28 January 2021
Expanding into foreign markets can be intimidating yet rewarding for any startup. Before extending their global footprint, startups must keep an informed eye on the regulations of the countries they want to venture into, and know the related compliances inside out. Some of the many technical aspects that companies expanding into new markets should keep in mind include:
International Investment Regulation Compliance
Establishing lawful compliance with investment regulation and rules is a major factor in setting up business in a new country. Importance should be paid to private capital investment structuring for raising funds through Alternative Investment Funds (AIFs). Startups may further take into account bilateral and multilateral agreements that have been set up to promote foreign investment and provide substantial protection to investors. On May 17th 2020, the Ministry of Finance announced that Indian Companies would be allowed to list their shares directly in Foreign Stock Exchanges. Indian conglomerates such as Infosys and Reliance Industries have already listed themselves on the NSE with further opting for direct Investment entry into an overseas market such as Bharti Airtel who invested US$ 978.92 million in its Mauritius Subsidiary.
Case Study: CapOne Research
CapOne Research is a FinTech startup launched in 2016. The company uses blockchain and AI to design payment systems.
Problem: The founder of CapOne had planned to incorporate the company in the US but found the Visa Compliance and structuring expenses structuring as a roadblock
Solution: CapOne took advantage of Estonia’s Startup Programme, thereby gaining access to EU-based Venture Capital Markets and Angel Investors. The ease of business and personnel availability was a factor of the company’s large growth
Conclusion: This manner of incorporating outside India to business conducive territories along with ‘Startup accelerator programs’ is an option that could benefit start-ups. In India itself, the new directive of being able to offer public listing in foreign markers comes as a step forward in easing compliance and cost with which Indian startups can promote and advertise themselves to a global audience.
Data Protection and Policy
Companies handling and processing personal data are now required to ensure strict compliance and processing guidelines under EU-GDPR privacy regulations - now considered a global standard for privacy protection. Specific consent, disclosure and collection mechanisms needs to be made by business entities that handle personal data. The rules may restrict the transfer of Data outside the region from where it was collected.
Data Privacy Law and Compliance is at the forefront of not just the technology industry but also the Service and Sales Industry to ensure free, fair and safe processing of sensitive consumer data.
Case Study: Paytm and Privacy
Indian startups such as Paytm have taken positive steps toward matching global giants like Google and Facebook in ensuring data welfare and protection.
Problem: The Indian Personal Data Protection Bill, 2019 incorporates many elements of EU-GDPR to ensure national compliance with global standards. The Srikrishna Committee was formed in 2017 to look into drafting the security and privacy rules that companies must act while handling vast amounts of data. Amongst the chief recommendations was requiring all data fiduciaries to store ‘critical personal data’ within India. This was followed in April when the RBI directed that all payments system operators, working in India, store payment systems data in India only within 6 months (in effect from October 15). However, the bill does not define ‘critical data’ explicitly.
Solution: Whilst the draft bill recommendations have been criticised for being a monetary and technical burden on start-ups as ‘an additional and complex regulator’ impacting ease of business for tech startups, Paytm takes a more positive stance. Recognizing that in an era where data is ‘the new gold’, regulatory authorities have had to take steps to create a strong consumer data protection framework that respects the privacy concerns of citizens. This was done by deeming all financial data (KYC, Aadhar and other identification-related biodata) as ‘Critical Personal Data’ and taking measures to store and process the same within India alone.
Conclusion: Likewise, startups wanting to expand to foreign jurisdictions can expect to deal with regulations that enforce co-operation and compliance in matters of private data. Paytm has been able to grow into Canada and Japan, and is compliant with related Data Privacy regulations - Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) and Japan’s Act for Protection of Personal Information (APPI).
To summarize, the basic tenets that an enterprise must follow to ensure data protection include:
Human Resources & Labour Law Compliance
Each jurisdiction has specifics and standards on HR and Labour law that need to be incorporated in employee contracts and other agreements on personnel and conduct. Further importance is to be given to Anti-Corruption policies and Insider Trading Disclosure mechanisms that regulate fair and lawful business conduct. Startups looking to enter a new country often take advantage of ‘floating employee’ arrangements that constitute a network of consultants and independent contractors.
