US$1 billion .
That’s how much Walmart paid in taxes to redomicile its fintech company, PhonePe, from Singapore to India in 2023.This process is known as a reverse flip, and it is trending among Indian startups looking to list on domestic stock exchanges.
Photo credit: PhonePe
Despite facing sizable tax liabilities, at least six startups that mainly operate in India are currently considering relocating their headquarters there.Meanwhile, nearly 20 unicorns and their investors have inquired about reverse flipping.
So do companies need to be headquartered in India for an IPO?
The listing rules do not say so.However, Rahul Charkha , a partner at Economic Laws Practice, tells Tech in Asia that “a company contemplating to list on Indian stock exchanges should have a separate legal entity in India.”
As the country’s IPO market booms , startups are opting to reverse flip to seize opportunities in the domestic market, leverage local advantages, and drive value creation.
The combined value of shares listed on India’s exchanges recently reached US$4.3 trillion , making the country the fourth-largest equity market globally and positioning it as “an alternative to China.”
Changing attitudes Among the companies eyeing an IPO in India is fintech major Razorpay, which aims to do so in the next two years.
“The Indian market has shown its strength in the past 10 years, which gives us the confidence to list here,” says Razorpay co-founder and CEO Harshil Mathur .
New-age tech companies like Zomato and PolicyBazaar, which have recently debuted on the country’s stock exchange, have achieved profitability only after listing, demonstrating the strength of their business models and the potential of the India market.
Beauty ecommerce platform Nykaa, which was already profitable before its IPO in November 2021, has seen its profit nearly double year on year for the December quarter in 2023.
This was not the case a decade ago.“Ten years back, there was a notion that if you’re an unprofitable startup, you can’t go public in India,” says Ashwin Damera .His company, edtech player Eruditus, is “considering domiciling back to India from Singapore.”
To list, companies used to look for alternative locations such as the US, which has the most tech investor expertise and deepest pools of capital globally.
But times have changed.
The thriving stock market is providing an opportunity for founders to achieve better value for their startups by listing on India’s bourses.
There are also more domestic VCs focused exclusively on early-stage startups.According to data sourced from Venture Intelligence, there are at least 11 such VCs, and they collectively invested in 97 new portfolio startups in 2023 alone.
The growth of India’s early-stage ecosystem has also diminished the significance of Silicon Valley institutions.
At least two companies in the chart above, including unicorns Razorpay and Groww, had US-based accelerator Y Combinator as an early backer.
Although Y Combinator is recognized as a global leader in backing early-stage startups, it recently faced allegations that it was pushing Indian startups to register outside the country.The accelerator has rejected these claims.
Nevertheless, some have admonished Y Combinator for this, saying that it “shouldn’t force Indian companies to flip to US/Singapore structures.”
This shift means that Indian startups aiming for IPOs are returning to their home country.Since the majority of these startups operate exclusively within India, establishing a local headquarters brings their management significantly closer to the market.
See also: India’s new breed of investment tech startups gains steam, but challenges persist
The motivation to reverse flip often comes from the founders, who were either born in India or have Indian ethnicity.“It is rooted in their desire to reconnect with their home country and tap into the potential advantages it offers,” says Salman Waris , an India-based technology lawyer who founded advisory company TechLegis.
Tax implications The two most common methods of reverse flipping are share swaps and inbound mergers.Each approach has its own set of advantages and caveats.
In share swaps, shareholders of the overseas entity exchange their stake for stocks in the Indian entity.
This results in both foreign and Indian shareholders holding stakes in the domestic company.Conversely, in a merger, the foreign company ceases to exist.
The Razorpay team / Photo credit: Razorpay
As shown by PhonePe’s example, reverse flipping can lead to a substantial tax liability , depending on a company’s valuation, the deal structure, and the legal and financial details.
Razorpay, which is planning a US$7.5 billion merger between its US-registered parent and India arm, may have to shell out US$250 million to US$300 million in taxes for its homecoming.
A reduced valuation would result in a smaller tax liability, but a hefty cut might not pass regulatory muster.
For example, if Razorpay reports a huge decrease in its valuation and a smaller tax liability, this would not be consistent with the company’s steady growth in the past few years.This would also attract the attention of US authorities, which get tax benefits as well under certain structures when startups reverse flip to India.
Indeed, there seems to be no respite from taxes in sight.
Piyush Goyal, India’s commerce minister, recently said that startups looking to come back to the country will have to bear the tax liabilities.
He added that these companies went outside for their own “selfishness” but now want to list in India “because here’s where you get the valuations.”
Reverse flipping also has an impact on investors.For example, a US investor who backs the US entity of a startup that eventually reverse flips to India would have an added degree of separation from their investment.
While the ownership stake remains intact, the investor will now have greater exposure to India’s regulatory environment, which is different from the US, explains Waris of TechLegis.
Takeaways for SEA While there are numerous parallels between India and Southeast Asia in the ecommerce, fintech, and edtech sectors, the phenomenon of reverse flipping has yet to gain traction in the latter.
Part of this has to do with how large India’s domestic market is.This vastness means that startups can thrive by focusing solely on the country for growth and fundraising.
That’s not the case for startups in Southeast Asia, though, except perhaps for those in Indonesia.
Jakarta’s central business district / Photo credit: FarisFitrianto / Shutterstock
Many come to Singapore to raise funds due to its status as the region’s financial hub.Even Indonesian companies, including Bukalapak and Traveloka, have their holding companies registered in the city-state, where capital gains tax is nil.
“Most term sheets issued by regional VCs often state that setting up a Singapore holding company is a prerequisite if a startup intends to raise an equity round from them,” says Joel Shen , who heads the Asian technology and VC practice for law firm Withers.
See also: 8 takeaways from Zomato’s investor deck for its $1.3b IPO
However, Indonesia has its own pool of local investors.For companies focused on the domestic market, it may make more sense to rely on investors in Jakarta and raise funds there.
Shen thinks that while “there’s clearly money in Indonesia,” there’s only “a lukewarm interest in tech for now.”
The country’s tech ecosystem is also still fairly young compared to India’s.
As such, it is still too early to predict if startups would be ready to flip from Singapore to Indonesia when the funding environment improves..
