Under the new rules, Indian entities can invest in foreign companies that have Indian subsidiaries, provided the entire investment structure does not have more than two layers.
Now, there are two interpretations about how the layers will be calculated, experts said. For example, suppose an Indian entity wants to invest in a US-based company that has a Singapore subsidiary and an Indian step-down subsidiary.
According to one interpretation, the Singapore entity is the first layer and the Indian company will be the second layer. So investment can go ahead.
However, some market participants follow the more conservative interpretation that investment in a US company would be counted as the first layer and hence the Singapore entity becomes the second layer and the Indian entity becomes the third layer.
Experts said if the second interpretation is correct and the US entity is unable to route its investments through a more tax-friendly jurisdiction such as Singapore or the Netherlands, the entities could end up paying double taxation.
Authorized Dealer (AD) bank, or authorized by the bank reserve Bank of India People aware of the development told ET that an industry meeting has been called later this week to discuss these interpretations and decide the future course of action to deal with foreign exchange transactions.
A senior official of an AD bank said, “Based on industry inputs, bankers can approach the RBI and seek clarifications on the same. “There is also some concern that this two-layer structure will set a precedent for other laws.”
RBI had released the draft amendments to the Foreign Direct Investment Rules in 2021 and the latest amendments introduced by the government are based on this. Originally, RBI proposed to allow round tripping, provided such an arrangement does not result in tax avoidance. The government replaced the tax avoidance criterion with the need for a two-layer structure.
Rajesh Gandhi said, “The requirement that the investment should not exceed two layers has given rise to some uncertainty for certain types of structures and hopefully this will be clarified in the coming days and the bankers will take a consensus.” Partner at Deloitte India