Finance final examination topics and review

India Investment

Situation Overview

Dan Ramirez and Susan Perdorna are interested in starting up a new company in Banglore, India and wish to locate some R&D Staff there and a small sales force to tap into the Indian market. Their families are also interested in the opportunity to invest. The type of corporate governance that they will select to manage the venture is a critical success factor in the new business division's success. The both the managers and investors will undoubtedly have to deal with the principal-agent problem given that the venture is oversees. Since the investors will be foreign based they will want to ensure that they are given rights and treated equitably as shareholders. They will also want to ensure that their agents act with integrity and maintain ethical business behaviors at all times. Furthermore, the investors will want to ensure that there is full disclosure and transparency.

To achieve all of these objectives, Ramirez and Perdona, are their respective families, will want to form a corporate model with a board of directors. The company could choose a local manager to oversee daily operations and have the board present to provide oversight as well as vote on any major decisions. This would ensure that the stakeholders could have a say in major decisions. Foreign members of the board should vote by proxy on major decisions that the company makes. The governance that the board operates by will dictate the decision making process and should be well thought out given the international commerce situation. There must be a balance achieved between local controls so that the business can be responsive to the local market as well as the interests of the foreign stakeholders.

One issue that the individuals and their families will have to deal with will be how to handle the company's profits. There is the opportunity that the company's investors will be subject to double taxation depending on how the corporation is constructed. For example, the investors could be subject to the Indian taxes as well as income taxes once the money is repatriated to their domestic country. This is a common problem for international investors. The United States has an incredible amount of capital being held outside its borders because if the bring the money back into the country they will have to pay taxes on it.