The government has decided to scrutinise foreign direct investment inflows through the automatic route to check round-tripping.

Round-tripping is the routing of money back into the country through a subsidiary based in tax havens like the British Virgin Islands and Mauritius.

Since the money is channeled into the country through a foreign company--a company registered in a foreign country--it technically qualifies as FDI. However, the government discourages the flow of such funds as local companies sometimes use this route to evade capital gains tax.

The finance ministry asked the Reserve Bank of India to look into the issue after it discovered a few cases of round-tripping, a government source told Business Standard.

Companies that are eligible for investment through the automatic route do not require the Foreign Investment Promotion Board's approval. They just need to get the RBI's endorsement. But there are no checks in place to detect non-compliance of sectoral policies.

In the recent past, FIPB had struck down Bharti Global's investment in Bharti Televenture on the ground that round-tripping could not be permitted.

With the FDI policy being liberalised, the need for increased surveillance had risen, the source said.

The proposed FDI policy being discussed by the group of ministers on foreign investment envisages FIPB clearance for only a few sectors like telecommunications, broadcasting, plantations and house building.

In China, foreign investments attract a lower corporate tax than local investment because of a policy aimed at wooing foreign capital. However, more than $10 billion of its annual $40 billion FDI inflows is through round-tripping from Taiwan, Hong Kong and Macau.

• FIPB has struck down FDI cases on the ground of round-tripping
• Automatic route has been expanded to allow more FDI inflows
• No surveillance system in place in the automatic route
• Estimates suggest 10% of FDI through automatic route are round-tripping cases
• Finance Ministry is opposed to round-tripping being included in the new FDI definition