Globalisation allows companies incorporated elsewhere to conduct business in India. A growing trend of changing domicile is encouraging foreign-incorporated companies with an Indian business focus to redomicile their place of incorporation to the country. This movement is becoming attractive as businesses pursue opportunities for growth, expansion and operational efficiency.
In the past, holding companies were incorporated outside India to take advantage of the overseas jurisdiction. This brought benefits such as easier access to foreign capital, tax optimisation for investors, a simplified regulatory framework, strategic expansion into global markets, protection of intellectual property rights and the enforceability of rights. This was the case even though the business’ focus was on India. The holding company often operated through a wholly owned subsidiary.
Companies are now considering redomiciling to India in preparation for listing on Indian stock exchanges. Additional benefits include simplifying the shareholding structure by reducing shareholding tiers; creating a unified business structure; eliminating inter-company transactions and reducing costs. However, such a change requires careful structuring. Various models have been developed to address different commercial imperatives and the same continues to evolve.
One option includes a reverse merger under section 232 read with section 230 of the Companies Act, 2013 (act). This structure sees the parent company merging with its Indian subsidiary. Although approval from the National Company Law Tribunal (NCLT) is required, it is possible to receive deemed Reserve Bank of India (RBI) approval. Zepto used this method. Another option is a reverse merger under the fast-track route permitted by section 233 of the act. This merges the parent company with the Indian subsidiary. NCLT approval is not required, but RBI approval is. Dream11 went down this route.
In a share swap, shareholders of the foreign holding company swap their shares in the foreign company for shares of its Indian subsidiary. Shareholders of the foreign holding company thus become direct shareholders of the Indian entity. The former subsidiary acquires shares in the foreign company, effectively reversing the original corporate structure. PhonePe took advantage of this model.
Kreditbee used the liquidation method. Here, the foreign holding company is liquidated, and its shareholders become direct members of the Indian company. The opposite model is the incorporation of a new company in India as opted by Sagility. This entity then implements one of the above structures or acquires the business operations of group companies. The new entity may also acquire shares of other operating companies located outside India, thereby becoming the intermediate holding company for all business operations. This means the entities above the Indian entities are usually investment vehicles, with their shareholders remaining members of the ultimate vehicle in the group structure.
When deciding the optimal structure for redomiciliation, the entities should consider the legality of the structure within the existing framework, tax efficiencies, timelines and any third-party contingencies. If they have substantive operations in their host countries, redomiciling may adversely affect contractual obligations, creditor rights and the carrying forward of losses – in such cases operations may need to continue in the host jurisdiction, and a holding structure adopted. Stakeholders must weigh up the advantages and disadvantages of redomiciling and make well-informed decisions. The process carries possible tax exposure and regulatory complexities that need to be navigated. Businesses should select the most suitable solution for their commercial interests.
Regulators accept the need to simplify redomiciliation and are introducing changes to provide clarity and speed up timelines. It is in the government’s interest to adopt reform and offer greater clarity to encourage changes of domicile. This will attract foreign capital, create new opportunities and demonstrate the strength of the economy.
Early-stage founders should compare the benefits of overseas domicile in the initial stages with the complexities and costs of redomiciling later in order to access Indian capital markets and make informed decisions.
Bharucha & Partners – Vandana Pai and Ayush Jain
