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Can Budget Lure Back Startups? What It Takes for Ghar Wapsi of Titans?

India is about to see a wave of startups returning home. The govt is reportedly considering plans to lure back Indian startups currently based abroad. But there are challenges to consider. What are the potential ways, what are the pros and cons? Read on!

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Swati Dayal
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Remember the wave of Indian startups flocking to Silicon Valley and Singapore for better prospects? Well, get ready for a plot twist! The narrative is shifting, with a potential "Ghar Wapsi" on the horizon.

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Get ready for a startup homecoming! Industry insiders are buzzing about a potential game-changer in the upcoming Union Budget – a scheme that could spark a mass "Reverse Flip" for Indian companies currently domiciled abroad. This initiative aims to woo Indian startups currently domiciled abroad, sparking a potential reverse flip phenomenon. But is it all sunshine and samosas? What's driving this trend, and is it all smooth sailing? Let's unpack the exciting developments and potential roadblocks.

Ghar Wapsi for Desi Unicorns: GIFT City Beckons

Imagine a scenario where Indian startups, currently scaling Silicon Valley heights or basking in Singapore's sunshine, could seamlessly return home – and that too, with minimal tax woes! This dream might soon become reality with the government's plans to leverage GIFT City (Gujarat International Finance Tec-City). Aiming to transform GIFT City into a global financial hub that rivals Dubai and Singapore, the government is reportedly contemplating tax breaks and other attractive incentives to lure back these "desi unicorns."

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The GIFT that Keeps on Giving: Unprecedented Access to Indian Markets

Leaks suggest the government might unveil policies that bridge the gap between GIFT City and mainstream Indian stock exchanges like the BSE and NSE. This unprecedented access could be a goldmine for these returning startups. Remember, GIFT City's special economic zone (SEZ) status already boasts significant tax benefits. Additionally, recent legislative tweaks have opened the door for unlisted companies to directly list on the GIFT International Financial Services Centre (IFSC).

This strategic move isn't just about tax breaks. It's about fostering the growth of Indian startups within a familiar ecosystem. By facilitating a smooth return via GIFT City, the government aims to connect these companies with India's burgeoning mutual fund and retail investor base. This homecoming allows startups to leverage the growing domestic capital pool and aligns their growth trajectory with the local investment landscape.

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Is a Reverse Flip Revolution on the Horizon?

The upcoming Union Budget holds the key. If these rumors materialize, we might witness a significant influx of Indian startups making a strategic "Ghar Wapsi" via GIFT City. This could be a watershed moment, propelling India's position as a global tech leader and injecting a fresh wave of innovation into the domestic ecosystem. Stay tuned, startup enthusiasts – the plot is thickening!

Understanding Reverse Flipping

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Reverse flipping refers to the process where Indian startups, initially domiciled abroad, move their parent entity's headquarters back to India. This trend, driven by a mix of regulatory, financial, and operational incentives, is gaining momentum. The Indian government’s new scheme could be the catalyst for this shift, leveraging GIFT City's benefits  to make the transition seamless and tax-efficient.

Why Startups Want to Reverse Flip to India

Several factors are compelling Indian startups to consider reverse flipping:

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Reverse flipping chart

 

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  1. Investor Comfort and Market Familiarity: Initially, startups like Razorpay and Zepto chose foreign domiciles like the US and Singapore to tap into investor comfort and market familiarity. Many investors were more at ease with jurisdictions they understood well.
  2. Regulatory Advantages: Countries like Singapore offered regulatory advantages, including favorable tax regimes and robust IP protections. Dividends in Singapore, for example, aren't taxed at the holding level, and there are no withholding taxes for shareholders.
  3. Operational Realities: Despite foreign domiciliation, the core operations of these startups often remained in India. Moving back simplifies operational complexities and aligns the corporate structure with business realities.
  4. Evolving Indian Regulatory Landscape: Recent changes in Indian regulations have made the local market more attractive. Simplified ESOP taxes, favorable capital gains tax regimes, and streamlined capital flow procedures are encouraging startups to return home.
  5. Patriotism Pays Off: There's a growing sense of national pride among Indian entrepreneurs. Many are now driven by a desire to contribute directly to the burgeoning domestic tech scene, fostering innovation within their own borders.
  6. Investors Get Acclimatized: As the Indian regulatory environment undergoes positive transformations, global investors are becoming more comfortable with domestic structures. This reduces the need for complex overseas setups, simplifying the operational landscape.

The Flip Side of the Coin: Challenges on the Road to Ghar Wapsi

While the idea of returning home sounds appealing, the reverse flip process isn't without its challenges:

Reverse flipping chart

    Weighing the Scales: Gains and Losses of the Reverse Flip

    The decision to reverse flip requires careful consideration of both the potential gains and losses:

      Reverse flipping chart

       

                         Reverse flipping chart

      Choosing the Right Escape Route for Startups

      Navigating the legal, regulatory, and tax complexities can be a daunting task. Here's a breakdown of the two primary methods to guide your strategic return:

      Inbound Merger: A Streamlined (but Time-Consuming) Path

      An inbound merger involves consolidating your foreign holding company (H Co.) with its Indian subsidiary (S Co.). Non-resident shareholders of H Co. simply exchange their shares for shares in the newly combined Indian entity. This method offers a streamlined approach, but requires careful planning due to:

      • Company Law Approvals: Securing approval from the Reserve Bank of India (RBI) and the National Company Law Tribunal (NCLT) can take approximately 7-9 months.
      • Foreign Exchange Compliance: Ensure adherence to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
      • Income-Tax Considerations: Capital gains tax exemptions might be available under Section 47(vi) and 47(vii) of the Income Tax Act, 1961, subject to specific conditions.

      Share Swap Arrangement: A More Flexible (But Potentially Taxing) Option

      This method involves a strategic share exchange. Shareholders exchange their H Co. shares for shares in a brand new Indian company (N Co.), which then holds control of H Co. While offering more flexibility, there are a few crucial considerations:

      • Foreign Exchange Regulations: The Foreign Exchange Management (Overseas Investment) Rules, 2022, require adherence to arm's length valuation principles.
      • Income-Tax Implications: The share swap might be considered a 'transfer' under Section 2(47)(i) of the Income Tax Act, potentially leading to capital gains tax.

      Budget 2024: A Potential Catalyst for Reverse Flips?

      The proposed "Ghar Wapsi" scheme in Budget 2024 has the potential to be a game-changer. By offering tax breaks, streamlined regulatory approvals, and other incentives, the government could significantly ease the complexities associated with reverse flipping. This could lead to a significant influx of startups returning to India, bolstering the domestic ecosystem and solidifying India's position as a global tech powerhouse.

      The stage is set for a pivotal moment in the Indian startup landscape. Will Budget 2024 usher in a new era of "Ghar Wapsi"? Only time will tell!

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