Round-Tripping Structures explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A structure put in place a decade ago to satisfy an investor becomes a diligence item at the IPO — and the bank processing the transaction is the one asking.
How round-tripping structures arose from externalisation
Externalization, or the migration of a start-up's capitalisation table to an overseas holding company, was examined both as a historical phenomenon and as a current structuring tool.
Structures that were prevalent under the erstwhile FEMA 120, involving investment through non-resident funds or gifts of shares from NRI relatives to create an appearance of an independent overseas holding company, were discussed as having, in certain cases, resulted in round-tripping or transactions requiring regularisation or compounding under FEMA, depending upon the facts and circumstances of each case.
The structures worked, in the sense that they were implemented and the businesses grew on top of them. Nobody examined them closely for years, because no transaction required anyone to.
An exit changes that. The session noted that this particular gifting structure was especially common in the software start-up sector and that its consequences are now surfacing at exit, since Authorised Dealer banks may require promoters to regularize historical FEMA non-compliances or obtain appropriate regulatory approvals before processing transactions such as an IPO or a stake sale.
The AD bank is the choke point, exactly as it is elsewhere in FEMA practice. It must be satisfied before funds move, and at an IPO or a stake sale a great deal of money is trying to move at once.
The session leaves the hardest question open: it is leaving open the question of whether gains already accrued on the strength of such historical structures can be retained. A promoter may have to regularise a structure and still face uncertainty about the value built on it.
The practical lesson for anyone advising on a start-up exit is that the capitalisation table's history is a diligence item in its own right, and it needs examining long before a transaction is announced.
Round-tripping structures are permitted, conditionally
The Foreign Exchange Management (Overseas Investment) Rules, 2022 permit overseas investments resulting in round-trip structures, subject to the conditions prescribed under Rule 19 and compliance with the applicable provisions of the Companies Act, 2013.
This is a significant liberalisation from the earlier position, where round-tripping was treated as objectionable in itself. Under the 2022 framework the structure is available — but only within Rule 19's conditions and within the company law limits, including the restriction on the number of layers.
Swap-based externalisation after Rule 9A
The swap-based externalisation route, whereby an Indian company sets up an overseas subsidiary that in turn acquires the shares of its own Indian parent's holding company by issuing its own shares, has become significantly more workable following the insertion of Rule 9A of the NDI Rules on 16 August 2024.
With a tax caveat: such swap transactions may constitute a transfer for the purposes of the Income-tax Act, 1961 and their tax implications must therefore be examined independently. No cash moves, but a taxable transfer may still have occurred.
The purpose test for the overseas entity
The session further observed, as a matter of structuring practice, that the intermediary overseas entity should ordinarily have a genuine commercial or business purpose, since a special purpose vehicle may properly be used for a further outbound acquisition but its use solely for holding an inbound investment may invite greater regulatory scrutiny depending upon the facts and circumstances of the case.
| Use of the overseas SPV | Regulatory position |
|---|---|
| A vehicle for a further outbound acquisition | May properly be used — it has a purpose beyond holding |
| Holding solely an inbound investment | May invite greater regulatory scrutiny — the entity does nothing except sit between the investor and India |
The reasoning is the same substance-over-form principle that runs through the tax and scheme analysis. An entity with no function other than to change the characterisation of a flow is doing exactly what anti-avoidance scrutiny looks for.
Common mistakes
- Deferring examination of the capitalisation table's history until a transaction is under way.
- Treating round-tripping structures as prohibited outright rather than conditional under Rule 19.
- Assuming a swap with no cash movement produces no taxable transfer.
- Interposing an overseas entity that holds an inbound investment and nothing else.