An overview of Entry and Exit Strategies available for businesses in India

The Indian economy offers unparalleled prospects. In the midst of an economic pandemic, India had a 27 percent increase in Foreign Direct Investment (FDI) in 2021, while all other G20 Nations suffered a loss. In the second half of the year, India even saw a boom in cross-border M&A activity. Other wealthy countries do not offer the variety of options that India does. According to the World Bank's “Ease of Doing Business Ranking 2020”, India is rated 63rd out of 190 countries in 2020. India has advanced 79 spots, from 142nd in 2014 to 63rd in 2019.

India's FDI programme has been a significant non-debt resource for the country. Foreign countries invest in India to benefit from reduced salaries and other particular investment benefits. According to a survey by the Confederation of Indian Industry (CII), India is likely to receive US$ 120-160 billion in foreign FDI per year by 2025. Companies all around the world are constantly striving to expand their operations to new locations. This includes increased fees for such businesses. One would then wonder why such companies would desire to expand at all. They grow for the following reasons:

Increased profit margins: As an organisation increases in size, it can benefit from economies of scale.

Playground for Innovation: Foreign Firms can test new products or services without fear of repercussions in their home markets. Even Disney tests their regulations, parades, and rides in Disney Shanghai before introducing them in the United States.

First-mover advantages: Companies may face stiff competition in their native markets, but they may be the first to debut a product in a foreign market and thereby benefit from being the first mover. They have the opportunity to forever define a product, such as toothpaste in India, which is commonly referred to as Colgate.

Talent pool: Starting operations in a foreign country provides them with access to a completely new talent pool, offering new ideas, skills, and assisting them in navigating the local market.

The Securities and Exchange Board of India (SEBI), India's primary watchdog, has sworn by its very constitution to protect the general public from petty unregistered entities trying to make a quick buck while attempting to complicate strict and accurate regulations put in place with the sole purpose of protecting the common man. The penalties for doing so are exceedingly harsh and cruel, with little consideration for "the corporate veil." T.G Venkatesh vs. Registrar of Companies [2007 78 SCL 1 AP] and Ashok J Shah vs. State of Gujarat [R/CR.MA/5331/1999] are two notable cases. This leaves the domestic and global private sectors with no alternative but to pursue other possibilities such as financial institutions, high-net-worth people, or fellow business entrepreneurs interested in funding the company and exiting with outstanding market profits.

There are numerous challenges to entering a new market, as well as specific aspects to consider, such as;

• Administrative distinctions

• Economic rules and regulations

• Cultural distinctions

• Accounting norms differ.

• International transportation of products.

• The country's laws, rules, and policies are distinct.

What exactly is market entry strategy?

Entering an enterprise in India or any other foreign country requires a specific plan, without which its foundation in the foreign country is brittle and unpredictable. Market strategy is the sales and marketing structure that a company uses while expanding globally. These considerations include the allocation of resources and technology, product awareness, translation, and other services required to make this happen. Private Limited Company Registration is the best route for any businesses outside India to get incorporated in India as wholly owned subsidiary company.

Strategies for entering into the market

Exporting

This is a passive mode of market interaction. The Indian market may not justify domestic production. This increases output elsewhere, resulting in a rise in marginal profitability. This can be done directly or indirectly.

Direct exporting

In this case, the corporation must establish its own export department and handle all aspects of packaging, branding, and shipping. This gives the organisation control over its processes while also saving money. The relationship between the exporting firm and the distributor is critical to the success of direct exporting. By establishing its own sales subsidiary, the foreign business can further reduce the number of intermediaries. If the sales volume is insufficient, hiring a distributor makes more sense. Using this method may necessitate the development of export infrastructure as well as employee training. Although, in the long run, the benefits of control may outweigh this expense.

Indirect exporting

Packing, branding, shipping, and distribution are all delegated to intermediaries such as agents, exporters, wholesalers, retailers, and distributors. These intermediaries are knowledgeable about local market conditions, reducing the risk of failure. However, the company will be unable to engage with its clients and may lose control over sales and marketing abroad.

Licensing

The foreign enterprise may grant an Indian entity permission to use its trademark or patents in exchange for a fee known as royalty. The foreign firm may lack the time and experience to enter the Indian market, or the production volume may be insufficient to sustain a manufacturing operation. The firm may not have sufficient resources to invest in the Indian market, and by licencing, they may be able to gain access to a vast market while maintaining a healthy profit margin. In India, economic and political instability may not warrant the risk of establishing a facility from scratch and hiring managerial staff. Instead, the licensee bears this risk. The scale of royalties is determined by the licensee, who may or may not be qualified to market and sell the product effectively. Substandard products may be produced by the licensee, tarnishing the licensor's image. The licensee's intellectual property is only licenced for a limited time, after which the licensee may use the same procedure or technology and appear as a local competitor.

Franchising

This is a sort of licencing in which a foreign company sells its brand, marketing strategies, logo, and operations to an Indian company for a charge.

