Round-tripping under FEMA: the two-layer rule and Schedule III

Round-tripping is not prohibited under FEMA in 2026; it is tested. Rule 19(3) of the OI Rules 2022 bars a resident’s financial commitment in a foreign entity that invests back into India only where the result is more than two layers of subsidiaries. Schedule III adds a second test: a resident individual who controls the foreign entity may not hold ODI in it if it has a subsidiary, and a controlled Indian company is one. A company at the top usually passes; a controlling founder is outside the general permission.

What the rules say, in their own words

The FEM (Overseas Investment) Rules 2022 were notified as G.S.R. 646(E) on 22 August 2022, superseding the 2004 foreign security regulations; the RBI’s Directions of the same date sit on its Master Direction on Overseas Investment. Neither treats round-tripping as a flat prohibition; they set a structural test. LRS vs ODI covers when a foreign shareholding is ODI at all; this page assumes it is and asks whether its shape is one you may hold.

Rule 19(3) reads: “No person resident in India shall make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries.” The proviso exempts the classes in rule 2(2) of the Companies (Restriction on Number of Layers) Rules 2017: banks, systemically important NBFCs registered with the RBI, insurers and Government companies. Founder-held structures are none of these.

Directions para 20(2) restates the rule and freezes any structure that already had two or more layers when the Rules were notified: no further layer may be added. Its note fixes “subsidiary” as an entity in which the foreign entity has control, which includes a stake of 10 per cent or more; an investee it does not control is not counted. The text does not say how layers are counted and no official clarification was located when this page was prepared; Schedule A flags where that gap matters rather than resolving it.

The Schedule III condition most founders miss

Rule 13 routes a resident individual’s overseas investment to Schedule III, and para 1(2)(i) is where founder structures break: an individual may make or hold ODI “in an operating foreign entity not engaged in financial services activity and which does not have subsidiary or step down subsidiary where the resident individual has control in the foreign entity.” Control under Rule 2(1)(c) starts at 10 per cent of the votes, a board majority, or control of management or policy decisions. A founder who personally holds 10 per cent or more of a Delaware or Dubai holdco that owns the Indian company is outside the general permission.

Schedule I, which governs Indian entities, has no counterpart to this bar. An Indian company holding the foreign entity is tested against Rule 19(3) and the 400 per cent of net worth ceiling on financial commitment; the same founder holding it personally meets the subsidiary bar as well. That is why the holding-company comparison turns on who sits at the top, not only where.

Directions para 22(1): an individual who made ODI without control in a foreign entity that later acquires or sets up a subsidiary may not then acquire control. Directions para 21(3): an individual may not make financial commitment by way of debt, so a founder loan is not a workaround. The first proviso to Schedule III para 1(2), for shares that arrive by inheritance, sweat equity, qualification shares or an ESOP, is row 5 of Schedule A.

Schedule A · Six founder structures tested against Rule 19(3) and Schedule III
Structure	Two-layer test, Rule 19(3)	Schedule III control condition	Reads as
1. Indian company sets up a foreign holdco, which owns an Indian operating company	Applies. The Rule does not say whether the count starts at the foreign holdco or below it; see the note under the table	Not engaged. Schedule I has no subsidiary bar; the 400 per cent ceiling, Form FC and a UIN before remittance apply	Permitted within two layers
2. Resident individual holds under 10 per cent of a foreign company, without control, and it owns an Indian subsidiary	Applies in the same way	Passes: the condition bites only with control. Unlisted shares are still ODI, so Form FC follows; no APR is due while the stake stays below 10 per cent without control and with no other financial commitment (Regulation 10(4)); no later acquisition of control (Directions para 22(1))	Permitted, with a ceiling on control
3. Resident individual controls a foreign holdco (10 per cent or more of votes, or the board) that owns an Indian subsidiary, acquired by remittance	Applies in the same way	Fails the general permission: para 1(2)(i) covers a controlled foreign entity only where it has no subsidiary or step down subsidiary	Not permitted under general permission; Rule 9(2)(ii) approval through the AD bank is the route the rules provide
4. Delaware flip: resident founders swap Indian shares for shares of a new Delaware parent and control it	Applies; the layer count is not settled, see the note under the table	Schedule III lists swap of securities as a mode on a merger, demerger, amalgamation or liquidation. Founders who control the parent are caught by para 1(2)(i) as in row 3. Non-conforming equity from a swap must be disinvested within six months (Directions para 22(3))	Mode and route are design inputs settled before the swap; approval route where the general permission does not reach
5. Employee or director of the Indian subsidiary receives the parent’s shares under a global ESOP, as sweat equity or by inheritance	Applies where the holding is ODI	Passes by the first proviso to Schedule III para 1(2). Under 10 per cent without control the holding is OPI. An ESOP must be offered globally on a uniform basis	Permitted
6. Any structure above adding a third layer, or a structure that already had two or more layers on 22 August 2022 adding another	Fails Rule 19(3); Directions para 20(2) freezes existing two-layer structures	Not reached	Not permitted, except for the four exempt classes

As read on 20 September 2026. Rule 19(3) does not spell out how layers are counted and no official guidance was located; the rows flag that gap. Every row assumes bona fide business activity under Rule 9(1) and none of the Rule 19(1) sectors: real estate, gambling and rupee-linked financial products.

If you already hold a structure that fails

Founders usually find this out when the AD bank refuses the next outward remittance or a flip stalls on their own FEMA position. The ODI regularisation checklist carries the seven-step sequence for missed filings; this section is about a position the general permission never covered.

