Round-tripping is often pitched as a smart way to structure global operations, attract foreign investors, or plan exits. But for Indian startups, it’s a minefield of regulatory violations and tax risks. This blog decodes what round-tripping is, why startups attempt it, and what makes it non-compliant.
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🔹 What is Round-Tripping?
Round-tripping refers to a capital movement where Indian money is sent overseas via ODI (Overseas Direct Investment) into a foreign entity, which then reinvests into Indian entities as equity, debt, or otherwise.
Example: An Indian founder sets up a Singapore holding company. That company invests in an Indian startup. Effectively, Indian capital is routed offshore and returns, which attracts regulatory red flags.
🔹 Why Startups Use Round-Tripping Structures
- Global HoldCo Setup: For strategic visibility or future IPOs
- Tax & Regulatory Arbitrage: To exploit lenient regimes (e.g., Mauritius or Singapore)
- Valuation Optimization: Better optics for fundraisingExit Planning: Easier for global M&A or investor exits
🔹 The Legal and Tax Minefield
FEMA Violations
- ODI used to reinvest back into India is restricted
- Circular routing is not permitted under FEMA Rule 19(3), 2022
- RBI FAQs directly prohibit such structures
Income Tax Risks
- GAAR (General Anti-Avoidance Rule) application
- Indirect transfer of Indian assets (Sec 9(1)(i))
- Angel Tax (Sec 56(2)(viib))
- Black Money Act compliance
Company Law Risks
- Foreign shareholding caps
- Improper disclosures
Enforcement in Action
- SEBI raising red flags on overseas IPO paths
- RBI blocking ODI filings
- ED initiating action under FEMA & PMLA
