ROUND TRIPPING UNDER THE ODI REGULATIONS
In contrast to the previous regulations on overseas investment, the round-tripping structures under the OI Rules1 and OI Regulations2 do not require any explicit approval from the RBI, provided that, such structures must be confined to two layers, as prohibitions persist for structures exceeding this limit.
Rule 19(3) of the OI Rules states that “No person resident in India shall make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries”. This is in line with exemptions extended to certain specified entities under the Companies (Restriction on Number of Layers) Rules, 2017. Therefore, while, round tripping is permitted, it has been limited to only two layers. However, despite the common perception that the two layers refer to both Indian and international layers, there is no explicit clarity on this matter. This lack of clarification may give rise to confusion regarding whether the layers are to be calculated on an international basis, excluding Indian layers, or inclusively considering all layers, including those within India.
The OI Rules have further specified that any investment made outside India by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or through step down subsidiary or the special-purpose vehicle, subject to the limits and the conditions laid down in the OI Rules. This clarifies that an Indian entity/ resident can make investments in a foreign entity which can further invest in other entities or whose primary business activity is investing in other entities.
In conclusion, the OI Rules and OI Regulations represent a pivotal moment in shaping the landscape of overseas investments in India. While, there remains certain ambiguities, the elimination of explicit approval requirements for round-tripping structures, coupled with the allowance for up to two layers, reflects a strategic move to strike a balance between encouraging legitimate investments and mitigating the risk of misuse. Further, the OI Rules and OI Regulations provide assurance to entities such as start-ups on the stability of their structures involving a foreign entity and an Indian subsidiary, making them legitimate. Overall, these developments not only signify a positive shift in regulatory frameworks but also encourage prudent and transparent overseas investments by Indian entities.
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