India: Chasing The Black Money Chimera From Panama To Paradise?

Last Updated: 30 January 2018
Article by Aravind Venugopal and Suditi Surana

Most Read Contributor in India, July 2019

Panama and Paradise papers have generated considerable controversy around overseas investments and questions are being raised about their legality. It is important to recognise that Indian individuals and companies are permitted to make overseas investments, subject to the fulfilment of certain conditions. Significantly, Indian companies can make offshore investments up to USD 1 billion or 400% of its net-worth, whichever is lower. Individuals can make offshore investments up to USD 250,000 annually under the liberalised remittance scheme and can also act as directors of foreign companies. Investments above these thresholds require a specific approval from RBI.

Individuals and companies are prohibited from investing in countries identified as non-cooperative by the Financial Action Task Force (FATF), an inter-governmental body. Currently, tax heavens such as Mauritius, Cayman Islands, Singapore and Panama are not identified as non-cooperative by FATF. Accordingly, investment in such countries is not by itself illegal.

Paradise papers reveal that many Indian companies have set up offshore non-operating companies. Some of these companies hold shares of other companies. Current regulations permit individuals and companies to make investments in entities engaged in bona fide business activity. Setting up of offshore non-operating companies which do not hold shares of other companies may violate the requirements of applicable laws. While individuals are prohibited from investing in offshore non-operating companies with further investments (referred to as pure holding companies) and offshore companies with subsidiaries, a similar specific prohibition has not been imposed on companies. This suggests that companies are free to make investments in offshore pure holding companies.

However, RBI in certain cases has taken a view that investments in offshore pure holding companies violates its regulations as pure holding companies cannot be considered as being engaged in bona fide business activity. Given the specific prohibition imposed on individuals and the lack of such a prohibition on companies, this stance appears to be an afterthought. If bona fide business activity requirement was intended to prohibit investments in pure holding companies, there was no need for a separate specific prohibition on individuals making offshore investments. FAQs in this regard on RBI's website (which do not have the sanctity of law) suggests that at least one level of pure holding companies is permitted. It will be interesting to note RBI's views on this issue in the days to come. If the intention was to prohibit companies from setting up pure holding companies offshore, clarity in the regulations may have provided a stronger deterrence. The rules issued by the Ministry of Corporate Affairs on layers of subsidiaries that Indian companies can have does not apply to overseas investments.

Additionally, regulations require that companies should not have been in RBI's exporter's caution list, list of defaulters to banking system or under investigation by any investigation, enforcement or regulatory body at the time of making offshore investments. Sector specific conditions and restrictions have also been contemplated in the regulations. Offshore investments are required to be reported to various regulators including RBI, CBDT and in case of investments by listed companies, SEBI. Currently, it is not clear whether conditions prescribed by regulations and reporting requirements have been violated by companies named in Paradise papers.

From a tax perspective, while companies and individuals are permitted to undertake 'tax planning', 'tax avoidance' is prohibited. The line between tax planning and tax avoidance is often blurry and depends on the facts and circumstances of each case. Considering judicial precedents, the rule of thumb is whether a transaction has an independent commercial rationale or if its sole objective is tax avoidance. For establishing wrong doing, regulators will have to evaluate whether adequate commercial rationale exists for incorporating offshore entities, especially pure holding companies.

Paradise papers have pointed out that certain elected representatives have not disclosed foreign investments made by companies in which they are shareholders. While elected representatives are required to disclose details of shares held by them and their dependents, currently they are not required to disclose further investments made by companies in which they are shareholders. From the disclosures, so far it appears that in most cases, offshore investments have been made by companies in which elected representatives are shareholders and not by the representatives personally. A failure to declare such indirect overseas investments may not violate existing laws. However, in the interest of transparency, going forward elected representatives should be required to disclose domestic and foreign investments made by companies owned or controlled by them or their dependents.

Considering the above, it should not come as a surprise that many Indian companies have offshore investments. Regulatory regime permits such investments and such investments are often essential in the post liberalisation context, where Indian companies work closely with global businesses for transfer of technology, sharing of R&D, access to global markets etc. An extensive investigation into specific cases will be necessary to conclude whether laws have been violated.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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