Many Indian Startups are Choosing to have their Holding Entity Outside India

[A Novo Juris Post ]

Indian companies have been facing issues in doing business, without any ease. Compliances have become complex and are becoming harder to meet all the compliances though there is full intent in complying with the various laws. While foreign direct investment has been eased, obtaining the registration number for such investment by Reserve Bank of India (RBI) takes quite some time, even though all these filings are now online. Without these registration number, the secondary sale of shares is difficult. Investment by early-stage resident Indian angels is subject to issues of valuation by merchant banker, with prior approval for the proposed investment by the Inter-Ministerial Board of Certification or valuation is proven to the satisfaction of tax officer. Else, there is a possibility that the investment can be taxed as income.

Many startups have global businesses. Startups that get selected for global accelerator programs are asked to have a holding company, primarily in the USA.

Restrictions on Exit Price (Put Option), under the Foreign Direct Investment Policy, the Indian entities cannot determine or assure the exit price to its non-resident investors. This restriction would impact where the investors require optionality clauses, which allows investors to sell their shares at a predetermined price after a predetermined period.

The new disruptive, technology companies find it easier to find exits such as Initial Public Offer, become attractive targets for acquisition/ merger. It is also believed that there is an inherent premium to valuation in being a non-Indian company.

Running a global business from India is most Indian entrepreneurs dream. However, the above and many other factors are making the Indian promoters to move their holding entity ie., the value-creating entity outside of India.

These and many other factors are the triggers for the promoters to move their holding entity outside of India (“externalize”). The Indian legislations are not easy to comply even during externalization.

Incorporation of an Offshore Entity

Incorporation of Indian Subsidiary

If an Investment is Raised

Intellectual Property (IP) Licencing Agreement

Applicability of Place of Effective Management (POEM) under Income Tax Act 1962