Business Law Review
Volume 42, Issue 5 (2021) pp. 231 – 239

https://doi.org/10.54648/bula2021033

Abstract

The practice of externalization, whereby an Indian company houses its shareholding, intellectual property and other assets in an overseas firm, thereby relegating the local enterprise to a subsidiary, has gained traction over the last decade. Its increasing popularity, particularly amongst startup companies, is attributable to the desire to adopt growth-enabling strategies, access to foreign funding, fewer regulatory requirements and a better tax regime. This article explores the concerns faced by founders of an Indian startup company and considers the viability of flipping the corporate structure overseas, in light of round-tripping restrictions under the Foreign Exchange Management Act (FEMA) 1999, and various tax considerations under the Indian Income Tax Act 1961. It attempts to resolve the question regarding whether the different corporate and tax law concessions introduced by the Indian Government have succeeded in providing a conducive ecosystem for startups. The article also examines various investor-friendly jurisdictions which startups migrate towards, with special emphasis on the State of Delaware in the United States of America. Finally, the author concludes that each enterprise must individually analyse its business structure to determine whether flipping acts as an aid or an impediment to growth, as externalization is not a onesize- fits-all approach.

Extract

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