Round-Tripping Structures: A High-Risk Game for Indian Startups

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.

🔹 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 fundraising

• Exit 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

• RBI blocking ODI filings

• ED initiating action under FEMA & PMLA

• SEBI raising red flags on overseas IPO paths