India intends to implement stricter regulations on foreign investments to address roundtripping

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The government is looking to tighten overseas investment rules introduced last year in a bid to curb roundtripping of funds, people aware of the plan said.

Roundtripping occurs when an investment made abroad is routed back to the country of origin. While roundtripping can occur for bona fide commercial reasons, it can also be done to avoid taxes and launder money – reasons that have the government worried.

One proposal being considered is to tighten the FEMA (Overseas Investment) Rules, 2022, which were introduced in October, the people said.

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The government wants to especially tighten clause 19 (3) of these rules, which specifies that a person resident in India may invest in an offshore entity or its step-down Indian subsidiary if the proposed investment structure is limited to two layers of subsidiaries. Such investments are allowed without any explicit permission from the Reserve Bank of India.

Now, the government wants to remove the rule that allows an investment structure with two layers of subsidiaries. In effect, the proposed amendment would allow such investments only if there is no intervening layer/subsidiary between the foreign entity and the one in India receiving the foreign investment.

The finance ministry is also considering options related to how overseas direct investment (ODI) and overseas portfolio investments (OPI) are viewed, the people added.

Currently, investments of 10 percent or more of the paid-up equity capital in a listed foreign entity, or acquisition of control in a listed foreign company, among other things, is classified as ODI. An investment that is not ODI is categorised as OPI.

India’s outward foreign direct investments dropped to $974 million in June 2023 from $1.9 billion a year ago.

The proposal is “under discussion stage,” said another person aware of the development. “The Prime Minister’s Office is also in favour of tightening the conditions. The RBI’s views are also important. So, a final decision will be taken after the examination of all aspects.”