Reverse-flipping trend showcases ease of doing business in India

For the longest time, Indian startups chose to incorporate or shift their base outside India. The reasons were many: increasing trust in the eyes of customers, eyeing foreign funding and IPO pathways, and easy access to tech partners.

But as India’s startup ecosystem strengthens, it is witnessing a new trend: reverse flipping.

At a TechSparks 2024 session, Anshul Khemuka, Partner in Khaitan and Co’s Direct Tax practice group, dove deep into the “next big thing”, and explained why Indian startups were opting to “incorporate, list, and headquarter in India”. 

Defining a startup as a nimble entity with the ability to pivot to a “dynamic and changing market”, Khemuka said incorporating a company in countries such as Singapore and the United States used to be a popular option due to the ease of doing business in those countries. 

“Even as we speak, capital convertibility is not the easiest in India. The other reason is… investors would invest only in an overseas jurisdiction rather than India, because of the Indian tax regime or the uncertainty around regulations in India,” she said.

Khemuka said reverse flipping, in which a company’s cap table is reconfigured, is an illustration of the ability of a startup to be inherently agile. She touched on the factors driving the reverse-flipping trend. India’s rise from rank 143 in the Ease of Doing Business Index to 63 in the World Bank's Doing Business Report (DBR) 2020 was a “phenomenal change”, and “the government’s been working very hard to make doing business in India a lot easier”.

She added that some of these companies were also aiming to create pathways to realise IPO aspirations by moving overseas, citing the example of Freshworks.

But listing in India has become a lot easier now. Startups raised at least $10 billion through IPOs in 2020, and the numbers were encouraging for companies to return to India, she said. 

“Another reason for a lot of fintechs to [return] to India is because the customer market is here, the brand recognition is here, versus, let's say, the US or Singapore.”

Khemuka said startups needed to understand the legal implications of a reverse flip. “It requires a lot of regulatory analysis and groundwork,” she said. She highlighted the complexity of a reverse flip under a cross-border merger from Singapore to India, stating that PhonePe had to undertake a securities exchange method.

The company’s valuation and stage of business also needs to be considered before taking a call.

Khemuka said it can take anywhere between 10 to 15 months to undertake a cross-border merger, depending on legal aspects in all jurisdictions. “You would want to balance between the desire to move immediately versus the legal implications. Costs and tasks play key roles in making a choice,” she said. 

Other methods to reverse flip include share swap or securities reconstitution, alongside liquidation of the overseas company, capital reduction, and transfer of shares.

Khemuka also explained some of the complexities involved in a cross-border merger and the nuances involved with a business transfer as options for reverse flipping. 

On challenges, she said authorities could raise questions on taxability of the compensation for cancellation of an old ESOP plan, promoter incentives, and shareholder rights alignment. There could also be complications if a company’s investors come from countries that shared a land border with India, Khemuka said.

Watch the video here: