🌐 Round-Tripping: FEMA Regulations for Indian Founders

When Indian founders set up US entities, understanding round-tripping regulations is crucial. Under the Foreign Exchange Management Act (FEMA) and the Overseas Investment (OI) Rules, round-tripping involves Indian residents making overseas investments that subsequently return to India as foreign investments.

📜 Rule 19(3): The Two-Layer Restriction

<aside> 🔑 Key Regulation: The current regulatory position on round-tripping is governed by Rule 19(3) of the OI Rules, 2022.

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"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, resulting in a structure with more than two layers of subsidiaries."

This provision allows round-tripping under the automatic route with a key restriction: the structure cannot exceed two layers of subsidiaries. This represents a significant liberalization from the earlier regime under FEMA 120, where round-tripping generally required prior RBI approval.

💡 Practical Implementation

For Indian founders establishing US entities, this means:

• ✅ Permissible structure: An Indian resident can invest in a US entity (first layer) that invests back into India, provided there is no additional foreign subsidiary layer that also invests in India.
• ❌ Prohibited structure: If the US entity has a subsidiary in another jurisdiction (second layer) that invests in India, this exceeds the two-layer limit and requires RBI approval.
• 📝 Reporting requirements: All such investments must be properly reported through Form ODI Part I for the initial investment and Form FC for the financial commitment.

📊 RBI's Historical Position

The Reserve Bank of India has historically viewed round-tripping with caution due to potential misuse for:

• 🛑 Tax evasion through favorable tax treaty jurisdictions
• 💰 Money laundering and bringing back unaccounted funds
• 📈 Manipulation of stock prices of Indian companies

While the 2022 OI Rules liberalized the approach, the two-layer restriction in Rule 19(3) maintains regulatory oversight while allowing legitimate business structures.

✓ Compliance Checklist

• 🔍 Structure verification: Ensure your investment structure complies with the two-layer limit
• 🏦 Proper routing: All investments must be routed through Authorized Dealer banks