IVCA reports (4th Quarter 2006) that after a two-year lull, investors are showing renewed interest in early stage ventures. This throws up the question of the best option for an overseas investor, particularly an US investor, to structure his investment into the Indian start – up company. The report also caried an extract of paper by Sri SR Gopalan.There are two basic options :
Under the first option, (Option A) an overseas entity, often a Delaware corporation, is formed and the investors as well as the Indian founders take a stake in the US corporation. The investors get Preferred Stock while the Indian founders are offered Common Stock. To comply with regulatory requirements, founders’ stake is either through stock options or through a payment of less than $ 25,000 as permitted by Reserve Bank under the automatic route. The US Company carries out all the US based activities such as marketing and sales. A 100% sub is formed in India for delivery operations. Often an intermediary company in a tax-exempt jurisdiction is formed to make the investment from the US Company into the Indian company.
Under the second option, (Option B) the investments are made into the Indian entity, which then sets up a 100% subsidiary or branch in the US to carry out marketing and sales. In this case also, the US investor may form an intermediary company in a tax-exempt jurisdiction to make the investment into the Indian company. As per the report with maturing of exit route in Indian shore, Option B is gaining in popularity.