Letters of Intent

Pankaj Raval (00:04)
Welcome back to Letters of Intent, where we explore the intersection of law, business, and innovation. I'm your host, Pankaj Raval founder of Carbon Law Group. And today I'm joined by my colleague and co-host, corporate attorney here at Carbon, Sahil Chaudry We are diving into Sahil's recent trip to India, a trip that lined up with some pretty big news in the world related to tariffs, IPOs, and what it all means for companies who are raising capital. Sahil, welcome back.

Sahil (00:30)
Thanks, Pankaj I'm excited to share.

Pankaj Raval (00:31)
Yes, I'm sure there's a lot of great news and interesting news to share from your time in India. We live in interesting times and there's a lot going on in the world, but particularly with US-India relations as well. So, Sahil, let's start with your know, a dear place for both of we spent time there. Even while born in the US, we spent both at least a year volunteering. And now you're us, what brought you back to India?

Sahil (00:55)
Yeah, Pankaj, you're right. I mean, we met through a program called Indicore. It seems like India keeps calling us back. And this trip, India called me back in a really remarkable, memorable way. my father-in-law, Anand Pandit he had his IPO of his company, Sri Lotus Developers. And I got to visit the National Stock Exchange in Mumbai for the ringing of the bell. The subscription window was July 30th to August 1st.

There was a price band of 140 rupees to 150 rupees per share. But literally on July 30th, the same day subscriptions opened, President Trump announced a 50 % tariff on Indian goods. Yeah, I mean, this was huge. This is a major flip in terms of India-U.S. relations for the last 20 years where it seems like things were moving in a more collaborative direction. And so this was a result of

Pankaj Raval (01:41)
Yeah.

Sahil (01:43)
the new Trump tariffs and specifically targeting India's relationship with Russia.

Pankaj Raval (01:48)
Interesting. So tell us more about exactly is the relationship between India and Russia?

Sahil (01:52)
So in a nutshell, India buys Russian oil and President Trump is alleging of that Russian oil is funding the Ukraine war. So that's the narrative that's being created India. But for other people who are maybe in the school of more it could be more about balance of power politics and trying to balance out the US's dominance in the

Pankaj Raval (02:17)
Wow. So it sounds like, yeah, probably a lot of mixed emotions when you're, you you're in India for a celebratory milestone and all of a sudden, uh, you have this global trade bomb dropped on India. Um, that kind of, did it, did it crash the party or you managed to still have, have so fun.

Sahil (02:32)
You know, we thought it might crash the party, but it didn't. In fact, analysts were really worried that the markets would turn choppy. But when Lotus listed on August 6th, it opened around 178 rupees, well above the price band. So that showed investors believed in the fundamentals despite the tariff shock.

Pankaj Raval (02:50)
Interesting. And when you say like, you know, it opened up above the price band of 140 to 150. Can you tell us a little bit more about like, what does that mean to a lay person in terms of like where, how a stock is priced causes it to open higher come trading day?

Sahil (03:07)
Yeah, absolutely. initially the stock is priced for its IPO, which means there's a certain allocation of shares that the company is willing to sell into the public market. And the initial buyers of those shares are the people who buy into the IPO. Now, once that bucket gets full, that's called being subscribed once. Now, in this case,

Lotus subscribed multiple times, way more times over than the initial allocation. And so that gives the market an indication that this, that the price of the shares was under what it could be in the marketplace. So when it was listed, it gets listed for the public at 178, meaning everyone who bought into the IPO is making a profit if they choose to sell into the public market.

Pankaj Raval (03:42)
Hmm.

Sahil (03:53)
So it's sign showing that the market believes in the fundamentals. And this is a very interesting time for India because despite the tariffs, the Indian market has stayed very resilient. And there many who describe 2025 as an IPO boom year for India. So the public equities markets in India are very strong. There's a lot of confidence. that means that there's going to be a lot of business.

between India and the rest of the world despite the tariffs. I in fact, kind of the lack of impact so far of the tariffs on the Indian markets shows that there's a lot of flexibility in terms of the Indian economy. even though it's been based on a manufacturing economy for the world, there's actually a huge consumer power in India that I think we're going to discover.

