Reverse Flipping: Reasons & Ramifications

Several Indian startups that expanded internationally are contemplating relocating their headquarters back to India. PhonePe, a fintech company owned by Walmart, officially shifted its domicile from Singapore to India in September 2022. Similarly, other startups like Razorpay and Groww are also exploring the possibility of moving their parent entities to India, a practice commonly referred to as 'reverse flipping,' particularly in anticipation of future listings, especially within the central bank-regulated fintech sector. Let's examine this trend more closely.

Why Are Startups Opting for a Reverse Flip?
Razorpay
Groww
Pine Labs and Others
At a Critical Juncture

Why Are Startups Opting for a Reverse Flip?

The motivation behind this trend raises questions: Why are startups opting for a reverse flip?

The decision to relocate the holding company to India, despite potential challenges like substantial tax implications, stems from various factors, particularly within the fintech sector. As regulatory frameworks tighten globally for fintech, companies are considering returning to India. Dhiresh Bansal from Meesho acknowledged this trend, stating that out of the 100-plus Indian unicorns, over 20 are currently incorporated outside India. The deliberation centers on whether continued incorporation outside India makes sense or if it's time for a homecoming.

Jitesh Agarwal, the founder of Treelife, a law and finance consultancy, highlights the maturation of the startup environment in India. He notes the presence of a significant untapped pool of domestic retail investors eager to invest in promising emerging companies. Additionally, government initiatives have streamlined the path for startups to go public, making the prospect of a reverse flip more attractive.

The Indian government has been actively encouraging companies to consider Gujarat's GIFT City as an alternative to foreign destinations. The International Financial Services Centres Authority (IFSCA) established an expert committee to outline a roadmap for 'Onshoring the Indian innovation to GIFT IFSC,' aiming to position GIFT City as the preferred location for startups contemplating a reverse flip.

The Economic Survey of 2023 emphasized the importance of encouraging Indian startups to relocate their parent entities to India. The growing trend of reverse flipping reflects confidence in India's potential as a global startup hub. Despite existing challenges, the long-term benefits of tapping into the domestic market and leveraging the strengthened startup ecosystem are compelling many startups to consider a return home, as expressed by Jitesh Agarwal in his article for BusinessLine.

Let's delve into the specifics.

Razorpay

Razorpay, headquartered in Bengaluru with a valuation of $7.5 billion, previously shifted its domicile to the US to facilitate fundraising from Y Combinator. A source familiar with the matter disclosed in May of the previous year, "They have initiated the initial phase of a multi-layered process to repatriate its parent entity to India. While it will require time and a substantial financial investment, both the management and board are enthusiastic about the move. This strategic decision aligns well with the stringent regulatory landscape in the financial services sector."

The anonymous source added that once Razorpay's parent entity is successfully brought back to India, the payment firm may explore the possibility of an initial public offering (IPO) listing. According to another report by the Economic Times (ET), the reverse flip could entail a tax payment ranging from $250-300 million in the United States.

Contradicting reports emerged in September when Rahul Kothari, Chief Business Officer at Razorpay, informed Financial Express that there were no immediate plans for a reverse flip. "Conversations on this matter predominantly center on taxation and legal considerations. Although there are various possibilities, a definitive plan has not been established at this time," he expressed.

In a September interview with Business Today, Shashank Kumar, founder and managing director of Razorpay, expressed the company's optimism about India's burgeoning fintech landscape, emphasizing its enthusiasm for Unified Payments Interface (UPI), neo-banking, and credit. Kumar emphasized Razorpay's commitment to simplifying processes for businesses, particularly as digital commerce gains traction among customers, and highlighted the significance of building trust, especially in tier 2 and 3 markets.

Groww

Since May of the previous year, there have been circulating reports indicating that Groww, the comprehensive financial services platform, is contemplating a shift of its legal jurisdiction from the United States to India. According to an ET report in November, the wealth management company submitted an application to the National Company Law Tribunal (NCLT) seeking approval for a cross-country merger involving its Indian subsidiary, Billionbrains Garage Ventures, and the U.S.-based holding firm, Groww Inc.

The report detailed that Groww was required to obtain clearances from the Karnataka tax department, the Reserve Bank of India (RBI), and other relevant sectoral regulators as part of the proposed merger process.

Pine Labs and Others

In the evolving landscape, Pine Labs, a payments firm, is now considering relocating its headquarters to India, adding to the growing list of companies exploring this option. According to sources cited by ET, the company might seek board approval for this strategic move in the current quarter, aiming to shift its parent entity from Singapore. With a current valuation of $5 billion, Pine Labs will initiate the necessary regulatory filings once the board provides the green light.

Addressing this potential shift in domicile, Pine Labs CEO Amrish Rau emphasized, “The decision (of shifting domicile) should not be based on valuations or taxation... It should be on whether the technology built is for global or domestic markets.  And this is the ongoing exploration currently taking place at Pine Labs. Based on those outcomes, we will decide on the best domicile for the company," as stated in an interview with ET in early 2023.

Additionally, there are reports suggesting that other companies, such as online shopping platform Meesho and B2B eCommerce firm Udaan, are also contemplating plans to relocate their holding companies back to India. Udaan, in particular, is said to be gearing up for a public listing within the next year or so, as reported by ET.

Insiders familiar with Meesho's strategic considerations revealed that the eCommerce firm is currently deliberating on the optimal course of action, recognizing its distinction as an eCommerce entity compared to its counterparts like Razorpay and Groww, which fall under regulated categories. Meesho operates in India under the entity Fashnear Technologies, while its parent company in the United States is Meesho Inc.

At a Critical Juncture

In the realm of startups contemplating a return, two prevalent approaches involve share swaps and inbound mergers. In a share swap, shareholders of the overseas entity exchange their shares with those of the Indian entity, resulting in both foreign and Indian shareholders holding stakes in the domestic company. Conversely, in an inbound or cross-border merger, the foreign company ceases to exist, as highlighted by legal experts.

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