The buzzword that has emerged in business circles—'Reverse flipping’ a phenomenon of growing trend of overseas startups shifting their base to India and opting for listings on Indian stock exchanges, has gained momentum in the Indian startup ecosystem. This strategic move is fuelled by India's flourishing economy, a huge market, promising venture capital, favourable tax structures, robust intellectual property protection, a young and educated population, and supportive government policies.
The Global Shift Towards India
India, currently the world's fifth-largest economy by GDP, is poised to climb to the third position by 2030. For the startup ecosystem, the country already ranks third after US and China. Capitalizing on this momentum, overseas entities, such as Pine Labs and Udaan, are reportedly actively considering the 'reverse flip' strategy, aiming to leverage the benefits of the Indian market.
In a striking example, PhonePe, initially an Indian entity, shifted to Singapore before reverting its base to India. This move incurred a hefty Rs 8,000 crore tax burden for investors and jeopardized offsetting accumulated losses of Rs 7,000 crore against future profits. The restructuring mandated employee migration to a new ESOP plan, resetting vesting status and introducing a one-year cliff. Razorpay and Groww are now exploring similar shifts, recognizing the potential of the Indian market.
How is Reverse Flipping Done?
Executing a reverse flip entails regulatory methods like share swaps and mergers and often requiring NCLT approval.
Reverse flipping also sometimes poses tax challenges for startups with soaring valuations post-initial flip. The process, similar to a 'transfer of assets,' triggers capital gains tax in India and potentially abroad. It can prompt a change in beneficial ownership, jeopardizing set-off of accumulated losses against future profits. Navigating exchange control regulations during fund or asset repatriation demands meticulous compliance by startups looking to return to India.
Leading the Pack - Pine Labs and Udaan's Strategic Moves
Pine Labs, a Singapore-based payments firm valued at USD 5 billion, is on the verge of seeking board approval to move its parent company to India, according to some media reports. Simultaneously, B2B e-commerce giant Udaan is exploring a similar shift as it eyes an IPO within the next 12-18 months. These moves align with a growing trend among well-funded startups, particularly in the regulated fintech sector.
Tax Bonanza and Motivations Behind Reverse Flipping
One significant motivator for the 'reverse flip' is the increased certainty of achieving a higher valuation in the Indian market. Notably, this move can lead to substantial tax benefits, as demonstrated by Walmart-backed PhonePe, which accrued nearly USD 1 billion in tax gains for the Indian government during its migration from Singapore to India in 2023.
Factors Driving the Reverse Flip Trend
The Economic Survey 2022-23 highlights a conducive environment for internalization into India, supported by government initiatives, reforms, and startup-friendly schemes. Changing founder attitudes, increased investment interest, and strong customer bases in India further contribute to the attractiveness of a near-future IPO exit.
Key Considerations for Reverse Flipping
In the face of global challenges and funding uncertainties, returning to India can streamline business operations and reduce administrative overhead. The entities and their stakeholders carefully analyse key considerations when contemplating a 'reverse flip’ like Structure and Regulatory Compliance, ESOPs and Tax Implications, Foreign Exchange Compliance and Feasibility of IPOs, and various other regulatory and sectoral approvals, both in India and host countries, may be triggered.
While the attractiveness of Indian valuations is a driving force, stakeholders collectively assess and align interconnected factors to ensure the success of 'reverse flipping.'
A Parliamentary Panel too in August 2023 emphasized the need for relaxing regulatory frameworks to facilitate direct overseas listings and encourage the reverse flipping of Indian startups, foreseeing a positive impact on the entire ecosystem.
Challenges Amidst Belief in India's Potential
While the trend underscores confidence in India's startup potential, challenges exist. Long-term benefits, including access to the domestic market and a maturing startup ecosystem, drive the momentum of startups looking to reverse flip into their home country.
The reverse flipping trend in India represents a strategic shift with multifaceted considerations. As overseas startups flock to India for IPOs, navigating regulatory complexities and aligning with the evolving economic landscape will be pivotal for success in this transformative journey.
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