A striking trend that is reshaping the Indian start-up landscape is ‘reverse flipping’. Several companies are making the bold move to reverse flip their headquarters back to India. This process involves relocating assets, operations, and intellectual property rights from foreign bases to a new entity in India. Noteworthy examples include PhonePe, Pepperfry, and Groww, all of which have successfully completed their transitions. Start-ups like Razorpay are also in the midst of this significant shift and sources reveal the same for Zepto.
But what’s driving this wave of reverse flipping? In an exclusive conversation with Business Today, Siddarth Pai, Founding Partner at 3one4 Capital and Co-Chair of the Regulatory Affairs Committee at the Indian Venture and Alternate Capital Association (IVCA), sheds light on this phenomenon, which IVCA aptly terms ‘Bharat Vapsi’.
Edited excerpts from the interview:
BT: How does reverse flipping benefit start-ups in terms of cost structures, regulatory advantages, or access to talent?
SP: The dislocation between the headquarters (HQ) and the theatre of operations has long been an issue for Indian start-ups who flipped. The majority, if not all, of their business, customers, employees and management are in India, while their HQ is either in Singapore or in the US. The lack of substance in foreign countries is concerning to authorities, with global compacts such as the Organization for Economic Cooperation and Development (OECD) Base erosion and profit shifting (BEPS) trying to plug these issues.
A simplified structure which reflects the business is easier to manage and results in less friction with the authorities, tax and otherwise. Talent has always been in India and not many have hired global talent.
BT: How do you think this shift will influence investor sentiment—both locally and globally—toward Indian start-ups?
SP: The India opportunity is a function of the country, not the domicile of the start-up. The reluctance global investors felt in investing in start-ups domiciled in India has largely gone away. The Indian Income tax act, 1961 made it abundantly clear that any investor in a company deriving substantial business from India is liable to pay in India during any exit, regardless of where the company is domiciled. The tax concessions given to Mauritius, etc have been terminated. The Foreign Exchange Management Act (FEMA) has largely liberalised FDI in sectors that start-ups operate in.
Given the fact that the Indian stock markets are seeing Rs 23,000 crore of (Systematic Investment Plan (SIPs) a month and given how IPOs have fared, value creation is much higher in India than other markets. These start-ups are household names and the inability of the Indian public to participate in their IPOs due to them being overseas entities is also a major reason for the shift back (to India).
BT: Do you believe the Indian government’s policies and infrastructure can adequately support this wave of relocations? What improvements would you like to see?
SP: The International Financial Services Centres Authority (IFSCA) published a report titled ‘Onshoring Indian innovation to GIFT IFSC’ which highlighted the policy changes needed to make relocation easier. Broadly speaking, they are:
1. Tax-free redomicile process in a time bound, objective manner 2. Greater flexibility in the range of instruments a start-up can issue 3. Easier exit norms for mergers and acquisitions (M&A), including escrows, indemnity payments, and deferred consideration 4. Stronger corporate law system with dedicated courts, like the way Delaware has.
The recent changes by MCA are a step in the right direction, but they need to be strongly timely, with the details required by the MCA RD to be given in advance. Furthermore the RBI clearance should have objective details that will be asked so that companies know what to expect well in advance
BT: How many start-ups do you think will make a comeback to India? What’s the market scenario?
SP: It is expected that at least 90% of India’s foreign domiciled Unicorns will flip back to India, in addition to around 4k-5k funded start-ups. The number of non-funded start-ups may be larger.