all. Every discussion brings forth new challenges for the framework and identifies new gaps. However, such discussions are the necessary evil to create a good regulatory environment in India. In the same spirit, this article tries to highlight a few issues in the new framework especially related to round-tripping. Even though round-tripping is deeply connected to tax evasion and money laundering due to its complex structure, a blanket ban can’t be imposed on the same.

RBI understood this concern and thus brought new changes. The changes have managed to give some relief by allowing two layers for re-investment, but some clarity is lacking. If the government provides clarity as to how would the layers be determined and what would be considered subsidiary implementation could be better. However, on a different line, it is asserted that disclosures could have been required along with some KYC requirements. Further, instead of restriction on layers, restriction in form of permission could have been imposed for meeting the actual objective. Despite this being missing, the new framework could be effective if implemented properly.


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