In recent times, start-ups in India relocated their holding company outside the country in a process known as “flipping”. It refers to the practice where start-ups, originally based in India, tweak their corporate structure so as to relocate their holding company and intellectual property (IP) to foreign jurisdictions (usually the US or Singapore) despite having most of their market, personnel and founders in India. This is mainly done for access to deeper pools of venture capital, favourable tax framework, market penetration and brand positioning as an international entity.
However, recent times have seen the emergence of a counter-trend: ‘Reverse Flipping’.
Indian start-ups are now opting to reverse flip back into India due to its favourable economic policies, burgeoning domestic market and growing investor confidence in the country’s start-up ecosystem.
Reverse flipping is the antithesis of the flipping trend. Here, start-ups that once relocated their holding companies outside India are now considering a strategic move back to India, primarily because the start-up ecosystem has now matured significantly. There is a large pool of untapped domestic retail investors who want to invest in emerging companies they believe have the potential to grow. Additionally, steps taken by the government in the recent times is making it easier for start-ups to go public, which could make it more attractive for start-ups to reverse flip.
Take, for example, PhonePe. Originally an Indian entity, it flipped its structure to Singapore but has now moved its base back to India. The founders have gone on record to say that the investors had to pay almost ₹8,000 crore of taxes to India. It also stands to lose the chance to offset its accumulated losses of almost ₹7,000 crore against future profits due to this restructuring. Also, all employees had to be migrated to a new India-level ESOP plan which stipulates a minimum one 1-year cliff thereby resetting the vesting status to zero with a one year cliff.
PhonePe is not alone. Several start-ups like Razorpay and Groww are also evaluating this shift, acknowledging the promise that the Indian market holds.
How is it done?
Structuring a reverse flip is not easy and start-ups considering this reverse journey have to navigate a maze of regulations. Some popular methods include share swaps and mergers. This may also require NCLT approval.
When a start-up’s valuation has increased significantly since its initial flip, there can be significant tax consequences upon reverse flipping. The process can be perceived as a ‘transfer of assets’, leading to capital gains tax in India and possibly even in foreign jurisdictions. This can also technically lead to a change in beneficial ownership, thereby risking the accumulated losses for set-off against future profits. Start-ups also need to navigate the exchange control regulations when repatriating funds or assets to India, ensuring all compliances are met.
The Economic Survey of 2022-23 acknowledged the concept of reverse flipping and has listed possible measures such as simplifying the processes for tax holidays, taxation of ESOPs, capital flows and reducing layers of tax to accelerate the reverse flipping process.
The International Financial Services Centres Authority (IFSCA) set up an expert committee to draw a roadmap ‘Onshore the Indian innovation to GIFT IFSC’. The committee submitted its report on August 25, 2023 with recommended measures to be undertaken by various stakeholders such as ministries and regulatory bodies in implementing the idea of onshoring the Indian innovation to GIFT IFSC. The IFSCA also plans to make GIFT City, the preferred location for start-ups to reverse flip into.
The trend of reverse flipping underscores the belief in India’s potential as a global start-up hub. While challenges exist, the long-term benefits of tapping into the domestic market, coupled with the strengthening start-up ecosystem, are compelling many to look homeward.
(The writer is Founder, Treelife, a law and finance consultancy )