News Excerpt:

The startup ecosystem in India is experiencing a notable rise in reverse flipping, where an increasing number of startups are opting to relocate their headquarters or establish a base in the country.

About Reverse Flipping:

• Reverse Flipping is a term used to describe the trend of overseas start-ups shifting their domicile to India and listing on Indian stock exchanges. 
• Indian start-ups are now opting to reverse flip back into India due to its favourable economic policies, burgeoning domestic market and growing investor confidence in the country’s start-up ecosystem. 
• At the time some of these companies were set up, quick and adequate funding was hard to come by locally. 
• As a result, many startups turned to foreign investors, which required them to set up holding companies overseas.

Recent Cases of Reverse-Flipping of Unicorns:

• Several high-profile startups have successfully executed reverse flipping to India, solidifying the country's position as a startup hub. 
• Walmart-owned PhonePe moved its domicile from Singapore to India, leveraging the vast user base and digital payment potential in the Indian market.
• Pine Labs, Meesho and Zepto are the latest new-age companies looking to move headquarters to India.

How Reverse-Flipping is done?

• Structuring a reverse flip is not easy and start-ups considering this reverse journey have to navigate a maze of regulations. 
• Some popular methods include share swaps and mergers, which may also require NCLT approval.
• The Economic Survey of 2022-23 acknowledged the concept of reverse flipping and has listed possible measures such as 
• simplifying the processes for tax holidays, 
• taxation of ESOPs, 
• capital flows, 
• reducing layers of tax to accelerate the reverse flipping process. 

Why are start-ups opting to reverse flip?

• India is the world’s fifth-largest economy by GDP and is expected to become the third-largest economy by 2030. 
• This growth is being driven by several factors, including a young and growing population, rising urbanisation, and increasing disposable income. 
• This presents a significant opportunity for overseas start-ups looking to expand into new markets.
• Further, according to International Labour Organization (ILO) reports India has the world’s largest youth population, with 66% of the population under the age of 35. 
• This young population is also well educated which makes India an attractive market for overseas start-ups looking for a skilled and talented workforce. 
• The Indian capital market provides overseas start-ups with access to a large pool of capital.
• The listing process on the Indian stock exchanges is relatively cost-effective compared to many of the Western exchanges. 
• This makes it an attractive option for overseas start-ups with limited resources. 
• Another significant upside is the opportunity to tap into the growing Indian consumer market.
• Additionally, overseas start-ups can find synergies with Indian companies. 
• This can lead to partnerships, joint ventures, and acquisitions which in turn help the overseas start-ups to expand their reach and operations in India.

Tax implications of reverse flipping:

• Companies opting to reverse flip will have to pay taxes in those markets where they are based in or in India, depending on the route they choose. 
• The quantum will depend on the company valuation and a third-party audit.
• Earlier, Walmart paid nearly $1 billion in taxes to the Indian government during the separation of PhonePe from parent Flipkart and the return of its holding company to India.

Way Forward:

• Despite the potential benefits, structuring a reverse flip poses challenges due to regulatory complexities, requiring startups to navigate intricate regulations and compliance requirements.
• Additionally, startups must navigate exchange control regulations when repatriating funds or assets to India, ensuring adherence to all regulatory obligations.
• The International Financial Services Centres Authority (IFSCA) established an expert committee to devise a strategy for 'Onshoring Indian Innovation to GIFT IFSC', aiming to make GIFT City a preferred destination for startups considering reverse flipping.
• The committee published its report, which proposed measures to be implemented by various stakeholders such as ministries and regulatory authorities in implementing the idea of onshoring Indian innovation to GIFT IFSC. 
• By doing so, the IFSCA intends to make GIFT City the preferable destination for start-ups to reverse flip into.
• The trend of reverse flipping is likely to continue in the coming years, as many overseas start-ups look to capitalise on India’s growth potential which is good for the Indian economy, as it will help to bring in new investment and create jobs.