Before engaging in this venture, the foreign enterprise must conduct extensive study on the market, Indian legal structure and franchise organisation, and possible franchisees. It differs from licencing in terms of the scope of quality control for all franchisee operations.

Mergers and acquisitions

Acquiring or merging with an Indian company in India allows for a more rapid entry into the local market. The foreign corporation does not take the time to establish itself in this manner or to gain resources that would otherwise be difficult to obtain. International mergers and acquisitions are difficult, if not impossible, to complete; they are also costly and time-consuming. Before engaging into any such deal, market research is critical. Top management faces a significant difficulty in integrating an acquired company into a new entity. This allows foreign firms to purchase Indian competitors and eliminate competition. These agreements typically involve the acquisition of undesirable assets and the incurring of fees to maintain them in real time or management time. Purchasing a minor ownership in an Indian company decreases risk and investment but also reducing overall control.

Exit of business

A company may, regardless of its performance and profit in the Indian market, may wish to quit for a variety of reasons, including:

Criteria/objective fulfillment: A partnership or corporation may be formed in India just for a certain project or to fulfill a specific criteria/objective. If it achieves this, it may wish to depart the market.

Unprofitable business: A firm established in India may not be lucrative for a long time or may have only made a profit for a short time. The company's revenue may not justify the costs invested, and in order to minimize losses, the company may need to depart the market at the appropriate time.

Catastrophic event: A foreign entity may have lost resources as a result of a natural or man-made disaster. The entity may or may not have insurance, but chooses to claim the insurance money and exit. This decreases the entity's losses.

Legal considerations: New legislation established or altered by the Indian legislature may be unfavourable to business. Compliance with rules and processes may necessitate high costs, leaving the business with insufficient profit margins.

Cash-out: If the business is profitable, the owner or investors may wish to sell their stake.

Exit plan for a business

A strategy must be developed for the existing firm in the same way that a strategy is developed for the formation of a business. Without such a strategy, the company may suffer more losses or incur greater liabilities than necessary. A business exit strategy must be developed concurrently with a business formation plan. This may appear to be detrimental, but it actually helps to build the firm in a specific path. Before making any investment, venture capitalists frequently need a business plan to include an exit strategy. Many choose to go for the company closure.

Choosing the best business exit strategy may be influenced by a number of factors, including:

• The degree of control the owners desire to keep over the company.

• Whether the owners want the business to be run the same way or differently.

• Whether or whether the owner wishes to ensure that the company's legacy is preserved.

• Market circumstances.

• The nature of the business.

• The size of the enterprise.

• The interest of a company's shareholders, members, partners, or founders.

Types of exit strategies

Mergers

Merging one company with another brings numerous benefits due to economies of scale. It also raises the worth of the company. This way, the owner retains entire control of the company. If the owner wants to cut links with the company, this may not be the greatest solution.

Acquisition

In this situation, one corporation buys out another. The benefit of this strategy is that the selling corporation gets to choose its own price, giving it more negotiation power. The more time the corporation has to bargain, the greater its advantage, and the less time it has, the narrower its possibilities. If a company's goal from the start is to be purchased, it should not deal with products that are so narrow or specialised that acquisition becomes difficult.

This is not appropriate when owners or members desire to retain some level of control.

Management buyout ("MBO")

When a company's administration purchases an organisation or a specific department. This is appropriate for a private firm owner who want to retire. The management is well-versed in the business, resulting in a smooth and trustworthy transfer of ownership. This method may be used by public firms to sell a non-core function to management. This exit has a number of disadvantages, including:

• Management may not be prepared or competent to assume ownership obligations.

• The owner may be forced to sell at a lesser price than an outside buyer.

• The management of a company may purposefully undermine its value in order to acquire it at a lower price.

Liquidation

In this case, the company is permanently closed. The company's assets are sold, and the proceeds are allocated to creditors first, followed by investors. This is the simplest and quickest way to exit a market. Liquidation is the least lucrative exit strategy because market value, business relationships, customers, and all other valuable assets are permanently destroyed. Under the Insolvency and Bankruptcy Code of 2016, an entity may even declare bankruptcy. When there is no other option, this is the last recourse. Bankruptcy carries a significant stigma.

Exit strategies must be carefully designed with the assistance of professionals. This may increase the expense, but it eliminates future confusion and higher costs. Intelligent exiting can maximise financial return for shareholders and investors. The business exit strategy should be regarded as seriously as the business creation plan.

How Compliance Calendar LLP can Help You?

Compliance Calendar LLP may assist you with automating your accounting and reducing company risks. You can discover more about our market entry experience or contact us to discuss a potential project with the CCL Team of Professionals.

Conclusion

Entry and exit strategies are critical components of every company's ability to respond to and adapt to changing conditions. The ability to respond and adapt relatively quickly is known as flexibility, and it is critical for good performance in any market, particularly during moments of significant change.