What I’ve learnt from incorporating an overseas startup
In light of the economic boom that Bangladesh is facing in recent years, the country is seeing an inflow of foreign direct investment (FDI) that is slowly transforming it into the next hub for doing business. With the dominance of traditional businesses in manufacturing and construction leading the 8% GDP growth of this riverine country in South Asia, there is an explosion of tech startups occurring over the last few years that is creating a platform for the next generation of ventures to stamp their mark in the region. With it, comes a array of founders looking to incorporate their startups abroad because of the preference that foreign investors have of a foreign holding company rather than a local entity. As a founder who has faced the roller-coaster of incorporating a startup overseas, here is an insight into what I’ve learnt during the ride.
Basics of incorporating abroad
Let us get delve into the reasons and process for incorporating a holding company abroad first. First things first: unless you meet a local investor with access to funds within the country, foreign investors will mostly prefer investing into a holding company abroad for reasons ranging from transparency, accountability and security of their money. By definition, a holding company is incorporated to buy shares in other companies whether it’s in the same country or different. By definition it only exists for investing into other companies and does not have operations of its own. Of all the challenges that a startup founder has to face, one of the greatest is the legal barrier that ensues when creating a company outside their own. I’ve had to face the same incorporating Loop in Singapore. While incorporating a company takes a week in Singapore typically, it takes about the same time in Bangladesh now, thanks to the One Stop Service solution that Bangladesh Investment Development Authority (or BIDA for short) has introduced (Source: Daily Industry). Check with your local company formation authority for the speed with which you can create one, and plan accordingly.
Creating a holding company
The first step is to incorporate a private limited company in the foreign country you intend to setup your holding company. The regulations may vary, but in Singapore, you must have a registered name, one local authorized representative (called a nominee director, we’ll get into more details in a bit) and a local registered address . A nominee director is voted by the board of directors of the company to represent one or more companies. In a holding company, a nominee director has to be a local citizen or resident. They may or may not own shares in the business. There should be a provision in the company’s business activity where you have the director’s have to mention that it is a ‘holding company’.
Creating a subsidiary
Once a holding company has been formed, the next step is to incorporate a local subsidiary in your country of operations. In my case, we incorporated Loop in Bangladesh as a private limited company before we incorporated our holding company in Singapore. Here’s the important point to note: You may or may not have the same shareholders as in the holding company, due to local shareholders owning shares in your company. But it is important to make sure that your holding company owns the ‘majority’ of the share in the subsidiary in order to activate the holding/subsidiary relationship (IFRS 10: Consolidated Financial Statements). This means the holding company must own more than 50% of shares in the subsidiary. But typically, in order to be safe for future investment rounds, it is a good practice to make sure the holding company owns at least 90% of the local subsidiary company so that you have more new equity to sell to investors when the need for fundraising arises. The last thing you will want is to be in a situation where you will run out of new shares to when raising a new round. There is also the 99+1 practice that foreign holding companies utilize, meaning that the holding company owns 99% shares of the local subsidiary, keeping the 1% to make sure that the local shareholders have enough local shares in order for the company not to get liquidated. Which brings us to our most important part of the incorporating overseas: share transfer.
Transferring local shares abroad
Shares by definition are a transferable property that is defined by the company’s Articles of Association/Incorporation. Share transfer is a process by which shareholders of a company can transfer their shares to another company by way of a share transfer form/application/instrument. In Bangladesh, for example, this share transfer form is called Form 117. Every shareholder who wants to transfer their shares to the holding company will have to apply for a share transfer through Form 117. The steps that every co-founder must learn here would not vary too much from the following but this is how it is done in Bangladesh:
Step 1: Check your company’s Article for the rights of share transfers. There might be restrictions which might hinder your ability to transfer shares, such as pre-emption. Under pre-emption, shares must first be offered to existing shareholders of the company at a price set by the Directors or Auditor of the company. If nobody’s buying, you are free to transfer your shares to outsiders.
Step 2: Serve a written application to the Board of Directors in your company that you want to transfer your shares abroad. Once they approve, get a board resolution from the Board of Directors of your company to allow you to transfer shares abroad, at a set price.
Step 3: Have a holding company bank account pay the price of the equal share that a shareholder is transferring. If you are transferring in your local currency, it is advisable to convert your share price to USD so that you can transfer an amount equivalent to the local currency in USD. The reason being, all international transactions are routed through SWIFT, which is controlled in USD. For example: if we want to transfer shares worth BDT 1,000,000, then we would have to convert that BDT 1,000,000 into USD11,803.98 (today’s inter-bank exchange rate: USD 1 = BDT 84.72). You must remit the share transfer money from your holding company’s bank account to your local bank account. Use a Telegraphic Transfer to officially wire the money into your local subsidiary’s bank account.
Since the transaction is between a foreign buyer (the holding company) and a local seller (subsidiary shareholder), a proof of payment is mandatory in many regards, as it is by the Registrar of Joint Stock Companies in Bangladesh. Your local company formation government agency will probably require an encashment certificate/letter for the share transfer money as proof of payment, so the lesson is, remit the money through your legal bank account channels!
Step 4: Take the encashment certificate/letter and sign the share transfer form, in our case Form 117 and submit to your government agency along with supplementary documents if they require. In addition, you might have to pay stamp duties on the par value of each share. Keep an addition copy of the form for your local subsidiary company.
Step 5: Have your local subsidiary company amend their share structure and issue a share certificate for the new shareholder, which will be your holding company. You are officially done!
As much as I have faced great pains in understanding the legal complications of having a startup incorporate overseas, the process gave me an unbelievable learning curve that tested my skills of business and law to the depth. This is the basic process of how to incorporate overseas so that startups all over the world can get the gist which will make the murky local details less messy to deal with. Happy incorporation everyone!