Economic Survey 2023. Laws mooted to spur reverse-flipping among startups 

Economic Survey 2022-23 has suggested measures like simplifying ESOP taxation, and easier corporate laws like in the US and Singapore to accelerate reverse-flipping among startups, namely moving domicile back to India (like in the case of PhonePe). 

Other suggestions include simplification of multiple tax layers, resolving uncertainty due to tax litigation, fewer restrictions on inflow and outflow of capital, and treatment of hybrid securities as it is done in the US and Singapore. 

Further, the survey suggested simplifying the process for grant of ‘Inter-Ministerial Board’ (IMB) certification for startups, and facilitating improved collaboration and partnerships with established private entities to develop best practices and state-of-the-art startup mentorship platforms. 

The survey also talked about exploring the incubation and funding landscape for startups in emerging fields like social innovation and impact investment. Elaborating on the reason why startups chose to set up headquarters overseas (aka flipping), the survey said, “Flipping happens at the early stage of the startups, driven by commercial, taxation and personal preferences of founders and investors. Some companies decide to ‘flip’ because the major market of their product is offshore. Sometimes, investor preferences like access to incubators drive the companies to ‘flip’ as they insist on a particular domicile.” 

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The survey added that some companies prefer to domicile in countries where they would like to access the capital market later for better valuations and ticket size. Better protection and enforcement of intellectual property (IP) and tax treatment of licensing revenue from IP, residential status of founders, and agile corporate structures were also noted as the reasons for “flipping” in the past.

This process effectively transforms an Indian company into a 100 per cent subsidiary of a foreign entity, with the founders and investors retaining the same ownership via the foreign entity, having swapped all shares.

“The flipping phenomenon mentioned above reflects startups venturing out for short-term gains in the dynamic, uncertain geopolitical world. However, the flip can be reversed with the collective action by the Government-related regulatory bodies and other stakeholders. With solution-oriented strategies, startups will continue to be the messengers of India’s entrepreneurial dynamism,” the survey added. 

PhonePe is a recent example of an Indian company undergoing the reverse-flipping process. The fintech company completed the process of moving its domicile from Singapore to India in late-2022. Talking about the experience, PhonePe CEO Sameer Nigam said in a Youtube Live,  “I think law needs change because it is not progressive and disincentivises India-based startups from changing domicile. Our investors paid almost ₹8,000 crore in taxes just to allow us to come back to India, and that’s a very stiff shock if the business is not yet at maturity and a few years away from an IPO.”

He also mentioned that 20-odd startup unicorns in India were interested in shifting their domicile to India and have reached out to PhonePe for details. 

Job creation

The Economic Survey noted that around 9 lakh direct jobs have been created by startups (self-reported) recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), with a 64 per cent increase in 2022 over the last three years. 

“About 48 per cent of our startups are from tier II and III cities, a testimony of our grassroots’ tremendous potential. Various targeted initiatives of the Government have given a major boost to startups,” the survey added. Further, it noted that the number of DPIIT-recognised start-ups have increased from 452 in 2016 to 84,012 in 2022.

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