by CA Ashish Nakrani
2024-12-12
Approximately 95% of Fortune 500 companies are incorporated in Delaware, according to Khozema Anajwalla, Country Director of Grant Thornton India Pvt Ltd. This is due to Delaware's business-friendly approach, which dates back to the late 19th century.
In 1899, Delaware enacted a general incorporation act, allowing anyone to form a corporation by raising funds and filing articles of association with the state. Today, having a holding company in a favorable jurisdiction like Delaware is advantageous for business growth.
Investors prefer to invest in holding companies rather than familiar jurisdictions. Incorporating a company in Delaware can unlock otherwise closed investment opportunities. The "Delaware Flip" refers to the process where Indian promoters subscribe to securities in a US holding company incorporated in Delaware.
Delaware's comprehensive laws make it a favorite among investors. The state's rules related to voting rights, stockholder control, and asset sales are intuitive, flexible, and predictable. Delaware companies can list on various stock exchanges, including NASDAQ and NYSE.
Non-US companies consider a Delaware Flip due to the USA's significant source of investment in private equity and venture capital. A US-based corporation can easily access IPOs, and investors prefer familiar jurisdictions with well-defined rights and duties.
Founders can relocate to the USA, obtain visas, and repatriate profits more easily. The competitive US market and arbitrage prospects offer numerous opportunities to raise capital.
Why Incorporate in Delaware?
Delaware is a popular choice for business incorporation due to its business-friendly laws and regulations. The state has a highly developed corporate law system, which provides a flexible and predictable framework for businesses to operate.
- Business-friendly laws and regulations
- Highly developed corporate law system
- Flexible and predictable rules for voting rights, stockholder control, and asset sales
- Easy access to capital markets and IPOs
- Attractive destination for foreign investments and start-ups
The "Delaware Flip"
The "Delaware Flip" is a process where Indian promoters subscribe to securities in a US holding company incorporated in Delaware. This allows the US holding company to have 100% paid-up capital in the Indian company, while the Indian promoters hold a 100% stake in the holding company.
- Indian promoters subscribe to securities in a US holding company incorporated in Delaware
- US holding company has 100% paid-up capital in the Indian company
- Indian promoters hold a 100% stake in the holding company
Benefits of Delaware Incorporation
Incorporating in Delaware provides several benefits, including easy access to capital from US investors. Founders can also relocate to the USA and obtain visas, making it an attractive option for startups.
- Easy to raise capital from US investors
- Founders can relocate to the USA and obtain visas
- Competitive US market and arbitrage prospects
- Delaware companies can list on NASDAQ and NYSE
Considerations Before Flipping Under FEMA
Before incorporating in Delaware, it's essential to consider the implications under the Foreign Exchange Management Act (FEMA). This includes round-tripping and tax implications, transfer of IP and valuation, share transfer and capital gain tax, and active business outside India and tax implications.
- Round-tripping and tax implications
- Transfer of IP and valuation
- Share transfer and capital gain tax
- Active business outside India and tax implications
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