Pankaj Raval (04:39)
That's fascinating. Yeah. mean, you would think that, for the last maybe century or maybe, yeah, maybe 70 years, America seems to have been the place where everyone wants to come and sell, right? There used to be a huge consumer class. But I think what we're seeing now in this global trade world that we're living in, that the middle classes of India and China growing significantly. And now maybe, you know, the power is really tipping maybe

Sahil (05:04)
Yeah, I think it's kind of yet to be seen how quickly that can happen. But I do think the way the BRICS nations together and have started posing a challenge to American dominance, I think it's not the world, like you said, it's not the world it was even 10 years ago. we're living in a more multipolar, multilateral world.

And I don't know if there's as much room anymore for an economic So, ⁓ yeah, but that was, you know, it was all in the news. We were, kind of at the edge of our seat seeing what was going to happen with the stock, but it did really well.

Pankaj Raval (05:29)
Yeah, interesting.

Sahil (05:48)
It gave me a window into IPOs and capital markets, which is something that we do. And it gave me a window also into how flexible clients need to be because all of a sudden overnight, you've had a really great trade relationship between the US and India for years. But I think the message coming back with is anything can happen.

at any time. I I think we were all very surprised with these new tariffs. you know, I think a lot of our clients may even be wondering like, where does the president get the authority to impose tariffs like this all of a sudden? Seems kind of dictatorial. It seems like this have to pass through the Congress or the Senate? so the source of authority here, we've got section 301 of the Trade Act of 1974, which

Pankaj Raval (06:23)
Yeah.

Yeah.

Sahil (06:35)
accounts for retaliation against unfair trade practices. So president believes that a country is imposing an unfair trade practice, for example, a trade imbalance is what President Trump cites often with India. They use this to impose a tariff. Section 232 of the Trade Expansion Act of 1962 on national security grounds, the IEEPA, the International Emergency Economic Powers Act in times of declared emergency.

In this case, the administration used Section 301, tying it to India's energy trade with Russia.

Pankaj Raval (07:07)
Interesting, interesting. So once these tariffs are actually announced, what happens? I do they automatically go into effect? the next step once tariffs are announced?

Sahil (07:15)
So the USTR, which is the US Trade Representative, publishes the tariff schedule in the Federal Register. From the effective date, Customs and Border Protection collects the duty. Importers don't get to negotiate. If your product's HTS code is on the list, you pay the duty when goods clear customs.

Pankaj Raval (07:32)
Interesting. And compliance, that work?

Sahil (07:34)
So the first step that we would advise our clients is to know your HTS codes. That's the Harmonized Tariff Schedule Classification. Step two is to update the customs documentation and make sure your broker is filing correctly based on these updated rates. And step three is plan for cash flow because the duties are due at entry and these tariffs I'm talking about, these are on top of the pre-existing duties. So if you were already paying 20%, you're now let's say on an item coming in from India.

Pankaj Raval (07:56)
Mmm.

Sahil (08:01)
You're now paying 70 that's on the cost of your goods.

Pankaj Raval (08:05)
there any ways around this? I know I'm sure people try to get creative or is it just too bad you have to pay the tariff?

Sahil (08:10)
Well, I mean, there are some relief valves, but it's not easy. The first is the exclusion request petitioning the USTR to exempt a product if no viable alternatives exist. The second are foreign trade zones or bonded warehouses. So goods can be stored or processed without triggering duties until they officially enter US commerce. And three, tariff engineering, structuring supply chains or product components

to fall under unaffected code. So for example, raw materials can come from one place, assembling the parts somewhere else. There are ways where you could work with a custom specialist or your broker to ensure that you are getting the lowest tariff rate possible.

Pankaj Raval (08:51)
So what's the bottom line for importers? What do they need to know right now?

Sahil (08:54)
The most important thing is to be aware of what your HCS code is. Don't panic, but don't be passive. You do need to understand your exposure, go in with your eyes wide open, engage your advisors early. So your advisors, that's gonna include your attorneys, your customs brokers, your CPAs, and pursue the exemptions if they apply. Because in this day and age, flexibility is everything.

