Company structure – Cross border issues

When we set up our company we went through some very detailed thinking on how to structure the company. Our business model involved research operations in India but our markets were going to be largely in the US and other developed markets outside India. We ended up incorporating in the US with a wholly owned Indian sub, which is kind of the vanilla solution, but in the process went through a decision process that may be interesting to other entrepreneurs.

Some people we talked to had set up a corporate structure that was designed for tax efficiency. They had a holding company in Mauritius or some other zero tax country, with subs in every country that they operated in. This gave them a very flexible corporate structure with great tax efficiency. Any of the subs could be sold or go public independently without an incidence of capital gains. And so on.

Another thought was to incorporate the parent company in India and have a wholly owned sub in the US. That had corporate income tax advantages as well as tax advantages in the event of a liquidity event. Also, doing an IPO in India would have a lower bar and probably get a better valuation as well.
In the end we decided to incorporate a Delaware company and have a wholly owned sub in India. While this is almost certainly less tax efficient it has other advantages that don’t show up on a spreadsheet exercise. If you are looking to get quality venture money into the company (and we are), you can’t go wrong with a US company. US VCs are comfortable with a US legal jurisdiction and not all of them are completely open to an Indian jurisdiction. Indian VCs on the other hand regularly fund US incorporated companies.

Also, the management of the company is largely in the US (4 out of 5 founders are here). Being an Indian company makes it operationally a tad more difficult. For instance, under Indian company law, board meetings must be attended in person, not on the phone.

In the end, the argument that tipped the scales for us was ‘simplicity’. The US-parent-Indian-sub structure was simple and a natural fit. Anything else would have made things complex to manage and complex to explain to an outside investor. Sure, we would probably have liked to have been more tax efficient. But then you have to make a whole lot of profit before you start worrying about the income tax on it!

While this solution works for us, everyone has a different business model and their own preferences. Be sure to talk to a lawyer and an accountant who know cross-border issues. And don’t forget to check within your network of entrepreneurs.

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3 Responses to Company structure – Cross border issues

  1. Rituparn says:

    Thanks Basab, It is good to learn this aspect of the Startup as well,
    All the best, follow you closely and would be happy to learn more

    All the best in your new venture ! All i’ve heard has been positive so far …

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  2. Venu says:

    Basab.. this is a good thought process.

    Having incorporated several tax structured companies in the past as a promoter i must say there are several routes. However, I sincerely think that the actual process of incorporating a company has been a difficult one. I am appreciative of the government’s efforts though. The MCA 21 has been great and has made incorporation easy and smooth.

    http://4indianbusiness.blogspot.com/2007/10/starting-business-in-india.html is a good read for anyone who wants to know what I am saying..

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  3. Jidesh Kumar says:

    MCA 21 envisages electronic filing of documents and paperless administration and pertains to Registrar of Companies offices as stipulated in the Indian Companies Act, 1956 (the Act). One can get a complete understanding of the MCA 21 from the MCA portal. The key benifits envisioned by the MCA 21 are as under:

    (a) On‐line incorporation of companies
    (b) Simplified and easy mode of filing of Forms/ Returns
    (c) Registration as well as verification of charges anytime and from anywhere
    (d) Inspection of public documents of companies anytime from anywhere
    (e) Corporate‐centric approach
    (f) Building up a centralized database repository of corporates operating in India
    (g) Enhanced service level fulfillment and customer relationship building
    (h) Total transparency through eGovernance (i) Timely redressal of investor grievances (j) Availability of more time for MCA employees for qualitative analysis of corporate information

    All the ROC’s have virutally become back offices and several facilitaion centers have been set-up know as Registrar’s Front Offices (RFOs).

    Armed with this knowledge, I proceeded to incorporating the company. For MCA21, the following four types of users are identified as users of Digital Signature Certificates (DSCs).
    (a) MCA (government) employees ; b) Professionals (Chartered Accountants, Company Secretaries, Cost accountants ) who interact with MCA and companies in the context of the Companies Act, 1956.; (c) Authorized Signatories and Directors of Companies ; (d) Representatives of Banks and Financial Institutions
    I had already solicited the help of my collegue Vinod [who works with us ] who also happens to be a CA.

