Homecoming for Startups Surge in Reverse Flipping in India

The Cayman Islands, the United Kingdom, Singapore and the US are well-known examples of nations where Indian startups had flipped at the first instance.

However, presently, a huge surge can be noticed in startups finding solace back in home country. India is attracting the well-known startups who had based in foreign countries to come back.

Reverse flipping and causes of its surge in India

• When startups move their holding companies back to India after originally been incorporated offshore, it is called reverse flipping. This is also known as internalisation.
• In practice, internalisation occurs when value and ownership of an entity are integrated back into India. As a result, after the foreign companies and offshore interest holdings are dissolved or merged, all overseas shareholders acquire shares of the Indian company. Shares of the foreign holding company held by Indian, are swapped for shares of the Indian company.
• This trend has been gaining traction recently as start-ups look to capitalize on India's large and growing economy, deeper venture capital pools, educated youthful populace, stronger intellectual property protection laws, and the higher likelihood of an exit at a higher valuation in India.
• The founders' and management's perspectives have shifted, they have started to recognize the value produced, the rise in investment interest, the growth of brand relationships, and the strength of the Indian customer base.
• Now, instead of having a US or Singapore-based holding company, individuals are starting to flip the structure so that the Indian [operating] company takes the lead and the[foreign-based] holding company merges, or "reverse flips," into the operational company.

Key considerations of reverse flipping

When relocating their domicile back to India, entities, their managements, and participating shareholders should weigh several legal and commercial issues.

These include:

• Deciding the structure of reverse flip: The most crucial stage in the internalization process is selecting the appropriate structure that complies with the legal, regulatory, and tax frameworks of the pertinent jurisdictions. Companies have chosen to use share swap arrangements, in which the shareholders of the foreign entity exchange their ownership of that foreign entity for shares of the Indian entity. Also, cross border mergers appear to be another most chosen method for internalization.
• Legal and regulatory considerations: The entity that is looking to reverse flip must evaluate the legal and regulatory requirements for establishing a presence in India. This may include adhering to corporate laws, employment laws, tax laws, and any other applicable legislation.
• Approvals and compliances: This may involve obtaining approval from regulatory authorities, such as the National Company Law Tribunal (NCLT), which approves mergers in India or other relevant government agencies. Further in cases of in-bound mergers, compliance with the Companies Act 2013 and its relevant rules, provisions of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Cross Border Merger) Regulations 2018 is a must.
• Potential tax implications: The entity would be governed by Income Tax Act, 1961 if it decides to use reverse flipping to establish its base or headquarters in India. Capital gains tax may apply in the relevant jurisdictions in case any gains are realized from the transaction, like it happened in the case of PhonePe's separation and the holding company's return to India wherein, Walmart (parent company) had to pay about one billion dollars in taxes for shifting the domicile to India. The amount of this tax would vary depending on several variables, including company's valuation and the applicable tax rates.

Recent examples of reverse flipping

• PhonePe shifted its domicile from Singapore to India in 2022.
• Pepperfry shifted its domicile from Singapore to India in 2021.
• Urbanladder shifted its domicile from Mauritius to India in 2022.
• Groww shifted its domicile from the US to India in March 2024.
• Pine Labs has received the approval from Singapore courts to merge its Singapore company with its Indian company which will pave way to reverse flipping.

Conclusion

Overall reverse flipping strengthens India’s startup ecosystem, encouraging regulatory improvements and positioning India as a favourable destination for both domestic and foreign companies. This has further led to economic growth, fostered entrepreneurship, innovation and job creation for India.

Authored by:

Diviay Chadha, Partner and Shivangi Sharma, Associate at Singhania & Co.