Draw the structure as the AD bank will see it. A Rule 9(2)(ii) file under Directions para 3(3) needs a diagram of every subsidiary with direct and indirect stakes. Count every stake of 10 per cent or more as control and every controlled entity as a subsidiary.
Classify each holding. ODI or OPI; control or not; and the mode of acquisition, because inheritance, sweat equity, qualification shares and ESOP shares sit under the proviso and a remitted subscription does not. Once ODI, always ODI.
Separate late paperwork from non-conforming positions. A late Form FC or APR is regularised with a late submission fee through the AD bank within three years of the due date. A holding Schedule III did not permit, or a third layer, is not a reporting delay and no fee cures it; Rule 17(5) bars holding or transferring an investment not permitted when made. FEMA, ODI and LRS compliance sets out the compounding that follows.
Choose the administrative fix. Bring the holding within a permitted shape, under an Indian entity or below control; disinvest, remembering that a full exit needs one year invested and no dues outstanding; or apply under Rule 9(2)(ii) through the designated AD bank with the reasons and the FEMA provisions cited.
Freeze further commitments until reporting is regularised. Regulation 12 of the OI Regulations and Directions para 19 stop any further financial commitment, transfer or outward remittance until then.
Re-test before every corporate action. A priced round, a new subsidiary or a share transfer changes the layer count or the control position, and Rule 19(3) applies “at any time thereafter”. The APR falls due every 31 December.

Who signs what: Form FC and the APR are signed by the investor, the company or its directors as the forms require; the APR is certified by a chartered accountant where statutory audit does not apply; the AD bank is the channel to the RBI. On the India leg, Infinilex counsel qualified in India sign the structuring advice, the legal grounds in a Rule 9(2)(ii) application and any compounding application: an advocate enrolled in India, or Infinilex’s company secretary or chartered accountant where a statute names that professional. Where a Delaware parent is involved, a US-admitted Infinilex lawyer signs the US leg: the charter, the swap agreement and the US securities analysis. Where the holdco sits in the UAE, Infinilex counsel qualified for the relevant UAE regulator sign that leg.

How this shapes a flip or a foreign holdco decision

Rows 1, 2 and 5 hold the same assets as row 3 and differ only in who owns the top entity and how the shares got there. Row 3, the founder who subscribed for control with remitted money, is the one that stalls.

For a Delaware flip, this is why diligence starts with the founders’ FEMA position; Delaware flip cost and timeline shows where that step sits. For a UAE holdco, the Schedule III question sits beside the tax-residence question in UAE company run from India. The inbound leg has its own route questions in FDI automatic vs approval route; both legs are designed together in cross-border structuring. None of this is a conclusion on your facts; it is a test to run on a diagram before the money moves.

Frequently asked questions

Is round-tripping permitted under FEMA in 2026?

Not prohibited; tested. The 2004 regulations were superseded on 22 August 2022, and Rule 19(3) of the FEM (Overseas Investment) Rules 2022 now states the position: a person resident in India may not make a financial commitment in a foreign entity that invests into India if the result is a structure with more than two layers of subsidiaries. Individuals also face the Schedule III control condition. Clear both and the structure sits inside the general permission; fail either and it needs the approval route or a redesign.

Can an Indian resident own a foreign company that has an Indian subsidiary?

It depends on who the resident is and how much they hold. An Indian company can, under Schedule I, within the two-layer rule. A resident individual can hold shares without control, still ODI with a Form FC and, once the stake reaches 10 per cent or another financial commitment exists, an APR, but may not later acquire control. An individual who controls the foreign entity is outside the Schedule III general permission because it has a subsidiary, unless the shares came by inheritance, sweat equity, qualification shares or an ESOP; otherwise Rule 9(2)(ii) approval through the AD bank is the route the rules provide.

What counts as control under the OI Rules?

Rule 2(1)(c) defines control as the right to appoint a majority of directors or to control management or policy decisions, directly or indirectly, including through shareholding, management rights, shareholders agreements or voting agreements carrying ten per cent or more of the voting rights, or in any other manner. A founder with 10 per cent of the votes has control, and so does one with 4 per cent and a board majority. The Directions apply the same meaning when counting subsidiaries for the two-layer rule.

What is the two-layer rule in the OI Rules?

Rule 19(3) of the FEM (Overseas Investment) Rules 2022: no person resident in India may make a financial commitment in a foreign entity that has invested or invests into India, at the time of the commitment or at any time afterwards, directly or indirectly, resulting in a structure with more than two layers of subsidiaries. Subsidiary means an entity the foreign entity controls, including a 10 per cent stake. A structure that already had two or more layers when the Rules were notified may not add another; banks, systemically important NBFCs, insurers and Government companies are exempt.

What if I already hold a foreign holdco that owns an Indian company?

Separate the paperwork problem from the position problem. A missed Form FC or Annual Performance Report is regularised through the AD bank with a late submission fee inside the three-year window. A holding the general permission never covered, such as a resident individual controlling a foreign entity with an Indian subsidiary, is not cured by a fee: bring it into a permitted shape, disinvest, or apply under Rule 9(2)(ii) through the AD bank, then compound any contravention. Until reporting is regularised the AD bank will not process further remittances.

Next step

Holding, or planning, a foreign entity that owns an Indian company?

Send us the structure diagram, who holds what and how each holding was acquired. We will test it against Rule 19(3) and Schedule III and map the route and filings before anything moves.

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