Round Tripping — A Regulatory Vacuum
Round-tripping is no longer an abstract technical concern discussed only among CAs, lawyers and bankers. It has become one of the most sensitive issues in cross-border structuring today — especially with increased overseas investments, global workforce models, and Indian companies expanding into the US, Middle East, Singapore, and beyond.
Whether it is a Startup incorporating a Delaware holding company, a group reorganizing its global entities, or promoters investing abroad through ODI, the question inevitably arises:
“Will this trigger round tripping?”
Over the last few years, the Reserve Bank of India has sharpened its scrutiny on ODI structures that result in an Indian entity investing abroad only for funds or ownership to circle back to India. Yet, the law does not define “round tripping.” This regulatory vacuum has made interpretation complex and highly fact-specific. In this article, let us explore the finer nuances of this grey zone:
1. What Is Round Tripping?
In simple terms, round tripping refers to a scenario where:
1. A resident invests funds overseas,
2. The overseas entity invests back into India,
3. Creating a circular flow of funds or ownership.
The concern for RBI is typically linked to:
- Money laundering or layering of funds
- Creating artificial valuations
- Shifting profits out of India
- Regulatory arbitrage
- Avoiding foreign investment caps or pricing norms
While round tripping per se is not prohibited under FEMA, structures that appear circular or lack commercial substance attract regulatory scrutiny.
2. Current Legal Position: Grey and Intent-Based:
No Explicit Statutory Prohibition Under FEMA Neither FEMA, 1999 nor the 2022 Overseas Investment Rules & Regulations specifically define or prohibit round tripping. However, RBI regulates it through approvals and interpretive guidance issued in individual cases.
RBI’s Guiding Principles (Emerging from Practice)
From recent years of approvals, compounding orders, and informal interactions, a few principles have emerged:
- Substance-over-form test:
The genuine commercial purpose of the overseas entity must be clearly demonstrable. - Degree of ownership:
If the Indian entity ends up reinvesting through the overseas subsidiary into India, especially where the Indian entity retains significant ownership, questions arise. - Nature of funds:
Whether funds are freshly raised abroad or simply routed out of India and reintroduced. - Control & voting rights:
If the overseas entity exercises significant control over the Indian entity or its assets, the risk heightens. - Sectoral restrictions:
If the reinvestment hits a sector prohibited for foreign investment (e.g., real estate, gambling, agriculture), RBI is almost certain to object.
3. RBI’s Current Approach: More Data-Driven, Less Tolerance for Ambiguity
a) ODI Screening Has Become More Rigorous
Under the new ODI regime (2022), AD banks must verify:
- Source of funds
- Business history
- Corporate structure
- Beneficial ownership
- Links between the Indian and foreign entities
- Potential circularity
Banks now escalate doubtful structures to RBI instead of granting automatic route clearance.
b) Overseas Step-Down Subsidiaries Are a Red Flag Zone
If an overseas subsidiary sets up or acquires an Indian entity, the bank is required to ensure compliance with:
- Control norms
- Financial commitment limits
- Foreign investment conditions
- Pricing guidelines
- Reporting requirements
Any mismatch pushes the case into “approval required” territory.
c) Reinvestment of ODI Profits Back into India
When overseas entities invest back into India using profits, retained earnings, or external capital, RBI examines whether:
- The overseas entity has real substance
- Profits are commensurate with operations
- Investment is strategic or financial
d) RBI Checks Cross-Regulator Data
A major shift in recent years:
RBI now triangulates information from Income Tax (foreign assets), MCA (beneficial ownership), GST (supply chains), and banks (remittance trails).
This significantly increases the detection of circularity.
4. Common Scenarios:
- Startup Flip to Delaware or Singapore
A classic case: Indian startup → incorporates a US holding company → India becomes a subsidiary → founders hold shares abroad.
If the US entity later invests or lends to the Indian company, banks examine substance and valuation.
- ODI into a Foreign Entity That Later Acquires an Indian Company
Group reorganizations often run into this, especially in IT/ITES businesses establishing global holding structures.
- Promoter-Level Overseas Holding Companies
When promoters set up overseas holding companies for investment, family offices, or global wealth planning, reinvestment into Indian assets often triggers scrutiny.
- Investment Funds Setting Up Feeder Structures
AIF managers using Singapore or Cayman entities must ensure that back-to-back Indian investments do not create circularity.
- Business Expansion Leading to Indirect Indian Assets
Foreign JVs or subsidiaries sometimes acquire Indian distributors or suppliers, unintentionally creating an indirect Indian investment.
5. How to be on Right Side :
This is where smart structuring, documentation, and clarity of intention make all the difference.
- Demonstrate Clear Commercial Substance Abroad
RBI’s biggest concern is “shell entities.”
Ensure the overseas entity has:
- Employees
- Office space
- Contracts
- Local revenues
- Third-party investors (if applicable)
A functioning business is rarely questioned.
- Avoid Circular Ownership Patterns
If an overseas entity holds Indian shares, ensure:
- The Indian entity does not indirectly hold ownership in that overseas entity
- Voting rights are not being transferred back
- There is no cross-holding loop
Document Business Rationale in Writing
Before incorporating or restructuring, prepare:
- A commercial rationale note
- Substance analysis
- Functional & risk explanations
- Funding plan
- Long-term strategy for the overseas entity
Banks appreciate robust documentation.
- Use Independent Capital Abroad
If an overseas entity will invest in India, ensure that funds are:
- Raised abroad
- Through investors, customers, or loans
- Not simply re-routed from India
Fresh capital breaks the “circularity” argument.
- Consider Share-Swap Structures Carefully
Cross-border mergers and share swaps must follow:
- OI Regulations
- Companies Act requirements
- FMV valuation
- Arm’s length tests
Incorrectly executed share swaps often look like round-tripping.
- Manage Step-Down Subsidiaries with Extra Care
If an SDE of an overseas entity is incorporated in India:
- Ensure >10% equity participation and control norms are met
- Maintain transparency in funding sources
- File APR and all ODI reports properly
Many problems arise not from the structure, but from reporting.
- Seek Prior RBI Approval When in Doubt
RBI is far more comfortable approving genuine business structures than dealing with post-facto compounding.
A well-drafted approval request is sometimes the most commercially efficient path.
6. Final Thoughts — The Line Between Permitted and Problematic
Round tripping sits in a grey zone, because intent matters more than form. Businesses today operate globally, and it is completely legitimate to establish overseas structures, flip for strategic reasons, or raise capital abroad.
The real risk arises when:
- There is no real business purpose,
- Documentation is weak, or
- Ownership appears to circle back into India without substance.
With careful planning, transparent rationale, and a focus on substance, businesses can operate confidently while staying compliant.
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In case you have any concern and queries or need any support FEMA, FDI, ODI and Taxation perspectives, you may like to contact us.
Abhinarayan Mishra, FCA, FCS; Managing Partner, KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; +9910744992, ca.abhimishra@gmail.com
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