Round-tripping: Offshore SPVs lacking bona fide activity used to raise funds and reinvest in India are treated as circumvention of FEMA norms.

Whether funds raised abroad through wholly owned overseas subsidiaries and returned as investment into Indian group companies amounted to impermissible round-tripping under FEMA and related transfer/issue regulations. The article explains that where overseas JV/WOS have nominal capital, lack bona fide business operations and primarily raise overseas borrowings to reinvest into India, such arrangements fall within the regulatory concept of round-tripping; Regulation 6(2)(ii) requires bona fide overseas activity and Regulation 7 imposes additional conditions for financial-sector parties. The practical effect described is that such transactions circumvent FEMA governance and can be treated as contraventions leading to enforcement consequences.

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Issues: Whether the establishment and use of two wholly owned overseas subsidiaries and their borrowings, followed by reinvestment into Indian group companies, amounted to "round tripping" and thereby contravened Section 6(3)(a) of the Foreign Exchange Management Act, 1999 read with Regulation 6(2)(ii) and Regulation 7 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

Analysis: The Tribunal examined Section 6(3)(a) (empowering RBI to regulate transfer or issue of any foreign security) and Regulation 6(2)(ii) (permitting direct investment abroad only where the overseas JV/WOS is engaged in bona fide business activity) alongside Regulation 7 (additional conditions where the Indian party is in the financial services sector). The factual matrix showed two wholly owned subsidiaries incorporated with nominal capital, which obtained substantial loans from overseas branches of ICICI Bank and invested those funds into Indian group companies (including purchases of redeemable preference shares). The Tribunal considered RBI's observations and relevant jurisprudence (including the Supreme Court's discussion of "round-tripping"), and accepted the view that channeling local funds abroad via SPVs and returning them as direct investment falls within the accepted concept of "round tripping" where the overseas entities lack bona fide business operations and serve primarily to raise overseas funds for reinvestment in India. The Tribunal found that the Special Director had applied the statutory provisions to the record, relied on RBI's findings and supporting material, and concluded that the overseas subsidiaries were not engaged in bona fide business activity and that the transactions circumvented applicable regulatory norms.

Conclusion: The Tribunal upheld the finding of contravention of Section 6(3)(a) of the Foreign Exchange Management Act, 1999 and Regulations 6(2)(ii) and 7 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, and dismissed the appeals.

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