Unicorn ‘Desh Wapsi’ – Reverse Flipping Is The New Startup Sensation

As the Indian government tightened its regulatory noose around Indian crypto startups last October, many homegrown players packed their bags and moved overseas in search of safer tax havens, mimicking what many big-ticket Indian startups had previously done. 

Indian unicorns have been known to move their bases to Singapore, the UAE and the US, allured by their lower corporate tax rate regimes, zero taxes on capital gains, lesser regulations and easier compliances.

What these companies do is that they first get headquartered overseas and then operate their wholly-owned subsidiaries in India. This practice is also known as flipping.

As per Inc42, as many as 20 out of the total 108 Indian unicorns are headquartered outside the country. Of these, nearly 75% are based in the US.

However, an interesting trend has recently started to emerge among big names in the Indian startup ecosystem. What many startup executives are mulling is reverse flipping. In simple terms, they plan to move their headquarters back to India.

Why Wary Of The India Move?

It all began with PhonePe shifting its headquarters to India late last year, eyeing a prospective public listing in the country. The move was strife with challenges as the digital payments giant hived off from ecommerce major Flipkart to become a separate entity.

Curiously, the move also came close on the heels of the reports that Flipkart was looking to move base to India, again over IPO plans.

Now, following their footsteps, fintech giant Razorpay and investment tech unicorn Groww (as reported by Entrackr), both backed by Y Combinator, are planning to move their respective headquarters to India.

It is pertinent to note that Y-Combinator is well known for ‘forcing’ its portfolio startups to shift their bases to the US. As a result, Indian startups and investors have been at loggerheads with the US-based accelerator for a while, demanding waiver of such mandates.

Earlier this year, PhonePe CEO Sameer Nigam claimed that 20 Indian unicorns were willing to relocate to India if regulations were eased.

However, what are these cumbersome regulations, which many find difficult to adhere to?

The biggest issue seems to be India’s complicated tax regime. A case in point is PhonePe’s recent move to India, which has raked up a tax bill of $900 Mn for its investors. 

Another issue seems to be that moving the base to India entails setting the employee stock option plans (ESOPs) vesting clock back to zero, leaving many in peril. Further, India’s ESOPs taxation regime is another bone of contention.

In addition, the country treats moving domicile to India as a restructuring event, putting startups, a majority of which are loss-making, at the risk of losing millions of dollars, unable to offset their previous losses against profits.

Moving on, another hurdle seems to be the country’s infamous tax and tax litigation system, which many startup cofounders cite as the primary reason for registering overseas. Heavy documentation and other compliance issues also become a massive challenge for startups looking to move back home.

The willingness of startups to return home hit headlines earlier this year after the collapse of Silicon Valley Bank (SVB), after their funds got stuck in the bank in the aftermath of the fracas. 

The situation was especially dire for Y-Combinator-backed ventures.

“So you have a bunch of foreign investors who tell our best young startups that they will invest in their companies provided they shift their company domicile overseas. The reason being that they do not want to be subject to Indian laws, taxes and government rules except to the minimum extent required (because) they say they do not trust the Indian government and the legal system,” ace investor and executive vice-chairman of Info Edge Sanjeev Bhikchandani told Inc42 earlier.

According to an Inc42 survey conducted in March this year, over 77% venture capital funds and 65% angels said that founders will reconsider overseas registration in the aftermath of SVB collapse. 

While many startups did register on US soil, they now seem to have been caught in the line of fire as moving their domicile to India would now result in them coughing up millions of dollars in taxes to the Indian public exchequer.

Amid all this, the centre seems to have woken up from its slumber and appears to be working on different aspects to encourage Indian startups to come back to the country. 

Indian Govt Becomes The Pathfinder

Realising the magnitude of the issue, Economic Survey 2022-23, for the first time, called for taking steps to ease welcoming Indian startups back home. It suggested a series of six steps to accelerate reverse flipping through simplification of ESOPs taxation and streamlining multiple layers of tax and tax litigation uncertainty.

It also suggested easing the process for the grant of ‘inter-ministerial board (IMB) certification’ and simplifying procedures for capital flows via lesser restrictions on the inflow and outflow of capital. 

The Economic survey also sought to improve collaboration with startups to establish best practices and improve India’s startup incubation and funding landscape in emerging areas. 

But, a bigger boost came in March 2023 after the International Financial Services Centres Authority (IFSCA) formed a panel to encourage reverse flipping of Indian startups.

The committee has been tasked with identifying challenges facing local startups based abroad and recommending measures to spur the development of GIFT City and turn it into a global fintech hub. 

As of now, the dichotomy of having one foot in India and another one abroad seems to have landed these startups in uncertain waters. 

Given that reverse flipping seems to be the buzzword that has occupied the psyche of Indian unicorn executives, it remains to be seen as to what would entice them to come home and write the next chapter of India’s growth story.