ECONOMY

RBI Tightens Rules On Overseas Direct Investment But Goes Soft On Round-Tripping?

The current FEMA rules permit individuals to acquire foreign securities as gift from any person. Consequently, various ingenuous offshore structures have been implemented in the past through third parties (including even consultants!), Kakkar pointed out.

Typically, here’s how externalization of Indian businesses happened, especially between 2010-2015, experts told BloombergQuint, on the condition of anonymity.

Let’s say an Indian founder gets a friendly lawyer or consultant to float a company in Singapore with a capital of $1. This lawyer/consultant would then gift 100% equity of the Singapore entity to the Indian founder, who would disclose it so. Now the Singapore entity will raise money from private equity, institutional investors etc. And consequently, through the Singapore entity, they would buy the business of the Indian founders.

So, via the ‘gift’ route, Indian founders avoided round tripping concerns, remitting money outside and consequent stricter ODI compliances. To deter Indian founders from transferring value of domestic assets in this way, the RBI has proposed restriction on receipt of gift of foreign securities from relatives only.

Given the regulator’s concerns on these structures, the draft rules propose to limit this permission by allowing receiving of gifts only from relatives, as defined under company law, and not from any person/third parties, Kakkar added.

To sum up the overarching objective of the proposed rules, they seems to match with the basic directional objective that we have now been seeing across our economic laws — that value transfers occur at fair prices and are not effectively done by understating or overstating values, Gupta said. “In the context of FEMA, this principle has been strengthened for a foreign company controlled by a domestic entity.”

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