Pankaj Raval (09:18)
Absolutely. I you definitely have to be nimble, it seems like in this market because things are changing so It really your margins significantly once these new laws are the uncertainty can make a lot of companies. know, you know, Google, these bigger companies, Apple are trying to shift operations, but it's not that easy, right? You can't just move a factory overnight to another country.

that means also, think diversifying supply multiple sources for your supply chain. mean, I think that's been, suggested for awhile, but I think it's indicative of when there's unrest, when there's kind of chaos in the world, you've got to be prepared have multiple sources inputs for products.

Sahil (09:54)
I think that's right. And in fact, that's probably the part of what these tariffs did with the India-U.S. relationship is damaging the sense of certainty with trade relations. And you're right. Business relies on certainty. So the more uncertainty that gets introduced to the market, more that we need to advise our clients to stay need room to maneuver here.

And the good thing is are a lot of tools now that make it easier to maneuver than ever before. I mean, we do have today, the communication systems are way more efficient. You've got video and audio and the internet and AI and have ways today to adapt to this uncertainty, but it's best to go into it with your eyes wide open and be ready to move and maneuver. I think you also hit on another point, which is

supply chain and customers. Yes, in one sense, would if you're in the US, sufficient or you're satisfied with the American market, you're importing goods from overseas. But today, that might not be what's happening in the US in terms of inflation, the middle class is getting squeezed. terms of the consumer economy,

Yes, the very important and maybe arguably the most are many other markets, Europe, South America, Asia, where those economies are getting activated. And they're not just manufacturing economies anymore. Especially when we look at, let's say, South America or Asia, you have full blown blended consumer manufacturing economies that are growing and very bullish. so I would even advise our clients to say

It's probably not a great idea to only be focused on the US or just to be thinking in this model going to buy from overseas and sell in America. I mean, today I need a global perspective. You need backups in terms of your manufacturing source and and your customers, too.

Pankaj Raval (11:39)
Absolutely. Absolutely. Great points. now let's turn back to the reason you went to India, the original reason for the trip, until issues may have created a little shadow on what you actually were there for. turning back to the IPO,

First off, congratulations. Seeing Sri Lotus developers list above the band in the middle of tariff headlines must have been surreal. Tell us a little bit more about your experience being there, being in the whole mix of it. What was it like? I know there's probably

some celebrity influence there as well that you must've had some fun with. So tell us, was that experience?

Sahil (12:09)
Yes, Pankaj it was so cool. you know, congratulations to Aisha's family, specifically Aisha's dad, who built this company from a small garage. was an inspiring moment, felt like a once in a lifetime experience. The energy was electric. I didn't get another shot at, you know, auditioning anyone for Bollywood, but

I did get to meet some really cool celebrities, yeah. And that was it was great to see, I you see someone achieve something that you've only seen on TV or in movies or read about in books and you get to be there in real life, it was a very surreal experience. It was so cool. And I just feel grateful I got to be a part

Pankaj Raval (12:29)
Don't give up man, don't give up.

That's awesome, that's awesome. listeners who don't know what IPOs are, how they work, you're not experienced with securities laws, tell us what is an IPO, why is it important, why is it relevant in today's world?

Sahil (12:59)
So an IPO or initial public offering is when a private company sells shares to the public for the first mechanics are you have to draft the registration statements or prospectus, which is an S1 in the US or it's with SEBI, the regulatory authority in India. It discloses financials, risks, management and your business And then you have to get into due diligence where lawyers, your accountants, bankers will scrub every detail because

your disclosures to the public regulated law. So you need to make sure that you're putting out there is factually correct because when someone's taking a risk on your security, the government wants to make sure that they are taking the risk with their eyes wide open. Then there comes regulatory review, which is through the SEC or SEBI in India, which reviews the offering and offers comments. Then the next step is the roadshow.

where you are marketing your securities to investors. And finally is the pricing and listing. you are pricing your shares with the help of your underwriters, your bankers. The shares are allotted and then they're listed on the stock exchange.

Pankaj Raval (14:08)
Wonderful. And So to summarize, disclosure, vetting, marketing, then launch. Is that right?

