A clutch of start-ups incorporated overseas have knocked on the doors of the Finance Ministry and the Securities and Exchange Board of India (SEBI) to allow them to list in India.

There have been several discussions on the matter in the past few weeks involving start-up founders, bankers, lawyers and officials from various government arms, said two people familiar with the matter.

Current regulations do not permit such companies to list in India and any framework to enable this will require changes in SEBI and FEMA norms as well as the Companies Act, 2013.

Several Indian start-ups had incorporated overseas about a decade ago in order to gain access to capital. Start-up accelerators such as Y Combinator would make it a condition for Indian start-ups to incorporate outside India, typically the US and Singapore.

Some of the start-ups were earlier happy to list overseas given the lack of depth in the Indian equity market, said experts. Not any more. “Such companies will not get adequate analyst coverage in the US and will trade at a discount. Listing in India would mean better brand recall and valuation premium for the company, retail participation and higher taxes to the government by way of STT and capital gains tax,” said a legal expert.

The Indian market has developed significantly in the past few years, with the number of demat accounts up 3x in the last three years and domestic mutual funds flush with money.

Reverse flipping

Large Indian start-ups incorporated overseas include Pine Labs, Dream11, Meesho and Razorpay. Some of the start-up firms are reportedly exploring an option to reverse flip their holding companies.

But reverse flipping involves a merger which could trigger a tax payout, as high as 20-30 per cent of the fair valuation, in the country the firm is incorporated in. The payout could be prohibitive, especially for the larger firms. Countries such as Singapore don’t allow a cross-border merger.

A few months back, Walmart-owned PhonePe had to shell out about ₹8,000 crore in taxes as the firm moved its domicile from Singapore to India. This involved a demerger wherein existing Flipkart Singapore and PhonePe Singapore shareholders, led by Walmart, purchased shares directly in PhonePe India, per reports.

Reverse flipping could also require compliance with a host of other regulatory and sectoral approvals including Cross Border Regulations and Press Note 3 norms. This is the reason why most top start-ups favour listing in India while continuing with their existing overseas structures instead of doing a reverse flip.

Emails sent to some of these firms did not elicit a response. An email sent to SEBI and the FinMin over the weekend did not get an immediate response.

“SEBI is waiting for instructions from the government. The latter wants the regulator to write to it first. So, the matter is stuck in a bureaucratic black hole,” said the person quoted above.

A few years back, SEBI had formed a committee to look at the possibility of allowing Indian companies to list abroad and foreign companies to list in India. The proposals were shot down on concerns of flight of capital triggered by foreign listings.

“Companies with substantial Indian connection should be allowed to list in India with the condition that whatever primary capital is raised is spent in India and cannot be repatriated,” said an industry official.

This is an election year and the government is busy promoting GIFT City, so this item is low on its priority list at the moment, the official added.

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