Early stage Indian companies are increasingly looking at migrating their holding company structures to offshore jurisdictions. Such restructuring transactions, commonly known as “flips” or “externalizations”, provide a plethora of benefits to companies and their shareholders – the primary advantage being improved access to global clientele, a key factor for startups looking to establish an international presence.
Relocating to an overseas jurisdiction also enables early stage companies to leverage ancillary benefits such as access to improved infrastructure and sophisticated technology. Such jurisdictions may further provide companies with higher valuations of their businesses and easier access to venture capital. Certain foreign investors may allocate a greater portion of their available funds for investments in jurisdictions prominent in specific industries. If the business of an Indian company pertains to such an industry, flipping to the jurisdiction will provide it with access to the higher fund allocation.
Externalization is further viewed as a way to encourage investment from foreign investors who are disinclined to invest directly in India due to aspects such as the fluctuating regulatory regime, particularly in relation to structuring of exits, and concerns about retrospective taxation. Other reasons that could make externalization transactions appear to be prudent include: a simplified business and tax environment in foreign jurisdictions; avoidance of issues relating to exchange rate fluctuations; ease in listing of businesses; and an evolved understanding of non-traditional business models.
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Nivedita Nivargi is a partner and Vandana V is an associate in the Bengaluru office of Samvad Partners.
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