1. Purpose and Objective of the Paper
This paper provides a comprehensive analysis and practical framework for Indian promoters engaged in both domestic and global business and investment ventures. With the increasing international presence and capital mobility, Indian promoters must align their business structures with regulatory frameworks under:
- The Income Tax Act, 1961
- The Foreign Exchange Management Act, 1999 (FEMA)
- The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
- Other relevant statutes
The paper examines how factors like residency, control, and disclosure requirements influence structuring decisions and includes case studies and best practices.
2. Regulatory Framework and Key Provisions
A. Income Tax Act, 1961
- Section 6 – Residential Status
- ROR (Resident and Ordinarily Resident): Global income taxable
- RNOR (Resident but Not Ordinarily Resident): Limited tax scope
- NR (Non-Resident): Taxed only on Indian-sourced income
- Section 139(1): Mandatory filing for RORs with foreign assets
- Schedule FA: Disclosure of all foreign bank accounts, financial interests, immovable property
- Sections 115BBA, 90/90A (DTAA): Taxation of global income and treaty relief mechanisms
- GAAR (Section 95): Prohibits impermissible avoidance arrangements
- POEM: Corporate residency test based on the place of effective management
B. FEMA, 1999
- Section 2(v): Defines a person resident in India
- Overseas Investment Regulations
- ODI allowed only with equity control and within financial commitment limits
- Reporting via Form FC, APR, etc.
- LRS (Liberalized Remittance Scheme)
- USD 250,000 per financial year for residents
- Restrictions on investment in unlisted overseas entities unless ODI-compliant
C. Black Money Act, 2015
- Applies to RORs failing to disclose foreign income/assets
- Penalties include:
- Tax @ 30%
- Penalty = 3x the tax amount
- Prosecution
3. Strategic Structuring Approach
A. Clear Separation of Personal and Business Holdings
- Use Indian HoldCo for domestic operations and succession
- Consider offshore holding/trust for global assets only if promoter is NRI/RNOR
- Maintain minimal layering, with strong economic substance and documentation
B. Residency Planning and Disclosure Consistency
- Align stay patterns, intention, and disclosures across jurisdictions
- For transition to NRI/RNOR, plan exits strategically and comply with residency rules
C. Trusts and Family Offices
- Domestic Trusts: Revocable/irrevocable; useful for Indian succession planning
- Offshore Trusts: Must comply with POEM/BMA, have real settlor, independent trustees, and substance
- Disclosure: Mandatory under Schedule FA if settlor/beneficiary is ROR
D. Outbound Investment Routes
- ODI: For control-based foreign business investments
- LRS: For personal investments (within permissible limits)
- NRI Investments in India: Via Schedule IV (Repatriable basis)
4. Interplay of Regulations
| Issue | Income Tax Act | FEMA | Challenge |
|---|---|---|---|
| Residency | Section 6 | Section 2(v) | Differing tests create ambiguity |
| Foreign Asset Holding | Schedule FA & BMA | Prohibited unless via LRS/ODI | Undisclosed holdings = severe penalty |
| Overseas Companies | POEM | ODI Rules | Offshore company controlled from India = Indian resident |
| Use of Trusts | Disclosure under BMA | Reporting under ODI/LRS | Lack of substance may trigger POEM/BMA scrutiny |
5. Live Examples and Best Practices
Disclaimer: The case studies below are based on public sources and regulatory proceedings. They are purely illustrative and do not imply wrongdoing unless determined by competent authorities.
A. Infosys – Nandan Nilekani
- Declared Indian residency; global philanthropy routed through Indian family office
- Fully compliant with IT and FEMA
- Best Practice: Transparent structure and domestic control
B. Uday Kotak – Family Trusts
- Used domestic trusts for promoter stake and succession in Kotak Mahindra Bank
- Aligned with SEBI and tax regulations
- Best Practice: Controlled and compliant succession planning
C. Rohan Murty – Returning Indian Resident
- Transitioned from NR to ROR with proper disclosure
- Assets realigned prior to joining Catamaran Ventures
- Best Practice: Proactive residency planning and compliance
D. NDTV – Prannoy & Radhika Roy
- Used Mauritius-based RRPR for control
- Allegations by SEBI/ED on shell structures and FEMA violations
- Challenge: Lack of substance triggered multi-agency scrutiny
E. Anil Ambani – Swiss Bank Holdings
- Declared zero net worth in UK; named in Pandora Papers
- Suspected BMA violations under ED probe
- Challenge: Inconsistent residency claims, undeclared offshore assets
F. Vinod Adani – Offshore Structures
- Named in Hindenburg report; controlled Mauritius entities
- Raised POEM and ODI compliance concerns
- Challenge: Perceived indirect control, opaque entity structures
6. Governance Recommendations
- Economic Substance: Ensure offshore entities have directors, staff, premises
- Transparent Control: Avoid proxy/shareholder layering; keep records
- Proper Documentation: Maintain trust deeds, board minutes, mandates
- Disclosure Compliance: Timely filing of Schedule FA, LRS/ODI forms, IT returns
- Residency Monitoring: Track days and intentions; align ITA and FEMA positions
- Succession Planning: Use domestic trusts where possible; ensure legality and disclosure for offshore structures
7. Case Study Questions
Case Study 1: Outbound Investment from India (Resident Promoter)
Scenario:
An Indian promoter wants to invest USD 500,000 in a Singapore-based B2B logistics startup. He’s already exhausted USD 250,000 under LRS for personal expenses.
Questions:
- Can the investment be made under LRS?
- What conditions/documentation are required under ODI Regulations?
- What tax disclosures are required under the IT Act?
- How to ensure POEM is not triggered in India?
Case Study 2: Offshore Family Trust with Indian and Global Investments
Scenario:
An NRI in UAE holds 70% of an Indian healthcare company via a Cayman trust that also holds global assets. His children, resident in India, are beneficiaries.
Questions:
- How is this viewed under FEMA and the IT Act?
- Do Indian-resident beneficiaries need to disclose trust assets?
- What are the POEM and BMA risks?
- How to align the trust with Indian succession laws?
Conclusion
Strategic structuring for Indian promoters must carefully align personal and business frameworks with both Indian and global laws. Key principles include:
- Maintaining economic substance
- Ensuring full disclosure
- Limiting layering and opacity
- Establishing robust governance structures
Case studies show that while many have used legal tools effectively, gaps in compliance and transparency often lead to regulatory challenges. Sustainable wealth and business management depend on balanced, compliant structuring.
General Disclaimer
This paper is for educational and informational purposes only. It does not constitute legal, tax, or financial advice. Please consult qualified professionals before making decisions based on this content. While care has been taken to ensure accuracy, the authors are not liable for any loss arising from reliance on this material. Views expressed are personal and do not represent any organization or regulatory authority.