Sahil (14:14)
That's exactly right. And each step is heavy got tons of compliance and precision level drafting.

Pankaj Raval (14:22)
And what are the pros and cons of going public?

Sahil (14:24)
So the pros are you have access to a huge amount of capital, you have liquidity for the founders, the early investors, and it's also a brand building move where you're building a huge amount of credibility. The cons are it's very expensive. The average IPO in India costs between one and one and a half million dollars, US, while in the US the average IPO costs four to seven million dollars just in legal accounting and underwriting fees.

And that's just the upfront costs. Once you're public, there are ongoing compliance costs, quarterly and annual reporting, audit fees, governance, and investor relations.

Pankaj Raval (14:59)
Interesting. So it's scale, it must come with a heavy compliance burden, right?

Sahil (15:04)
That's right, which is why many companies consider private alternatives like in the US the Regulation D offering.

Pankaj Raval (15:11)
Reg D is that private placements you're talking about?

Sahil (15:14)
That's exactly right. So instead of going into the public market, you go into the private market with accredited investors.

Pankaj Raval (15:20)
Interesting. So what is this actually involved and why is it a good alternative to an IPO?

Sahil (15:24)
Regulation D is an SEC exemption that lets companies raise money privately without a full IPO registration. It's faster, cheaper, and it's less public.

Pankaj Raval (15:35)
Interesting, interesting. So I'm a company trying to raise, let's say $10 million. I can, instead of having to go through all this compliance and, you know, pay maybe hundreds of thousands of dollars, legal fees and compliance fees, can raise money investors on a private level potentially, do a lot faster and without all the compliance headaches.

Sahil (15:57)
That's exactly right. So the process is straightforward. We would draft a private placement memo which discloses the company's business risks and terms. It's similar to what you would do with an S1 for a public offering, but it's much less involved. Then the second step is you sign your subscription agreement with investors based on the investors becoming aware of your risks, which you disclose in your private placement memo and your business model.

Then you would file a simple form D with the SEC within 15 days of the first sale. It's a simple form that your attorneys file for you. And then you have to comply with state blue sky notice filings, which means even though the SEC grants the exemption, many states still require companies to file a short notice and pay a small fee if their residents invest. It's how state regulators keep visibility into private offerings.

Pankaj Raval (16:48)
Interesting and who can invest any and can anyone write a check?

Sahil (16:52)
That's investor rules come in. Government is very careful when it comes to who can invest because they want to make sure that the person investing is not going to be defrauded, that that person has the exposure to deals to be able to evaluate a deal well. So under Reg D, most investors must be accredited. That means an individual with over one million dollars in net worth, excluding their primary residence or

income over $200,000 in each of the last two years or $300,000 with a spouse expecting the same this entities as well like banks, VCs or companies with over $5 million in assets and now certain licensed professionals like holders of a series 7, 65 or 82 licenses.

Pankaj Raval (17:37)
Interesting. So the logic is these investors are sophisticated enough to understand the risks. So the SEC doesn't require as many protections, is that right?

Sahil (17:45)
Exactly. The theory is investor sophistication substitutes for regulatory oversight.

Pankaj Raval (17:51)
what are the pros and cons of a Reg D compared to an IPO?

Sahil (17:55)
Well, the pros speed, you can close around in a matter of weeks, cost, which is far lower than an IPO, and privacy, no need to open your books to the world. The cons are

there's a limited investor pool. can mostly these to accredited investors. There's illiquidity, securities are restricted and they can't be freely traded. And there's a liability risk. If the disclosures are misleading, even sophisticated investors can sue.

Pankaj Raval (18:22)
it's not actually free money. You still need to be pretty buttoned up legally. And it sounds like some risks are there.

Sahil (18:28)
D offerings succeed when companies treat them seriously with solid disclosures, proper filings, and clear, compliant investor communication.

Pankaj Raval (18:37)
So effectively, you know, there's a lot of pros for people who are raising maybe not as much, maybe don't need to hit the open markets and have all this disclosure. Obviously, with your public company, there's a lot of compliance, a lot of updates you need to make, especially with the SEC filing 10Ks and quarterly and annual reports. So if you don't want to go through all that, you can go through a private round of financing, which is for smaller

amount of money, but still significant in many ways. know, there's still a lot of risk there, there's still securities laws compliance. And it sounds some of the risks also of not complying is that, you know, there's criminal civil penalties that you could be facing if you don't do it right. I correct?

