Reverse flipping - Time to head home ?

In recent years, a new trend has emerged in the business landscape (especially among startups) – the “reverse flipping” / “flipping back” of companies to India. This phenomenon characterized by foreign companies reincorporating themselves as Indian entities, is gaining momentum as businesses seek to capitalize on the myriad opportunities offered by the Indian market.

Reverse flipping / Flipping back involves a company changing its domicile to another Country with a more favorable regulatory and tax environment.

One of the primary drivers of reverse flipping to India is the country’s rapidly growing economy and burgeoning consumer market. With a population of around 1.4 billion and a larger section of middle class, India offers immense potential for businesses across various sectors, from technology and healthcare to consumer goods and manufacturing.

By establishing a presence in India, foreign companies gain access to a vast and dynamic market? enabling them to expand their customer base and drive their growth. Additionally, India’s strategic location and robust infrastructure make it an attractive destination for companies looking to establish a foot hold in the Asian market.

Factors driving Reverse Flipping:

Regulatory reforms : Indian government’s initiatives to promote Ease of doing business and attract foreign investment have bolstered investor confidence in the Country’s business environment. Reforms such as the introduction of Goods and Services Tax (GST), liberalization of Foreign Direct Investment (FDI) policies and measures to streamline regulatory processes have made India a more attractive destination for foreign companies seeking to establish or expand their presence in the Country.

Listing of microcap shares : Indian government has implemented various measures to facilitate the listing process for microcap shares in India. These include relaxation of listing requirements, streamlined approval process for IPOs (Initial Public Offers) and FPOs (Follow-on Public Offers) by reducing the time and paperwork required for listing, establishment of separate trading platform to cater specifically to the needs of microcap and start up companies, easier access to capital by establishing Startup India program and various funding schemes.

Innovation Ecosystem : India has a vibrant innovation ecosystem with a burgeoning startup culture, incubators. Accelerators and research institutions. Companies see India as a source of innovation and creativity and establishing a presence in the country allows them to tap into the eco system.

Key tax law changes promoting foreign investments : Reduction in Corporate tax rate from 30% to 22%, abolition of Dividend Distribution Tax (DDT) shifting the tax burden from companies to shareholders, streamlining of taxation for Foreign Portfolio Investors (FPIs), Tax holiday for startups, exemption from Minimum Alternate Tax (MAT), introduction of Advance Pricing Agreements (APAs) etc. have played a significant role in attracting the companies to India.

Apart from the above, the factors such as significant infrastructure development, access to low-cost resources, skilled workforce, robust economic growth, market potential and strategic location have also contributed to the reverse flipping.

Structuring a reverse flip:

Reverse flipping can be structured in two ways which are as follows:

1.?? In-bound merger : In this arrangement foreign headquarter entity merges with its Indian subsidiary entity. The assets and operations of the foreign entity are eventually owned and controlled by the Indian entity and the shareholders of the foreign entity are issued shares of the Indian entity as consideration. This arrangement would be tax neutral in India under the Income-tax Act 1961 provided all the conditions of an amalgamation / merger are satisfied.

?2.?? Share swap arrangement : In this arrangement shareholders of the foreign headquarter entity swap their shares in the foreign entity with the shares of the Indian entity. The transfer of shares in the foreign entity would be subject to capital gain tax in the hands of shareholders in India as the same would fall under the term “transfer” given in income-tax Act 1961.

Major instances of Reverse Flipping:

In recent years, several high-profile instances of reverse flipping to India have made headlines, underscoring the growing trend. Companies from diverse sectors have opted to reincorporate themselves as Indian entities to capitalize on the Country’s vast market potential and conducive business environment.

Walmart owned fintech firm PhonePe has shifted its domicile from Singapore to India in September 2022. Several other startups such as Razorpay, Pine Labs, Groww, quick commerce firm Zepto and e-commerce platform Meesho are considering moving their parent entity to India.

However, while reverse flipping offers numerous benefits, it also poses certain challenges and considerations for companies. Cultural differences, regulatory complexities and market dynamics are among the factors that companies need to navigate when establishing operations in India.

The trend of reverse flipping to India represents a strategic move by companies to unlock new growth opportunities and tap into country’s vast market potential. As India continues on its trajectory of economic growth and development, the trend is likely to gain further momentum driving increased investment and collaboration between Indian and foreign businesses.