    The first step – OBTAIN A DIN /Director Identification Number

    Process

    An existing Director/ person intending to become a Director are required to make an application to MCA for allotment of a unique identification, namely, Director Identification Number (DIN). It is intended to be a lifetime number. For obtaining DIN, form DIN1, requiring personal details such as name, address, and email ID of the person making an application, is required to be filled in. There is a fee of Rs. 100/ for application for allotment of DIN. On submission of of form DIN1 online, applicant shall be allotted a provisional DIN and then he/ she is required to pay the requisite fees with reference to the provisional DIN obtained. The applicant shall be required to take a printout of the submitted eForm and will have to attach proof identity, proof of residence, proof of father’s name, proof of date of birth and photograph. The applicant shall be required to sign the physical copies of the form and get these documents duly notarzed/ attested by an approved authority. The applicant shall be required to send these documents along with the proof of payment made for DIN application to MCA DIN Cell at Noida. On receipt of these documents, the application will be scrutinised and on approval, the DIN shall become active. The outcome of application (approval / rejection) shall be communicated to the user through email. Also the applicant can enquire the application status by quoting provisional DIN allotted at MCA portal.

    Comment:

    DIN is a mandatory process for foreign directors too and is required while applying for Form 1A [Name Availability Form]. A provisional DIN number is allotted instantly upon uploading the required information on the MCA portal. Eureka, it works..

    The process of obtaining a permanent DIN however takes approximately 4 weeks subject of course to documents being in order. Form DIN-2 needs to be submitted to the MCA along with the approved number of all companies of which they hold a director position. DIN-3 attested by Company Secretary is required to be submitted to the concerned Registrar of Companies (ROC).

    The Second step – DSC/ Digital Signature Certificate

    The Digital Signature Certificate (DSC) is another requirement that is now required to be accomplished. I suggest that the DSC be applied parallel alongside applying for Name Availability since the process of incorporation can be accomplished that much more faster. The DSC can be obtained from six private agencies authorized by MCA 21 (Ministry of Corporate Affairs 21st century).

    For the purpose of using the new electronic filing system under MCA 21 Project the applicant needs to obtain a Class II Digital Signature Certificate. Company directors submit the prescribed application form along with proof of identity and proof of address. Each agency has its own fee structure which ranges from INR 400 to INR 2650.

    Comment:

    The process was remarkably smooth with the process taking around 2 days, although Vinod did share with me that he had encountered problems previously. If the directors are foreign in origin, valid address proofs in the form of passport duly notarised and photographs would need to be provided. It is advisable therefore that several copies [I had around 5 copies] of the address proof of the directors be notarised since this saves valuable time. A good CA is very necessary to ensure that there are no undue delays.

    Step three – Applying for Name Availability

    Perceived to be a simple step, this can at several instances be time consuming. It is therefore advisable to go in for professional consultation before one applies for name availability. Clients often feel that their chosen names would be made available to them as a matter of course. This of course is from from reality. There are a few tips to get your name of choice.

    Firstly, caution must be exercised that the chosen name is not generic., in the sense the name must not be too general. For example Wipro technologies – while the name Wipro is just fine, the Registrar of Companies (ROC) would take objection to the usage of ‘technologies’. This is because the ROC is guided by an internal circular to the effect which has come into effect post incorporation of most MNC’s who tend to have generic names.

    Secondly, a good CA would always suggest you to check informally at the ROC whether a choice of name would be available. This is quite critical to hasten the process.

    Thirdly, in case of a wholly owned subsidiary, if the choice of name bears the name of the parent entity, it is always advisable to obtain an NOC from the parent entity to the effect that it has no objection in the Indian subsidiary using the same name. This is particularly so if the parent entity is a well known name eg., Walmart

    Fourthly, it is necessary to provide six names in the order of preference. It is necessary to make an intelligent choice of names since the ROC is likely to grant the second choice if the first does not fit the bill.

