India’s Regulatory Reforms to Accelerate Homecoming of IPO-Bound Startups

India’s Regulatory Reforms to Accelerate Homecoming of IPO-Bound Startups

Sub: Eco

Sec: Capital Market

• Streamlined Reverse Flip Merger Process:
  • Reserve Bank of India (RBI) has scrapped a time-consuming compliance step for foreign-based companies performing a “reverse flip” merger with a domestic subsidiary.
  • The process time has been reduced from 12-18 months to approximately 3-4 months, enhancing efficiency and encouraging startups to list in India.
• Impact on Indian Startups:
  • Dozens of Indian startups previously based abroad for better access to capital and favorable tax conditions are now queuing to return home.
  • Financial hubs such as the United States and Singapore are witnessing a shift as startups prefer India’s listing prospects over maintaining dual listings, which are not permitted in India.
• Notable Startups in Advanced Stages:
  • Razorpay, Pine Labs, and KreditBee are in advanced stages of completing the reverse flip merger.
  • Zepto, Eruditus, and InMobi are also preparing to finish the merger process in the coming months to pursue eventual IPOs.
• Advantages of Listing in India:
  • Experts stated, “India is a home market and a place where everybody knows and understands us. From a listing perspective, it makes sense to be in India.”
  • IPO Prospects: Listing in India offers investors a potentially more lucrative exit avenue and aligns with the strong appetite for tech stocks among Indian public and retail investors.
• Regulatory Support and Compliance:
  • Experts highlighted that the streamlined merger process facilitates swift and efficient scheme approvals without court intervention.
  • Previous Challenges: Before the regulatory change, companies like PhonePe and Groww faced lengthy and costly reverse flip processes, with PhonePe paying $1 billion in capital gains taxes and Groww taking several years to complete the merger.
• IPO Market Growth in India:
  • IPOs by Startups: In the first nine months of this year, IPOs by startups such as Ola Electric and FirstCry have raised $9.17 billion, up from $4.68 billion in the same period last year (LSEG data).
  • This surge positions India as a rare bright spot for equity capital raising in the Asia-Pacific region.
• Government and Regulatory Stance:
  • Commerce Minister Piyush Goyal mentioned that startups shifting back to India will have to pay capital gains taxes, emphasizing that the motive is financial gain through higher valuations in India.
  • Regulatory Preference: India’s central bank and other regulators prefer local firms over foreign counterparts for key operational licenses, enhancing the attractiveness of staying within India’s regulatory framework.
• Future Outlook and Opportunities:
  • Experts also noted that the regulatory changes will encourage even more companies to undertake reverse flips, further boosting the IPO ecosystem in India.
  • Investment Opportunities: With easier access to the IPO market, startups can leverage India’s growing economic landscape to achieve better growth and valuation outcomes.

Reverse Flipping

Reverse Flipping refers to overseas start-ups relocating their domicile to India and opting to list on Indian stock exchanges. This trend is driven by various economic, market, and policy-based incentives.

• Key aspects:
  • Higher Valuation Potential: Start-ups perceive India’s large and growing economy as offering opportunities for higher exit valuations.
  • Access to Venture Capital: India has deeper pools of venture capital, helping businesses secure the funding needed for expansion.
  • Favorable Tax Regimes: Policies provide tax benefits that make it lucrative for companies to establish their base in India.
  • Improved Intellectual Property Protection: India now offers better protection for intellectual property rights, making it safer to innovate.
  • Young and Educated Population: India’s demographic advantage adds to the country’s attractiveness for entrepreneurship.
  • Government Policies: Initiatives like Start-Up India and Make in India provide favorable support systems for foreign start-ups.

Govt. recognized reverse flipping as a growing trend and recommended measures to accelerate the process.

• Proposed Simplifications:
  • Tax vacations.
  • Reforms in Employee Stock Option Plan (ESOP) taxation.
  • Easing capital movement.
  • Reducing tax layers to facilitate easier operations.

What is Flipping?

Flipping refers to an Indian company transforming into a 100% subsidiary of a foreign entity. This involves the relocation of headquarters overseas along with the transfer of intellectual property (IP) and assets. In this process, the Indian start-up effectively becomes owned by the foreign entity, and the founders retain ownership by swapping shares.

• Impact of Flipping on India:
  • Brain Drain: The relocation leads to the loss of entrepreneurial talent from India.
  • Loss of Value Creation: Flipping results in value being created in foreign jurisdictions instead of benefiting the Indian economy.
  • Intellectual Property and Tax Revenue Loss: India loses valuable intellectual property rights and potential tax revenues when companies move overseas.