š®š³ Reverse Flipping: Homecoming for Indian Fintechs
From foreign shores to the roots of India, Indian fintechs are coming back home in a move called āReverse Flippingā. What? Why? How? Read on.
Phonepe, Razorpay, Groww.
Do you know what these Fintechs have in common?Ā
Nah, not just their unicorn status.Ā
All these startups have headquarters outside India, and are now coming back to India, in a phenomenon called āReverse Flippingā.
Flipping: What and Why?
Before we understand āReverse Flippingā, let us see what āFlippingā is.Ā
Flipping is the phenomenon when companies domicile (incorporate) in geographies outside of their home country.Ā
Over 8,000 Indian startups and around 20% of Indiaās unicorns are registered outside the country, like Singapore or the US.Ā
Why go abroad, you ask?
Well, these new homes offer many benefits - better laws, lower taxes and better startup infrastructure.
For instance, Singaporeās corporate tax rate is 17%, while Indiaās corporate tax rate ranges from 25%-30%.
Plus, the US and Singapore rank 1st and 6th in the Startup Blink Global Startup Ecosystem Index (2023), while India ranks 21st!Ā
Flipping also makes it easier for startups to attract foreign investment and expand globally.Ā
Reverse Flipping: What and Why?Ā
Reverse flipping is simply Desh wapasi of startups (mostly fintechs). This is now emerging as yet another trend, fuelled by:Ā
Regulatory Evolution: The Indian government, recognizing the potential of fintech, is progressively changing regulations to support startups. While initiatives like 'Startup India' and regulatory relaxations are making India an increasingly attractive business hub, the government is tightening regulations for fintechs, especially those in the lending business.Ā
Market Potential: India's diverse market, with its huge consumer base and growing digital penetration, offers immense opportunities for startups to grow closer home. The 'Made in India' tag can further enhance brand perception among Indian consumers, fostering trust and loyalty.
Ease of Doing Business: The government has reduced over 39,000 compliances to promote Reverse Flipping by:
Streamlining taxation policies on employee stock options (ESOPs)
Fostering collaborations with established private entities to cultivate best practices and mentor startup founders
Facilitating capital flows with reduced restrictions on inflow and outflow and treating hybrid securities
Enhancing Indiaās startup incubation and funding landscape in emerging domains like social innovation and impact investment
Access to Capital: The Indian investment landscape is evolving. With more venture capitalists and angel investors showing interest in Indian startups, access to capital is no longer a distant dream.
Wait, thereās more!
The IPO experience. The ultimate exit opportunity for startups is now pulling these startups back to their roots.Ā
But hey, coming home is no easy path.Ā
Way Back Home: A Rocky Road?
Reverse flipping is a carefully navigated cross-border migration, full of tax implications and regulations.
This migration is usually done via two routes: share swaps and inbound mergers.
In a share swap, shareholders of the foreign entity swap their shares with the shares of the Indian entity. Result? Both the foreign and Indian shareholders have shares in the Indian entity.
An in-bound cross-border merger, on the other hand, merges the foreign company into the Indian entity. The foreign entity does not exist anymore, and the assets and operations are eventually owned and controlled by the Indian entity. Shareholders of the foreign entity receive shares of the Indian entity.
For companies with many shareholders, an in-bound merger is the less-cumbersome route.
An in-bound merger requires approvals from the National Company Law Tribunal (NLCT) in India and the compliances under the applicable laws of the host country.Ā
The entities have to obtain board, shareholder and creditors approvals, and prepare a whole bunch of documentation, including the valuation report and financial statements, to file with the NCLT.
Once approved, in comes hefty taxes...
Taxes vary with the chosen structure. If the reverse flip happens via an inbound merger, shareholders of the foreign amalgamating entity may claim exemption from capital gains tax if the transaction qualifies as an āamalgamationā under the provisions of the Indian Income Tax Act, 1961.
In case of share swap, taxes in India are levied on the difference between the value of shares of the Indian entity at the time of the reverse flip and the cost of acquisition of the shares of the foreign entity.Ā
So, thatās it?
Nuh-uh.
In-bound mergers are required to be compliant under the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 and also need RBI approvals. And there may be other regulations and compliances depending on the specific sector the startup is operating in.
With so much paperwork and compliances, is it really worth it?
Well, these startups think so.
PhonePe was one of the first startups to reverse flip from Singapore in 2022. This shift came with investors paying over Rs. 8,000 Crore as taxes, and a brand new India-compliant ESOP policy for its employees.Ā
Razorpay is following suit, with an expected cost of $250-$300 Mn in tax payments for its US-to-India transition.Ā
Jumping on the bandwagon, US-based Groww is also preparing to come back home.
While these startups await approvals, public listings in India may be on the horizon.Ā
The Ripple Effect of Reverse Flipping
The reverse flipping trend is not just a passing fad; it's a reflection of the evolving dynamics in the global and Indian startup ecosystem. It indicates India's growing stature as a startup powerhouse, capable of offering a nurturing environment for businesses.Ā
As startups choose to base themselves in India, there will be a greater focus on solving uniquely Indian problems, leading to more tailored solutions for Indian consumers. This could spur a new wave of innovation in sectors like digital payments, lending, insurance, and wealth management - all tailored to the Indian context.
Zooming out, this trend could lead to more job creation, increased foreign investment, and a stronger startup ecosystem in India.Ā
As we witness more fintechs making their way back to Indian shores, a new era of innovation and growth emerges.Ā
The big question is: will reverse flipping become the norm across other sectors too? How can India solidify its standing as a global startup hub, ensuring this isn't a temporary shift but a long-term strategic advantage?Ā
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