Raj Ramachandran, Partner at JSA Advocates & Solicitors
Flip and flip back – survival of the fittest!
Not so long ago, globalisation was the norm. In that globalised world, the key criterion for domiciling a business was merely the most productive, efficient and feasible market. Businesses therefore explored widely across; in some cases, it was for operational efficiency, while in some it was the target market, and in others it was access to global capital. Predictability and efficiency of legal process also played a key role in finalising such foreign jurisdictions. In such pursuit, many companies set up holding companies in jurisdictions like Singapore and US, even where business operations and the target market were primarily in India.
In recent times though, economies seem to be more inward focused than outward. Globalisation seems to make way for deglobalisation. Geopolitics has played a key role in this.
Business must however go on. In that endeavour, businesses have continued to identify newer markets not only for operations and seeking investment, but also for access to and promise of capital markets for liquidity and exit.
While global uncertainty continues, India seems to have the necessary depth of domestic capital, and a maturing capital market. A combination of the two has triggered several companies to look back at India favourably. Companies which had previously perceived foreign shores as being more favourable are now seeking to make a come-back. Flipping their investment holding entity to India.
Taking note of the changing scenario, Indian regulatory authorities proceeded to liberalise the regulations to encourage such a come-back. Since 2024, Indian regulations have provided incrementally more reason to make the come-back and reducing the frictions previously encountered.
It started in 2024 with Indian regulations permitting share swaps under the automatic route. A share swap could be completed without any statutory approvals and hence was faster to implement and close. Though this was a significant change, the tax impact of share swaps was a major factor holding back several companies from following the path. Later in 2024, foreign companies were permitted to undergo a statutory inbound merger into an Indian company under the fast-track route if the merger was into a wholly owned subsidiary. Where the fast-track, route was not available, the NCLT had to be approached for approval for the inbound merger. Although the NCLT route takes more time and process, the path was set and clear. The revised norms via a statutory merger provided tax neutrality to the transaction, and removed all key pain points, thereby providing a landing strip for such companies.
Several companies have successfully redomiciled to India following the path. A couple of companies are now also listed, with others closely following suit. These successful closures are encouraging others, and the pipeline for redomiciling is strong, credit to continued liberalised legal and regulatory environment, along with availability of domestic finance and liquidity in capital markets.
Key aspects to bear in mind in connection with redomiciling transactions include compliances in relation to redomiciling, ownership transfer and assignment of intellectual property, compliance with applicable foreign exchange regulations for foreign assets/ ECBs, and treatment of stock options. These procedures and actions however have to be carefully navigated. Since the Indian company will inherit the debt of the foreign parent in an inbound merger transaction, the regulations contemplate that compliance has to be ensured within a 2-year period, or alternatively non-compliant foreign assets have to be disposed off within such period.
While the trend of redomiciling will continue, it is also likely that very early-stage companies, and companies experimenting with unique technologies and processes may still find a foreign jurisdiction holding company structure exciting given the appetite and access to high-risk capital as well as favourable instruments in such jurisdictions.
Regulations do play their part in ensuring that due process is followed and there is always a fairly logical reason to a legislative provision. Typically, however, it results in a compliance paradox. A fine balance of regulation and ease of business should help, with benefits outweighing the risks to encourage businesses and compliances.