Sahil (19:16)
Absolutely, that's right. But that's where we come in. You know, we are there to advise our clients. If you want to raise, for example, one to five million dollars, that's a type of round that makes sense do privately. Let's say you are opening a restaurant or opening up a software business or opening up your and you need capital to execute on your business plan. I mean, there are multiple ways to get money in the door.

One is alone through financing, but another very legitimate way is this private I would just advise that this is a great way to raise capital, but just know that you have to be compliant. And as long as you're willing to play that game, it's an excellent way to raise capital.

Pankaj Raval (19:58)
Absolutely. And it sounds like, know, also just disclosing the risks, right? Because fundamentally, the SEC is there, so investors, know, smaller investors especially, don't get taken advantage of. This is why we have all this compliance in the first place. So, you you need to make sure that you are disclosing the risk correctly. And if you fail to disclose a risk and it ends up being a bad investment, you could be facing serious consequences, criminal civil the many...

tens of hundreds of thousands of dollars, maybe millions, depending on how much you raised. So just something to be really cautious of and careful of. And that's without all the other legal fees that you're going to be incurring as well. So we want to help people avoid these issues, do it the right way, make sure that they are compliant when raising money.

Sahil (20:40)
And I just want to draw a distinction for our listeners that let's say you have a business plan and you disclosed every possible risk and one of those risks came to fruition and as a result your business failed. That's not reason to be subject to penalties necessarily as long as you were honest, transparent, upfront and you were compliant.

The thing that the government wants to ensure is if you're going to take a risk, you know capital is at risk. You could lose all your money when you invest in a business. And as long as you are sincerely operating that business without defrauding the public or anybody you're selling your securities to, the government is essentially saying, we understand that there are risks in business, this capital is at risk, but you have to be upfront and sincere

with the people buying the security. So the failure of your business the problem and not the reason to not do this. It is an excellent way to raise capital as long as you are willing to be sincere and transparent. And Pankaj, we're seeing a lot of these Reg D offerings now in the real estate market, presumably because it's a proven business model, tried and tested.

And when you have an operator that is capable and is shown a proven track record, we're seeing operators in real estate raise funds to go in and buy apartment complexes or homes for rehab projects. So we are seeing real estate actually represent a very large number of regulation D offerings in California.

Pankaj Raval (22:07)
That's amazing. Yeah, really, really good insight. I'm sure there's a lot more to discuss about that in the future, which we'll definitely get back to. So, you know, just wrapping up, Sahil, we've covered a lot today. You know, we've covered tariffs, we've covered IPOs, we've covered Reg D offerings and intricacies involved there. If you had one piece of advice for business owners navigating all this, what would it be?

Sahil (22:27)
I'd say build flexibility into your strategy. Whether it's international trade shocks like tariffs or raising capital in the US, the rules change quickly. The best companies are the ones that prepare for multiple paths so that they can pivot when things shift.

Pankaj Raval (22:41)
that's a great note to end on. Thank you so much for joining us and providing your feedback and insight on your travels and understanding market and what it's like there on the ground when launching an IPO.

Sahil (22:52)
Thanks Pankaj it is always a

It is such a pleasure to get to talk about it and share this with our listeners.

Pankaj Raval (22:58)
Wonderful. And thank you all again for listening to Letters of Intent. I hope you've enjoyed today's conversation. Subscribe, share, and join us next time as we continue exploring the intersection of law, business, and innovation. You can find us on all the leading podcast channels as well as on YouTube. We are also on social media, Letters of Intent, as well as on Carbon Law Group or at CarbonLG on Instagram, on LinkedIn. So you can find us pretty much anywhere on the internet.

And we encourage you to comment if you want to hear more on certain subjects. I have questions. We are always happy to provide answers to any questions that listeners may have. next time, I'm Pankaj Raval and thank you Sahil Chaudry for joining me as my co-host. And this is Letters of Intent.