    Comment:

    We were able to obtain the desired name with not much difficulty since we had done our homework of checking with the name with the ROC well in advance. Officially, the ROC accomplishes this taks in 7 days and I must say that more often than not this timeline is often exceeded. It amazes me as to how much can be accomplished with bureaucrats in India with the right connections.

    Step four -Memorandum & Articles to be stamped

    Once a name is approved, the Memorandum of Association and Articles of Association together with miscellaneous documents have to be filed within six months of the approval. In practice, if the proposed name is available the same is granted within 2 or 3 days.

    The application should be accompanied necessarily by the following: (i) Unsigned copies of the Memorandum of Association and Articles of Association. (ii) Payment receipt. Ensure that the copies submitted to the Superintendent of Stamps or to the bank for stamping are unsigned and no promoter or subscriber has written anything on it by hand. The Superintendent returns the copies, one of which is duly stamped, signed and embossed evidencing the payment of the requisite stamp duty. The rate of stamp duty varies from State to State. According to Article 10 and 39 of the Indian Stamp Act,1899, stamp duty payable on memorandum of association and articles of association for a company to be incorporated in Mumbai, Maharashtra is: AOA: Rs. 1000/- for every Rs.500,000/- capital or part thereof subject to a maximum of Rs.50,00,000.00. Stamp duty for the MOA is Rs.200.00 Once the Memorandum and the Articles of Association of the Company have been stamped, the same is required to be signed by the Promoters of the Company including commencing with the name and description, father’s name, address, occupation and the number of shares subscribed for in their own handwriting which is duly witnessed. After signing the documents are to be dated. Declaration form 1: On Rs 100 stamp paper

    Comment:

    It took us around 2 working days to get the stamping done. The process was however delayed since we had to get the overseas directors to sign off on the Memorandum and Articles.

    Final Steps – Documents to be presented to obtain the Incorporation Certificate

    After the stamping of the MOA and AOA, 3 copies along with the following documents are required to be scanned and uploaded on the MCA-21 Portal: – The stamped copies of the MOA and AOA – Copy of the Form-32 along with the consent letters of the Directors of the Company, who are appointed therein. – Form-1 – application and declaration for incorporating of a Company and printed on non judicial Stamp paper worth INR 20. – Form 18-evidencing the address proof of the Company. – Form-1A-evidencing the name approval. – Copy of challan evidencing the fee with respect to above mentioned forms. – Power of Attorney from the subscribers in favor of any person for making corrections on their behalf in the documents and papers filed for registration .This must be on nonjudicial stamp paper of INR 100. – Identification of the subscribers by way of copy of driving license, passport, voters identity or ration card. These documents, in addition to their online uploading, are also to be filed in original with the ROC. Once the documents are uploaded and confirmation of payment of fee is received from the Bank by the ROC, it processes the papers in order of their receipt. A software ensures that the queue can not be jumped by ROC. The fees paid to the Registrar for registration are scaled according to the amount of the authorized share capital of a company as stated in its memorandum.

    Comment:

    The process of issuing a certificate of incorporation normally takes seven working days. Pursuant to incorporation, TAN and other necessary registrations as required can be obtained.

    Concluding remarks

    In all the process of inorporating of a private limited company in India can be a smooth process if the right tools of approach are adopted. We took around 18 working days to obtain the certificate of incorporation. I must make a special mention that that the government has made an honest attempt to smoothen the rough edges that one encountered in incorporating a company. This is not to say that the present system is fullproof as one can still find old barks of wood at the ROC reminding one that it may take a while before things are up to speed of this digital era.

    H/P: +91 9811620150

    Jidesh Kumar.M.D
    Managing Partner
    King, Stubb & Kasiva
    Advocates & Attorneys
    E-66, 2nd Floor, Kalkaji
    New Delhi- 110019
    India

    Ph : +91 11 – 41032969, 41318190, 41318191
    Fax: +91 11 – 41329569
    Web: http://www.ksandk.com
    E-mail: jidesh@ksandk.com

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