Indian-founded but overseas-headquartered startups are charting their return to India in a trend that is reshaping the business landscape. This reversal, commonly known as ‘Reverse Flipping,’ is gaining momentum due to several compelling factors. India’s growing market potential, backed by a booming digital economy, is creating an attractive environment for businesses that initially sought opportunities abroad. Government policies, such as ‘Startup India,’ along with significant regulatory shifts—especially around round-tripping—are making it easier and more profitable for these startups to relocate their operations back home. 

 

 

Companies like Pepperfry, PhonePe, and Groww are leading the charge, having already moved their headquarters to India. Their return presents a larger movement among fintech and e-commerce firms. Startups in sectors like fintech, SaaS, and health tech are finding India’s evolving landscape more conducive to growth and innovation. Major fintech players, including Pine Labs, Meesho, Flipkart, KreditBee, and Zepto, are either in the process of shifting their headquarters or are seriously considering it. 

To understand ‘Reverse Flipping’, we need to first understand what ‘Flipping’ is. ‘Flipping’ refers to the process where an Indian entity transfers its ownership to a foreign-incorporated company, along with key assets such as intellectual property, while still retaining most of its market, personnel, and founders in India. In this arrangement, the Indian company becomes a wholly owned subsidiary of the foreign entity, with its operational activities continuing primarily within India, despite its legal and financial structure being based overseas. 

Meaning and Rise of Reverse Flipping 

The meaning of reverse-flipping is that a corporate reconstruction process takes place in a company and there is change in the legal registration of the company from one country to another. In the Indian-context, the word ‘reverse’ suggests that the entity was initially India-registered then it shifted its registration to abroad in a way that the ownership of the entity is externalized abroad but in some cases the value may or may not vest in India. The process where the corporate entity shifts its registered place of business back to India is known as reverse-flipping. 

The rise of reverse-flipping in India has been stated by the Economic Survey 2022-23 as it delineates the probable reasons behind such steps; governmental schemes and reforms, easing of regulations, investor-friendly environment, “greater access to capital within the prevalent private equity and venture capital setup”. The increasing popularity of adopting the process of internalization is due to change in the picture of India as a creditor-friendly jurisdiction from the eyes of the founders and management of companies. The amount of value our nation has been creating in terms of credit and increased investment is visible in the form of direct brand relationships with the customer base and which in-turn exemplifies the attractiveness of future-exit option given to the investors via an IPO. The major reason behind this move is to be better equipped with investment strategy in terms of IPO and going public in the next couple of years. 

Right Structure for the Reverse Flip 

 

 

Choosing the right structure for a reverse flip is a critical decision for startups, as it has far-reaching implications on legal, regulatory, and tax matters across jurisdictions. A reverse flip essentially involves the process of bringing a foreign-incorporated company (typically a holding company) back to India, and the structure chosen for this process must comply with the legal frameworks of both the foreign jurisdiction and India.  

1. In-Bound Merger: An in-bound merger is often considered the most straightforward structure for a reverse flip. Here is how it works: 

• The foreign entity merges into the Indian company. 

• The Indian entity takes ownership and control of the foreign entity’s assets, operations, and liabilities. 

• As part of the merger, the shareholders of the foreign company are compensated with shares of the Indian company. 

This method is simpler because it consolidates ownership under a single Indian entity and streamlines operations.  

2. Share Swap Arrangement: Another option is a share swap arrangement, which offers a different approach to achieve the same goal: 

• Shareholders of the foreign entity exchange their shares for shares in the Indian company. 

• The foreign entity remains, but control shifts to the Indian entity, as its shareholders now hold ownership in the Indian company. 

While a share swap is less disruptive than a full merger, it introduces other complexities. The foreign entity continues to exist, which means it might still be subject to regulations and taxes in its original jurisdiction. However, the Indian company becomes the controlling entity, which can streamline management and decision-making while keeping foreign operations intact. 

Interplay of Reverse Flipping with other Legislations 

1. Companies Act, 2013

According to Sections 230 and 234 of the Companies Act, 2013, companies planning a merger need to submit a detailed merger plan, called a ‘scheme,’ to the NCLT. The NCLT will then review the scheme and may require meetings with the company’s members and creditors. It also sends notices to other regulatory bodies, like the Registrar of Companies and the Regional Director, for their input. If there are any objections or feedback, the NCLT will evaluate them before granting approval.  

2. Income Tax Act, 1961

If a reverse flip is done through an in-bound merger, shareholders of the foreign company can avoid capital gains tax, if the merger qualifies as an ‘amalgamation’ under India’s Income Tax Act, 1961. Under this Act, “transfer” includes giving up or cancelling capital assets. If the reverse flip is a cross-border merger that does not meet the conditions for tax exemption, the cancellation of the foreign entity’s shares could be taxed as capital gains. 

However, if the reverse flip is done through a share swap—where foreign shareholders exchange their shares in the foreign entity for shares in the Indian entity—those foreign shareholders will be taxed in India. They will owe tax on the difference between the value of the Indian shares at the time of the reverse flip and the original cost of their shares in the foreign entity. 

3. Compliance with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 

In-bound mergers are primarily governed by Chapter XV of the Companies Act, 2013, along with the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. Under Rule 25A of these rules, obtaining prior approval from the RBI is mandatory for in-bound mergers. The RBI has issued the Cross Border Regulations, which state that if a merger follows these regulations, it is considered automatically approved by the RBI, eliminating the need for separate RBI approval. However, for any other cross-border merger transactions that do not fall under these regulations, prior approval from the RBI will be required. 

5. Press Note 3 (2020 Series) Approvals 

A reverse flip involving foreign investors may trigger the requirement for prior approval from the Government of India under Press Note 3 (PN3). According to PN3, approval is mandatory when the investing entity is based in a country that shares land borders with India or if the beneficial owner of an investment in India is in or is a citizen of any such neighbouring country. 

Therefore, it is essential for companies considering a reverse flip to thoroughly assess whether PN3 applies to any of their foreign retail or institutional shareholders, and to plan accordingly by seeking the necessary approvals in advance. 

Conclusion 

 

In conclusion, as valuations in the Indian market become increasingly attractive, many entrepreneurs are recognizing the advantages of returning their business domicile to India, particularly in markets where they have strong customer relationships. This trend of reverse flipping, especially among fintech companies, holds significant economic benefits for India, including increased job creation and further development of the startup ecosystem. However, given the complexities of operating across multiple jurisdictions, companies must carefully evaluate various interconnected legal, regulatory, and tax factors before proceeding with internalization. A well-planned approach will ensure that the benefits of shifting back to India outweigh the challenges and lead to a successful transition.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments and is not guaranteed to be accurate, complete, or up-to-date. Readers should consult a qualified legal professional before taking any action based on the information provided. The authors and publishers disclaim any liability for any loss or damage incurred as a result of reliance on this article. This article does not create an attorney-client relationship.