Zepto Joins Reverse Flip Parade; Eyes India IPO In 2026

Another Indian unicorn is looking to reverse flip to India. Nexus-backed Zepto is looking to join the likes of Eruditus, RazorPay, Pine Labs, and Groww in the reverse flipping queue, sources close to the company told Inc42.

But as seen in the case of PhonePe, where the tax liability was as high as $900 Mn, most of these unicorns are playing the waiting game and figuring out the best reverse flipping structure.

While Zepto’s reverse flipping structure has not yet been finalised, the startup is eyeing a 2024 date to register itself as an Indian company. The sources said the company is planning a public listing by 2026 after meeting its EBITDA profitability targets in 2024. In FY23, Zepto reported a net loss of INR 1,272.4 Cr.

As per one of the sources, Zepto is trying to flip through a share swap, where shareholders of the Singapore company will receive shares of the Indian entity, and the Singapore entity will be liquidated. However, Inc42 couldn’t get a confirmation of the ratio for the share swap, if at all one takes place. The Mumbai-based company did not respond to our questions on the reverse flipping.

For the sake of clarity, Kiranakart Technologies Private Limited is the Indian entity operating Zepto, while its Singaporean holding company is Kiranakart PTE LTD. In this case, the Singapore entity holds most of the shares of the Indian entity. Zepto’s investors get shares of the Singapore company and indirectly hold shares in the Indian company.

Reverse flipping via share swap would give shareholders of Kiranakart PTE LTD shares of Kiranakart Technologies Private Limited.

“From an Indian taxation point of view, investors are getting the shares of the Indian company for virtually nothing. But these shares will have a huge value when they are acquired. The purchase price will be zero and the tax liability will apply to the total value of the shares acquired,” according to a finance professional who was earlier a CFO at two ecommerce companies.

The quick commerce unicorn is currently valued at close to $1.4 Bn, and even though investors would acquire shares for zero, the value of each share in the company would measure up to this valuation.

Investors could potentially be taxed at 33%-42% for this transaction as per Indian laws, which would result in an outlay of close to $600 Mn at the highest rate of 42%.

“The tax liability will be very high, but the company is looking to take this step in pursuit of a public listing in the next two years,” the finance professional added.

Of course, there are other options available for startups looking to redomicile to India. For instance, Groww is also looking at the amalgamation route to merge the foreign entity with the Indian entity. It’s not yet clear whether Zepto will opt for this route or go for a share swap.

As we will see, there are challenges in both the approaches, and companies, in particular, are looking to avoid a large tax outlay while reverse flipping.

Taxes & Reverse Flipping

In the case of reverse flipping via share swaps, capital gains tax is applicable on the difference in the value of shares of the Indian entity at the time of reverse flipping, and the cost of acquisition of the shares of the foreign entity.

But the cost of acquisition of shares and the valuation of the Indian entity are highly contested matters between the businesses and tax authorities.

For instance, in the case of telecom giant Vodafone, the Indian government slapped a tax notice, which led to a litigation that took over 13 years to be settled in favour of the company.

“In Vodafone’s case, the company’s views on the valuation and share acquisition price differed from the government’s view. Ideally any company looking to reverse flip needs to align its views with the government. Failing which, there could be a big tax liability and potentially prolonged litigation,” said the source quoted above added.

If the company attracts the taxman’s attention for unpaid taxes on this transaction, the government is likely to extract its pound of flesh by imposing steep penalties and overdue interest on the tax amounts. In some cases, the penalty could be as high as 3X the actual tax obligation.

For instance, towards the end, the potential tax exposure for Vodafone had grown to over INR 20,000 Cr from around INR 12,000 Cr after years of litigation. It must be noted though that Vodafone eventually won a ruling in its favour and is awaiting a settlement from the Indian government.

Besides the capital gains tax, there could be further tax implications for foreign shareholders at the time of exit from the Indian entity.

Even though the tax is applicable to investors in Zepto, indemnity clauses in the shareholders’ agreement means that the company would have to bear this cost, as we saw in the case of PhonePe. The fintech unicorn raised a big round to cover for some of the $900 Mn outlay, but it is still a hefty bill to foot.

In the case of a share swap, Zepto also stands to lose the chance to offset its accumulated losses (from the previous fiscal year) against future profits. Plus, employees with stock options would likely have to migrate to a new ESOP plan, with the vesting clock for their shares being reset to zero.

Unicorns Line Up For India Flip

Like we mentioned above, there are other ways to reverse flip, such as an in-bound merger of the two companies with the Indian entity acquiring the foreign entity.

In the case of such in-bound mergers, shareholders can claim exemptions from capital gains tax if the transaction qualifies as an ‘amalgamation’. An amalgamation essentially means there will be a single entity after the merger.

In case, the merger does not qualify as an ‘amalgamation’, capital gains tax upon cancellation of shares held by the foreign entity in the Indian entity may also be taxable in the hands of a foreign entity.

However, Zepto is veering towards the share swap option as it believes it is the fastest way to reverse flip as amalgamation procedures involve regulatory approval, one of the sources said.

For instance, Groww applied to the National Company Law Tribunal (NCLT) for an approval on amalgamation in August last year. The Bengaluru-based fintech unicorn is looking at amalgamation of its US holding company, Groww Inc, with its primary Indian entity, Billionbrains Garage Ventures Private Limited.

Razorpay is reported to be seeing whether Groww gets its approval through the amalgamation process in a reasonable time, but it could also go for a share swap like PhonePe if the NCLT approval for Groww takes a long time to come.

The experience of US-registered Groww and Razorpay is likely to differ from Singapore-registered Zepto and PhonePe. In this context, PhonePe is the example that would best apply to Zepto and LivSpace, another Singapore-registered startup looking to flip back.

Singapore has zero tax on capital gains, whereas in the US, profit from income is taxed at 21%, which is why PhonePe had to pay a huge tax bill in India. If Groww or Razorpay look to reverse flip to India under a share swap agreement, the 21% US tax liability for its investors could be offset against their Indian liability.

Zepto Eyes 2026 IPO

There are a lot of hoops that investors and companies have to jump through for reverse flipping and these barriers persist despite longtime demands from several investors and key stakeholders of the startup ecosystem.

The reverse flipping wave is fuelled largely by the Indian public listing plans for unicorns as well as the need for financial services and fintech players to streamline their shareholding and governance structure to Indian laws in the light of tighter regulations by the Reserve Bank of India.

Plus, unlike the US, the Indian stock market is currently in a bullish phase for new-age IPOs as the investor base has widened considerably over the past few years.

“Given the market conditions in India, it’s only right for ‘IPO-able’ companies to look at ways to redomicile to India. Zepto is still trying to figure out the best way that would allow it to get this process completed in 2024,” said another source close to the leadership.

Scaled-up startups are looking to capitalise on the higher liquidity and risk appetite for tech stocks in the Indian market after reassessing their IPO ambitions throughout 2022 and 2023. Ola Electric, OYO, Swiggy, Awfis, MobiKwik are some of the companies that are lining up for their stock exchange debuts in 2024. Many others are looking at a 2025 date for an IPO.

Zepto, which entered the unicorn club in 2023, saw its net loss balloon 3.35X in FY23 to INR 1,272.4 Cr. Meanwhile, revenue from operations surged 14.3X to INR 2,024.3 Cr in FY23 against expenses of INR 3,350 Cr.

However, the company did report an improvement in net profit margin from -277% to -63% in FY23, and claimed to be on track to become EBITDA positive by FY25 — just over one year from now.

“People are starting to realise that quick commerce is not only a much more concrete guarantee than people thought a year-and-a-half ago, but it’s also gonna be a much bigger category. I think there is a realisation that quick commerce has the potential to disrupt ecommerce,” said one of the sources in the company.

The source added that the momentum on the grocery side itself for quick commerce offers a much larger outcome potential than what ecommerce marketplaces are currently doing.

Reaching profitability on an EBITDA level and showing a path to net profits would be the key for Zepto’s public listing ambitions. Despite the bullishness, consumer services companies are not being afforded the long rope by the market in terms of losses.

Zomato only saw its stock price make a big rally after it reported profits in back-to-back quarters, while Swiggy is also fortifying its bottomline with revenue initiatives and job cutbacks as it prepares to go public. Zomato’s profitability has shown that losses can be overcome in this segment with focussed revenue planning.

In comparison, Zepto is the newest kid on the block and it will need to exhibit signs of profitability faster than Zomato and potentially Swiggy to get the backing from public markets.