Reverse Flip: Razorpay’s Cross-Country Merger May Incur $250-300 Mn Tax

While Fintech unicorn Razorpay plans to relocate its parent company to India through a cross-country merger, this move could incur a tax payment of $250 Mn – $300 Mn in its current domicile, the United States.

This plan involves a merger between its US-registered entity and its Indian arm.

Razorpay and its investors are contemplating a merger at a reduced valuation from its peak of $7.5 Bn in 2021. Despite this, advisors on both sides of the deal, including those in the US and KPMG and Deloitte in India, are hesitant due to the paced growth trajectory of the payments processor over the past two years, ET reported.

A reduced valuation would proportionally decrease the tax liability; however, a significant reduction might face challenges in obtaining regulatory approval.

“Yes, there have been discussions to value the company at $3 Bn – $4 Bn, but external advisors are of the view that it may not be cleared by US authorities because of the company’s steady growth over the last year or so, even as peers in the US have seen correction in their valuations,” a source said as quoted in the report.

Razorpay is set to pursue approval from the National Company Law Tribunal (NCLT) within the next two months for the merger. Additionally, the company will appoint an auditor for the valuation discussions.

The fintech unicorn is also looking at raising a new round of funding from investors in 2024 to cover the tax payout. The uncertainty surrounding the duration of NCLT approval has prompted this strategic move.

Razorpay’s decision to relocate is primarily motivated by its goal to list on Indian stock exchanges within the next two to three years. This strategic move is also aimed at enhancing the company’s ability to navigate the regulatory landscape more effectively.

Razorpay has reportedly held discussions with government officials as well regarding the requisite approvals needed for the relocation process.

Founded by Shashank Kumar and Harshil Mathur in 2014 as a payment gateway platform, the startup has branched out into SME payroll management, banking, lending, payments, insurance among others, over the years.

In 2021, Razorpay bagged $375 Mn in its Series F round from Lone Pine Capital, Alkeon Capital, and TCV, among others, at a valuation of $7.5 Bn. Razorpay entered the unicorn club in 2020 after bagging $100 Mn from Singapore’s GIC and Sequoia Capital, among others.

Razorpay’s standalone net profit widened 20% to INR 7.3 Cr in the financial year 2021-22 (FY22) from INR 6.1 Cr in FY21 due to a strong growth in its business.

The startup’s revenue from operations surged 76% to INR 1,481 Cr from INR 841.2 Cr in FY21.

A growing trend among major players in the Indian startup scene is the consideration of “reverse flipping” — relocating their headquarters back to India. Triggered by PhonePe’s shift, which paid INR 8,000 Cr to shift domicile, for a potential public listing, this move has encountered challenges.

As per an Inc42 survey published earlier this year, over 77% venture capital funds and 65% angels said that after the SVB collapse, founders are rethinking overseas registration, with tax implications deterring a return to India for startups registered in the US.