Setting up an Indian Subsidiary for founders in India (ESOP route)

Expanding your international business into India involves setting up a subsidiary. For many founders, one option to consider is the Employee Stock Option Plan (ESOP) route. In this model, a company incorporated outside of India establishes a subsidiary within the country, and shares of the subsidiary are allocated to the founders through ESOPs. While this approach may seem straightforward, it's important to evaluate its potential risks and challenges before moving forward.

Understanding the ESOP Structure

Under the ESOP route, founders are typically granted the majority, if not all, of the shares of the Indian subsidiary. This allows them to maintain significant control over the business in India. While this may appear beneficial initially, it can lead to complications, especially as the company grows.

Legal and Regulatory Concerns

One of the primary challenges of using the ESOP route is the potential for legal complications. The rapid allocation of almost 100% of the subsidiary’s shares to the founders could be perceived as a violation of Indian corporate laws. Such an ownership structure might raise red flags with regulatory authorities, as it doesn’t align with the intended framework for foreign-owned subsidiaries in India. This could expose the company to scrutiny and delays in operations.

Impact on Future Investment

As your business expands, attracting investors will likely become a key priority. The ESOP route, however, could hinder your ability to secure funding. Since this structure is not widely recognized or tested, investors may be hesitant to back a company with such an unconventional ownership model. Investors typically prefer a more standardized approach to ownership, and the ESOP structure could be seen as a deterrent, potentially leading to delays or even the withdrawal of investment offers.

A Word of Caution

Considering the legal complexities and the potential challenges in attracting investors, it is advisable to reconsider the ESOP route for setting up an Indian subsidiary. Alternative methods of incorporation, which comply more closely with Indian regulations, are likely to provide a more stable foundation for growth and investment.

Want to Learn More?

For a deeper understanding of how to set up an Indian subsidiary and the best strategies to adopt, check out our YouTube video. In the video, we explore the steps in detail and provide valuable insights into avoiding common pitfalls. Don't miss out on the full breakdown that can help you make informed decisions for your business expansion into India.