Semiconductor startup Ishoni Networks Inc. appears to have survived a nasty internal battle with its Indian subsidiary, one that has Ishoni executives crying foul.

In May, employees in the U.S. and India told Light Reading that Ishoni was all but dead (see Two VOIP Chip Players Diverge). At the time, it appeared true: The India office was being vacated, and U.S.-based COO Amin Varis was out of the country, trying to regain control of the company's Bangalore subsidiary.

Varis arrived in Bangalore on May 2 to discover what he claims was a web of deception aimed at dismantling Ishoni. The revelations led to the arrest earlier this week of three Bangalore-based Ishoni employees who had started a rival offshoot, Ample Wave Communication Networks. They were charged with illegally copying Ishoni's software.

Varis pins the blame on Ishoni's Indian board of directors and on Vivek Mansingh, managing director of the Bangalore office. Their plan, Varis says, was to bankrupt Ishoni, then acquire its intellectual property on the cheap. Ample Wave, staffed with ex-Ishoni employees, could then support the product. (Light Reading's attempts to contact Ample Wave or the arrested parties were unsuccessful.)

Varis says Mansingh has been fired and the Indian board removed -- but adds the process was difficult and provided quite the education in international business and law.

Ishoni created the Bangalore subsidiary to handle software engineering. But, by law, the subsidiary had to be a standalone company. Hence, it got a name -- Ishoni Networks (India) Private Ltd. -- and its own board of directors. The board consisted entirely of Indian nationals, including Mansingh, who was named managing director of the subsidiary.

According to Varis, the trouble started in February, when the Bangalore office contacted him asking for more money. Varis complied but says he then lost contact with Bangalore. "After I transferred the money, the Indian operation was out of my control. They wouldn't return my phone calls."

Meanwhile, according to Varis, the Indian board began emptying the Bangalore office.

"On the 8th of April, they [told employees] the company did not have any money, even though they had $500,000," Varis says. "Something like 90 percent of the people resigned."

Suspecting something was amiss, Varis says he made a surprise visit to Bangalore on May 2, discovering only nine employees remained there. Varis claims Mansingh was trying to evacuate the office entirely by coercing employees to join Ample Wave, threatening them with ruination of their careers if they didn't comply.

The result was paralysis for Ishoni. "All our software was being done in India, so without that team, we could not support our customers," he says.

It's quite common for a Silicon Valley startup to lose touch with its overseas operation, says Raj Judge, partner with law firm Wilson Sonsini Goodrich & Rosati.

"The main problem with this stuff is that the guys [in Silicon Valley] don't physically manage a subsidiary well," Judge says.

His firm helps about one client per week open an Indian subsidiary, and the process is simple enough that Wilson Sonsini provides a "tool kit" for it. Still, many startups dive into the subsidiary game without a complete understanding of what to do, Judge says.

For example, Ishoni didn't have to staff its Indian board with Indian nationals. Judge says many companies get by with a two-person board, sometimes consisting of two U.S. board members. It expedites incorporation if one director is in India, but it's not a necessity.

More important are the logistics of control. Judge says it's vital that the overseas board be granted only limited authority, even when it comes to the company's bank accounts.

"When [U.S. companies] don't do that, they don't have control. Part of the problem is having small startups having subsidiaries halfway around the world, and they can't control them," Judge says.

Varis says all but Mansingh had resigned from the board after Varis's arrival in Bangalore. The subsidiary could not refuse a demand to place Varis on the board, and once that was done, he fired Mansingh. He then constructed a new board of six members, including himself and U.K. national Antonio Mario Alvares, who, according to Indian media reports, filed the criminal charges against the Ample Wave employees.

None of this was particularly easy, though. "I had two lawyers sitting with me all day for four or five days," Varis says.

Varis stresses that this was an isolated incident and that it hasn't dampened his enthusiasm for developing software in India.

"I've worked with companies in India, in Russia, in Israel, in Britain, in China -- I've had joint ventures all over the world. I've never come across this kind of situation. They say that in Bangalore something like this has never happened," he says.

Meanwhile, Ishoni is fighting to regain credibility and restaff its offices. Varis says he's got a staff of 20 in India and 15 in Santa Clara, Calif. The company is seeking a new managing director for the Bangalore subsidiary; for now, Varis is doing the job, making sure to stay in close contact this time. "I spend about four hours a night on the phone," he says.

The company's product, a single-chip broadband gateway for customer premises equipment, continues to ship, and Varis claims a follow-up chip should be out within a few months. Even so, Ishoni remains in rebuilding mode.

"Because we were not able to support the customers for two or three months, they left," Varis says. "We are trying to get as many customers back as possible."

Ishoni is 51 percent owned by Royal Philips Electronics N.V. (NYSE: PHG; Amsterdam: PHI) (see Royal Philips Bankrolls Ishoni) but is run as an independent company.

— Craig Matsumoto, Senior Editor, Light Reading