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Anatomy of a simple India - Delaware flip
- 1. STARTUP X 1 ANATOMY OF A SIMPLE INDIA – DELAWARE FLIP
- 2. STARTUP X IMPLICATIONS Any India – Delaware flip involves, at the very least, the following considerations: Foreign Exchange Management Act • The FEMA controls the entire structuring process and restricts the manner in which a flip can be structured and in some cases, may even restrict the post flip head office’s activities. Intellectual Property Owned by the Indian Company • The Intellectual Property must be transferred to the parent company (for obvious reasons) either by assignment or license or by an acquisition of controlling interest in the company that owns the IP. Indian Tax Laws • The transfer of shares, purchase of shares and transfer of intellectual property must be completed in a tax efficient manner.
- 3. STARTUP X IMPLICATIONS US Law Considerations • US and Delaware law will guide the kind and nature of shares and shareholding rights. • If this is a Venture Capital deal, rights of investors should be determined in accordance with NVCA standards. US Tax Considerations • A variety of US tax considerations need to be carefully parsed, while determining the optimal structure for a flip. • Of critical importance is the general resistance to “gifts” – an integral component of many India – Singapore flips.
- 4. STARTUP X STANDARD FLIP OUT OF INDIA DELAWARE HOLDING COMPANY NEW INDIA COMPANY RESIDENT SHAREHOLDERS NON-RESIDENT SHAREHOLDERS US COMPANY This structure is one of the few – and more popularly used ones - that are available for the proposed re- structuring that is to be undertaken.
- 5. STARTUP X STEP 1: Incorporation of a Delaware Holding Company NON-RESIDENT SHAREHOLDERS OF INDIAN COMPANY DELAWARE HOLDING COMPANY MECHANICS A Delaware holding company (“Delaware Holding Company”) can be set up by non-resident shareholders of the Indian Company with nominal share capital. Non-resident shareholders can acquire shares of the Delaware Holding Company for a nominal consideration
- 6. STARTUP X STEP 1.1: Resident Shareholders Acquire Shares A resident shareholder can acquire shares of the Delaware Holding Company through different routes. Some of the popular ones are discussed below. Through funds acquired or earned outside India when the person was a person resident outside India under FEMA. Through the Liberalized Remittance Scheme, wherein resident individuals can remit up to USD 2.5 M abroad for certain transactions IMPLICATION. Remitting money under the LRS may attract round tripping concerns if the resident individuals’ money is remitted back to India. Further, the Delaware HQ may be subject to restrictions in respect of future actions. This must be weighed against the potential tax liability of a “gift” under applicable law. OR
- 7. STARTUP X STEP 2: Transfer of US Company to Delaware Holding Company INDIAN COMPANY DELAWARE HOLDING COMPANY DELAWARE COMPANY US COMPANY TRANSFER OF SHARES MECHANICS The Indian Company transfers its shareholding in the US Company to the Delaware Holding Company. Transfer will be subject to Pricing Guidelines and compliance with the FEMA. Transfer will require US Tax advice.
- 8. STARTUP X STEP 2: Transfer of Delaware Company to Delaware Holding Company (Contd.) STRUCTURE OF DELAWARE HOLDING COMPANYSTRUCTURE OF INDIAN COMPANY INDIAN COMPANY RESIDENT SHAREHOLDERS NON-RESIDENT SHAREHOLDERS RESIDENT SHAREHOLDERS NON-RESIDENT SHAREHOLDERS DELAWARE HOLDING COMPANY US COMPANY
- 9. STARTUP X STEP 3: Setting Up New India Subsidiary DELAWARE HOLDING COMPANY NEW INDIAN COMPANY The Delaware Holding Company sets up a new Indian entity with a nominal share capital. DELAWARE HOLDING COMPANY RESIDENT SHAREHOLDERS NON-RESIDENT SHAREHOLDERS US COMPANY NEW INDIAN COMPANY STRUCTURE OF DELAWARE HOLDING COMPANY
- 10. STARTUP X STEP 4: Non-Resident Shareholders Participate in Share Swap NON-RESIDENT SHAREHOLDERS INDIAN COMPANY DELAWARE HOLDING COMPANY SWAP OF SHARES Non-resident shareholders of the Indian Company transfer their shares in the Indian Company to the Delaware Holding Company in exchange of shares of the Delaware Holding Company STRUCTURE OF INDIAN COMPANY POST SWAP DELAWARE HOLDING COMPANY RESIDENT SHAREHOLDERS INDIAN COMPANY RESIDENT SHAREHOLDERS NON-RESIDENT SHAREHOLDERS DELAWARE HOLDING COMPANY STRUCTURE OF DELAWARE HOLDING COMPANY POST SWAP
- 11. STARTUP X STEP 5: Merger of Indian Entities DELAWARE HOLDING COMPANY NON-RESIDENT SHAREHOLDERS RESIDENT SHAREHOLDERS INDIAN COMPANY NEW INDIAN COMPANY 100% MERGE ISSUE SHARES STRUCTURE OF NEW INDIAN COMPANY NON-RESIDENT SHAREHOLDERS RESIDENT SHAREHOLDERS DELAWARE HOLDING COMPANY NEW INDIAN COMPANY Note: This is an optional step. Instead of a merger of the two Indian entitles, a slump sale of the Indian Company to the New Indian Company may be considered as well. RPS RPS RPS: Redeemable Preference Shares
- 12. STARTUP X THE TEAM PRAVEEN RAJU MATHEW CHACKO ANKITA HARIRAMANI AADYA MISRA
- 13. STARTUP X CONTACT US PRAVEEN RAJU Spice Route Legal, Office Number 01B115, C-20, G Block, BKC, Mumbai – 400051 praveen@spiceroutelegal.com MATHEW CHACKO Spice Route Legal, No. 313, Patel Ram Reddy Rd, Domlur, Bengaluru – 560071 mathew@spiceroutelegal.com