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Abstract –

Round tripping is a practice where funds are transferred from one country to another and transferred back to the origin country for purposes like black money laundering or to get the benefit of tax concession/evasion/avoidance from countries like Mauritius which enjoy low taxes etc. Due to these reasons, RBI has always prohibited such transactions.

The RBI through the FAQ’s in 2019 clarified its position on round tripping. It strictly prohibited such investments under the automatic route, but allowed them under the approval route ie, with prior approval of the RBI on case to case basis.

Recently, the RBI has eased up this restriction by introducing the draft Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules, 2021 dated August 9th 2021. This draft was open for public comments till August 23rd 2021, thus the final rules are still awaited.

This article seeks to highlight the various amendments that the RBI proposes to bring about in round tripping norms and further analyse their consequences. It also seeks to address issues that need to be rectified immediately before the implementation of this draft.

Round tripping, from a Reserve Bank of India (RBI) perspective, is a situation where one is investing in an overseas company that has an investment or holding in an Indian company. There could be two scenarios in this situation – one, when an overseas company is already in existence and it now intends to invest in an Indian company for commercial purposes or two, where there is an overseas target under the overseas direct investment regulations and such target has a presence in India. Both these scenarios shall amount to round tripping. In simple words, round tripping is when funds flow from a country to a foreign country and flows back to the same country in the form of foreign investment. However, the term “Round Tripping” is not defined under Foreign Exchange Management Act, 1999.

This phenomenon takes place due to many reasons, and the most common of them is for tax avoidance/ evasion or concession purposes. In October 2020, RBI banned Foreign Direct Investment (FDI) from Mauritius[1]to prevent round tripping. Mauritius enjoys tax havens ie, tax is much lower compared to India, thus a hub for the creation of shell companies. Money is then invested into Indian companies through these shell companies, thereby taking advantage of tax concessions. In order to avoid such round tripping, RBI banned FDI from Mauritius and such other countries which fall under the grey and black list of Financial Action Task Force (FATF).[2] Another reason for this practice is to convert black money into white money used for stock price manipulation. The routes used for this are usually Global Depository Receipts and Participatory Notes.[3]

RBI’s stance on round tripping was not clear until 2019 when it released FAQs addressing the issue. RBI vide the FAQs took a stance and strictly prohibited round tripping. In May 2019, it clarified that a foreign joint venture or wholly-owned subsidiary cannot be used by an Indian party to route investments back into India. The said FAQs were further updated on September 19, 2019,[4] clarifying that Indian companies or resident individuals seeking exemption from the above restriction need prior approval from RBI before entering such transactions.

The FAQ provides a ban on automatic routes for ODI investments in two ways; one, Indian party is prohibited from setting up a subsidiary in India through a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) and two,  Indian party is prohibited from investing in a JV or a WOS which has made any prior investments in India.

It is to be noted that, individual residents do not fall under the definition of “Indian Party”[5].

While a strict interpretation of the FAQ would mean that the restrictions related to round tripping are not applicable to individual residents, the RBI seems to have taken a liberal interpretation as there have been cases of the Enforcement Directorate (ED) issuing notices to individual residents as well.[6] Thus, Indian residents investing in foreign companies under the Liberalised Remittance Scheme (LRS scheme) and rerouting the funds back to India shall also fall within the purview of round tripping and shall require the approval of RBI to do so.

The RBI now seeks to liberalise this restriction to promote ease of doing business. The RBI, through Draft Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules, 2021 dated August 9th 2021[7], proposes to amend the norms for round tripping. It provides that, if such round tripping is for the purpose of tax evasion/ avoidance, then it shall be prohibited. So it may be safe to assume that, if the practice is not for tax evasion, it shall be permitted, thus liberalising the restriction. This rule is very similar to the General Anti-Avoidance Rule which came into effect on 1st April 2017 under the Income Tax Act, 1961. The General Anti Avoidance Rule (GAAR) seeks to keep a  check on those transactions which are entered into solely for mitigating/evading/avoiding of tax.[8]Thus, this amendment would encourage legitimate and bona fide offshore companies like SPACs etc.

Further, the draft rules have put a cap on acquiring foreign securities by way of a gift. The draft rules propose to allow transfer by way of gift only from relatives subject to limitations as prescribed by the RBI. Relatives shall include husband, wife, father (including step-father), mother (including step-mother), son (includes step-son), son’s wife, daughter, daughter’s husband, brother (including step-brother) and sister (including step-sister)[9]. This limitation shall drastically reduce the extent of third parties gifting foreign securities to Indians to escape round tripping penalties.

While the above propositions are very welcoming, there are few issues that need to be addressed immediately before effective implementation. Firstly, there is no clarity on what shall amount to tax evasion/ tax avoidance purposes; whether it shall serve the same meaning as stated under GAAR or not. Secondly, there is no clarity on the authorities which shall determine whether the flow of investment is for tax evasion/ avoidance purposes; whether it shall be the RBI or the taxing authorities or both. And lastly, the ambiguity and concerns with GAAR as a hindrance to corporate restructuring may also distress the above amendment.

Clarity with respect to the above mentioned issues by the RBI is vital for the amendments to serve their intended purpose.

[1]T E Narasimhan & Raghavendra Kamath, RBI’s stand on FDI from Mauritius to slow down PE inflows in NBFCs, Hindu Business Standard (Oct 12, 2020).

[2]Sugata Ghosh, Finance companies cannot be set up with FDI from Mauritius: RBI, Economic Times (Oct 07, 2020).

[3]All you wanted to know about: Round-tripping, Hindu Business Line (Nov 03, 2014)

[4] RBI FAQ on Overseas Direct Investments, FAQ 64. (Sept 19, 2019).

[5]Para A. 3(k) of Master Direction  – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS)Abroad, “Indian Party” means –

a. company incorporated in India or

b. body created under an Act of Parliament or

c. partnership firm registered under the Indian Partnership Act, 1932, or

d. Limited Liability Partnership (LLP), registered under the Limited LiabilityPartnership Act, 2008 (6 of 2009),making investment in a JV / WOS, and includesany other entity in India as may be notified by the ReserveBank:

Provided that when more than one such company, body or entity make an investmentin the foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.

[6]Sachin Dave, Intense focus on ’round-tripping’: RBI, ED scrutiny raises spectre of harassment, Economic Times (Sep 02, 2019),


[8]Understanding basics of General Anti-Avoidance Rule (GAAR), TaxGuru (May 06, 2020)

[9]Section 2(77) of Companies Act, 2013.

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