Many high-growth Indian startups are deciding to incorporate as C-corporations in the US to access favorable startup ecosystem benefits and flexible capital raising options using instruments like SAFE, Convertible Notes etc.
However, an issue arises due to RBI regulations that prohibit Indian residents from investing in such overseas investment instruments. Indian founders must still access domestic capital for growth.
Two structuring options can be evaluated in such cases to enable Indian investor participation:
- Setup an Indian Subsidiary
This approach involves incorporating a separate private limited company in India under the US C-corp as a subsidiary or "child" company. The Indian entity will be majority owned and controlled by the US parent to qualify as a subsidiary.
Now Indian investors can purchase equity or preference shares issued locally by the Indian subsidiary entity. This keeps them compliant with Indian regulations. Economically their investment gets funnelled upstream with the Indian subsidiary participating in the valuation growth of the US parent, where the core business is based.
- Direct Investment in US Parent Company
Instead of creating a separate Indian subsidiary, the second option allows Indian investors to directly purchase US C-corp shares, within the limits imposed by RBI and FEMA guidelines.
So equity or preference shares can be issued by the US entity to Indian resident investors in foreign currency, providing direct access and upside participation in overseas parent company.
Appropriate capital controls and filings with RBI are necessary for monitoring under LRS and ODI regulations.
In conclusion, both approaches - subsidiary route or direct investment route - can effectively enable domestic capital access for Indian founders while being compliant, which becomes crucial as startups scale.