It is important to refile for Intellectual Property such as trademarks, copyrights or patents in a new territory to ensure global recognition. The business may individually apply for the same in each country or alternatively go for a comprehensive filling such as that offered by the EU Intellectual Property regime that holds valid for all European Union countries. The same may further be useful for securing a parallel entry into North American markets. Trademark Incorporation and Registration in North America as has been done by giants such as Flipkart and Myntra, is a route preferred to not only ease tax burdens in India but also to increase valuation and reputation in Business.
A very well-known startup in India recently started expanding in the UK and posted vacancy ads on LinkedIn. The public, at large, including some prospective recruiters mistook this Indian startup for a UK-based startup that had a similar sounding name. This came into the eyes of the UK-based startup and rounds of to and fro legal notices were ensued on the Indian startup. This delayed the Indian startup's expansion plans and also cost a substantial legal fee on top of settlement offers for coexisting in the UK market.
Tax structuring and management may help minimize tax obligations. Ensure that taxes deducted at the source such as employee payment and post-sale/service VAT are dealt with in a timely manner. In cases of planned externalization, the acceleration of market value of the startup could give rise to substantial tax obligations. Different geographies are subject to different rates and methods of taxation; with jurisdictions even incentivizing small to medium business entities that can take advantage of international agreements between states which support and ease business activities.
In case of any restructuring involving transfer of shares/assets, income-tax may become payable but will be subjected to certain conditions. Income-tax in such scenarios would typically be based on the FMV (Fair Market Value) of the assets being transferred.
Case Study: Vodafone Tax Case
Vodafone International, an Amsterdam-headquartered telecom giant had asserted control of Hutchison Telecommunications International Limited (HTIL) - a company based in Hong Kong. As per the agreement, Vodafone acquired a Cayman Islands-based entity named CGP Investments (Holdings) Ltd, a subsidiary of HTIL.
Problem: Vodafone, having entered the Indian market through Hutch, was consequently brought under the radar of the Indian Income Tax authorities for Capital Gains Tax on the account of CGP. Though the company was not based in India, it was holding the underlying Indian asset company in operation. A legislative change -‘Retrospective Taxation’ law - was introduced in India and this law presented Vodafone with a liability of over INR 22,100 Cr.
Solution: Prolonged litigation in the highest courts of India was followed by recently concluded International Tribunal hearings where Vodafone was able to plead protection undertaking the India-Netherlands Bilateral Investment Protection Agreement (BIPA). The tribunal ruling held that India had breached ‘guarantee of fair and equitable treatment’
Acquisition opportunities, Joint venture/Co-operative relationship
Today, India’s biggest startups see careful and calculated acquisitions as the best way of global expansion. Startups looking towards global expansion have acquired foreign entities in similar fields to allow for expansion. The best examples include Oyo, having made a deal worth €369.5 Mn to buy Amsterdam-based Leisure Group. Byju’s has also grown into the biggest EdTech company in the world having recently acquired US-based ‘Osmo’ for $120 Mn.
Case Study: InMobi goes International
Problem: InMobi is a Bangalore-based mobile advertising company that rose from humble beginnings in 2007 as a SMS-based service to becoming India’s first Unicorn Startup Company. A key aspect to extending its growth and resources was in trying to operate in a new market by expanding resource and technical partnerships.
Solution: In 2018, InMobi found a way to make inroads in the US Market by strategically partnering with Telecom giant ‘Sprint’ for digital marketing and data services, setting up offices in locations such as Kansas City and San Francisco. The partnership comes from the acquisition of Pinsight Media, the mobile advertising branch of Sprint that operates and advertises across verticals including consumer goods, retail, entertainment and finance by focusing on engaging consumer interaction by targeting and retention. The acquisition of Pinsight offers InMobi an infrastructure to combine network mobile services and integrating customer information, using data from wireless carriers to help companies better target ads on smartphones to the right audiences. This is in parallel with Sprint’s competitors, Verizon and AT&T; each having their own digital advertising segments named ‘Oath’ and ‘Adworks’, respectively. Naveen Tewari, Founder and CEO at InMobi, said, “this industry-first acquisition allows InMobi and Sprint to work on our respective strengths together, and provides a global template for partnerships between advertising platforms and telcos”
Conclusion: Many companies find an entry foreign markets by commencing mutually beneficial business partnerships with organizations already established in that region. This method of resource sharing in matters of clientele, real estate and employees can prove to be highly efficient and structured manner of expansion, and ensure a strong infrastructure of support and growth while entering into new markets.
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