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Foreign Exchange Management

Round Tripping under the New Overseas Direct Investment (ODI)

Round Tripping

“Round Tripping” or “round trip transactions” means a series of transactions in which first the money is transferred to another country and then makes its way back into the country of origin. It is an unethical practice and is considered an attempt to manipulate the authorities. Round Tripping Transactions are not considered bona fide and the Reserve Bank of India (RBI) looks at these transactions with suspicion. These transactions are presumed to be undertaken to evade or avoid tax therefore, RBI followed a strict view while considering transactions in which the funds were remitted to a foreign country and then came back to India and were used to create assets or resources.

Scenario before and after the New ODI Regime

Rules and Regulations issued by the RBI in the erstwhile regime did not mention the term “Round Tripping”. So it issued FAQ (Frequently Asked Questions) on Overseas Direct Investments, allowing an Indian entity to set up an Indian subsidiary through its foreign entity after seeking approval from the RBI. This implies that the fund-raising options from offshore investors were limited. An Indian entity considering foreign investments was required to obtain prior approval from RBI if the investee entity had any investment in India. This not only prevented round tripping but also unintentionally restricted legitimate transactions.

The RBI first introduced a draft Foreign Exchange Management (Non-debt Instruments-Overseas Investment) Rules of 2021 on 9th August 2021 which provided that a financial commitment by a resident Indian in a foreign entity that has invested into India at the same time when such Financial commitment was made or any time after, either directly or indirectly may be designed to evade or avoid tax therefore, it was prohibited. Any contravention of this rule was considered a contravention of serious or sensitive nature.

To remove restrictions on legitimate transactions and provide clarity regarding the cases where it is allowed and where it is not allowed, the Government of India in consultation with the RBI notified the new ODI regime comprising of Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Foreign Exchange Management (Overseas Investment) Directions, 2022. The New ODI regime supersedes the old regime which comprised of the Foreign Exchange Management[1] (Transfer or Issue of any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

New ODI Regime on Round Tripping

The new ODI regime liberalizes the round tripping rules barring only those financial commitments in a foreign country that has already invested or is going to invest in India either directly or indirectly resulting in a structure with more than two layers of subsidiaries. The exception to this rule is banking companies and a few categories of non-banking financial companies. This is provided under Rule 19(3) of the new ODI regime and it implies that the new ODI rules allow a resident Indian to invest in a foreign entity that has invested or invests back into India without any prior approval from the RBI subject to it being up to two layers of subsidiaries. Under the erstwhile regime, approval was given by RBI on a case-to-case basis. The new regime allows round tripping for genuine business transactions for up to two layers of subsidiary. The purpose of restricting the number of layers to two is that two layers are considered bona fide and general industry practice.

Definition of Subsidiary under the new ODI regime

A subsidiary is defined as an entity in which the foreign entity has control and the layers of the subsidiary are to be determined with reference to the foreign entity. A subsidiary for the purpose of the ODI rules means an entity over which the company has control. Now control as per the ODI rules means:

  1. any right to appoint the majority of directors or to control the management or policy decisions exercisable by a person or persons acting independently or all of them; or
  2. any control arising by way of shareholding or management rights or shareholder’s agreement or voting agreements that gives them 10% or more of voting rights; or
  3. In any other manner as may be prescribed.

There are two possible interpretations of the definition of a subsidiary:

  1. If the foreign entity is a subsidiary of an Indian entity, then the foreign entity can have only one more subsidiary under it irrespective of whether it is in India or abroad; or
  2. If the foreign entity is not a subsidiary of the Indian entity then the foreign entity can have two levels of a subsidiary in India or abroad.

The layers can be computed by counting the first overseas subsidiary while excluding the Indian subsidiary into which the foreign investment is made. For example, an Indian entity that has a subsidiary in the US. The subsidiary in the US has a subsidiary in the UK. The U.S. subsidiary will be the first layer of the subsidiary to be counted and the UK subsidiary will be the second layer. The UK subsidiary will be allowed to invest in the Indian entity.

The new ODI regime, however, does not clarify the manner of calculation of two layers of subsidiaries from an Indian entity’s perspective or a foreign entity’s perspective. But RBI’s Master Direction on Reporting provides instructions for filing Form FC which requires providing information relating to the step-down subsidiary of a foreign entity which supports the viewpoint of calculating layers of the subsidiary for the foreign entity.

Impact of the New ODI Regime on Round Tripping

  1. It permits round-tripping for genuine and legitimate transactions subject to the condition that it should not exceed two layers of subsidiaries.
  2. It eases doing business in India by addressing the issue of investing in the international market.
  3. It removes the hurdles of Indian entities that wanted to invest in or acquire foreign companies with Indian holdings or who were wanting to externalize their business to an attractive destination to attract more foreign investment or to take advantage of a special scheme.
  4. It prevents round tripping of transactions and also tax evasion or tax avoidance.
  5. The new ODI regime also allows individuals to explore alternatives for achieving a similar structure such as acquiring sweat equity shares or shares under the employee benefits scheme or setting up a partnership firm, LLP or a company to invest in foreign entities having Indian Subsidiaries.


The new ODI regime is a step taken by the Indian government to ease doing business in India. It is a significant step when it comes to addressing the issue of investing in the global market that the Indian corporates were facing. This change to liberalize the regulations governing ODI was a much-awaited move. It is a positive move that allows Indian businesses to expand their presence worldwide while also making a downstream investment into India.

Read our Article: Overseas Investment Rules and Regulations

Ankita Tiwari

Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.

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