The Prodigious Son Returns: Why Indian Startups Are Coming Back To Town

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So, you've started a startup in India. You've got a great product and service. And the startup is growing and you're getting investors. Do you continue to set up shop in India itself? Or do you set up a base in a foreign country? Usually, that was what would happen. Indian companies would go to countries, like Singapore or the US.

But, there's been an interesting trend afoot: Indian companies, that were domiciled in foreign countries, may be opting to return to their home countries. There's even a term for it: reverse-flipping. What companies are returning to their roots?

Take?Groww, for example. According to Groww CEO Lalit Keshre, as of March 2024, the company completed its domicile transition from the US back to India. Or Pine Labs, which was said to have received approval from Singapore in May 2024 to shift its operations to India. Or think of PhonePe, which moved its domicile from Singapore to India in October 2022. Plus, Razorpay's?parent entity, which was registered in the US, is said to be looking to bring its Indian units under a single local holding company and shift its headquarters back to India.

But, why could this be happening?

Could this be due to an aspiration to list on Indian bourses in the coming years? Are there certain regulations that may lead them from the US to India?

Could it be about personal taxes? Could it be about CapTable structuring?

According to Mozammil Ahmad, lawyer and former Strategy Manager - Fox & Mandal, "Recently, there has been a rise in reverse-flipping into India for a plethora of reasons, such as easy access to capital from private equity and venture capital, change in rules regarding round-tripping (structuring to avoid paying taxes and laundering money) and the growing maturity of the Indian capital market."

Ahmad adds, "The Government of India has implemented various initiatives for startups, such as the Fund of Funds for Startups scheme (meeting funding requirements), regulatory reforms, easing public procurements and heightened intellectual property protection".

"India's appeal for reverse-flipping grows with increased investment, broader customer base and future exit options such as Initial Public Offering prospects. The country has emerged as the global leader in the number of IPOs year-to-date in 2023. The third quarter of 2023 saw 21 IPOs in the Indian market, compared to just 4 in the same quarter of 2022. By moving their parent entities to India, FinTech companies may be able to tap into the growing investor interest and demand for Indian tech & benefit from favourable valuation and listing norms in Indian stock exchanges", states Ahmad.

Groww and Razorpay are said to trace their roots to Silicon Valley's Y Combinator programme, which is why they may have incorporated in the US. Y Combinator is said to have a requirement to invest only in US-domiciled companies.

It's said that Razorpay may be contemplating a merger at a lower valuation than the $7.5 billion ascribed to it in 2021.

And while Razorpay is originally an Indian company, once it establishes a presence in the US, it becomes subject to US regulatory frameworks. Could it be that Razorpay leaving the US and determining its own valuation may not be only at their discretion? There's said to be a US regulatory body called CFIUS (Committee on Foreign Investment in the United States) that plays a role in overseeing and approving transactions involving foreign entities and US businesses.

And when a company, like Razorpay, decides to leave or change its corporate structure, the authorities are involved. Sure, companies typically have autonomy in determining their own valuations, but a body, like CFIUS, may scrutinize the financial aspects to ensure they align with industry standards and there aren't any risks. Some worry that Razorpay's proposed valuation of $3 billion - $4 billion may raise concerns amongst external advisors.

And the move back to India is said to incur a tax payment of around $300 million in the US, where Razorpay is currently domiciled. Plus, there's a clearance that Razorpay would seek from the NCLT (National Company Law Tribunal). NCLT approval is said to have a timeline of 6 to 9 months.

Razorpay would have to seek clearance from the NCLT to merge its American holding company with its India unit. And Groww had obtained board approval to merge its US holding company Groww Inc with its Indian entity Billionbrains Garage Ventures.

Are there more progressive laws to facilitate the return of startups to India? Are ESOPs affected when a reverse-flip takes place? Is there a reset to zero vesting, where employees lose the progress they've made in owning company stocks?

Ahmad remarks, "The Employee Stock Ownership Plan of Indian companies would get affected when there is a relocation of a company’s base. There must be a minimum period of 1 year from the grant of the option of an ESOP and its vesting. In the context of a reverse-flip, entities may face objections from their employees who will be forced to wait for an additional period of 1 year and will not be able to exercise their vested options for such an additional period until the statutory requirements are met, upon the migration of the ESOP plan into India".

Has the Indian stock market become an attractive avenue for companies to go public? In the US, are Indian companies categorized as small-cap? If so, does the Indian IPO climate present more favourable opportunities for homegrown brands? And has the Indian government actively encouraged local startups and businesses to redomicile to India? Initiatives like setting up the International Financial Services Centre (IFSC) in GIFT City aim to create a conducive environment for businesses to thrive.

As these Indian companies, like Groww, Razorpay and Pine Labs, shift their domicile back to India, it might showcase what it's like to navigate all those financial intricacies and regulatory changes.?

"Given the favourable IPO climate, broader customer base and increased investment potential, more FinTechs and other companies domiciled abroad may follow this trend of reverse-flipping", quips Ahmad.

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