Overseas Indian Start-ups Seeking Listing in India
- October 16, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Overseas Indian Start-ups Seeking Listing in India
Subject: Economy
Section: Capital market
Why in News?
- Overseas Indian Start-ups Seeking Listing in India: A group of start-ups set up overseas, are lobbying the Finance Ministry and SEBI to allow them to list in India.
- Regulatory Changes Required: The current regulations do not permit such companies to list in India. Any framework enabling this would necessitate changes in SEBI and FEMA norms as well as the Companies Act, 2013.
- Rationale for Listing in India: With the development of the Indian market, start-ups prefer listing in India for better brand recall, valuation premium, retail participation, and higher tax contributions to the government through Securities Transaction Tax (STT) and capital gains tax.
- Challenges of Reverse Flipping: Some start-ups are exploring reverse flipping of their holding companies, which involves a merger and potential tax implications. Compliance with various regulatory and sectoral approvals is also required.
- Government Response and SEBI’s Role: SEBI is reportedly waiting for instructions from the government. Earlier proposals to allow Indian companies to list abroad and foreign companies to list in India were rejected due to concerns about the flight of capital triggered by foreign listings.
- Industry Demands: Industry officials suggest that companies with substantial Indian connections should be allowed to list in India with the condition that the primary capital raised is spent in India and cannot be repatriated.
- Current Government Focus: The government’s focus on promoting GIFT City and other priorities in the election year has pushed this matter down its priority list.
About Securities Transaction Tax (STT)
STT is a turnover tax that applies to transactions conducted through an exchange for securities such as shares, debentures, bonds, mutual funds, government equity securities, and derivatives. The investor is obligated to pay this tax on the total sum received or paid during the transaction. STT does not apply to commodities and currency transactions or transactions conducted outside of the exchange. The rates of STT differ for delivery-based equity transactions and intra-day transactions, as well as for buying and selling securities. It was introduced in 2004 by the then finance minister P Chidambaram to reduce the evasion of capital gains tax.
About Capital Gain Tax
Capital Gain Tax is a form of tax levied on the profits arising from the sale of a ‘capital asset’. This gain is considered as income and is subject to taxation in the year in which the transfer of the capital asset occurs. Capital gains tax can be categorized as long-term or short-term, depending on the duration of the asset’s holding period.
Two types of capital gains tax:
- Long-term Capital Gains Tax: This tax is applicable to the profits earned from the sale of assets held for more than a year. The tax rates can vary between 0%, 15%, or 20%, depending on the individual’s tax bracket.
- Short-term Capital Gains Tax: This tax is applicable to assets held for a year or less and is taxed as ordinary income.
- It’s worth noting that capital gains can be reduced by deducting any capital losses that may occur when a taxable asset is sold for less than its original purchase price. The resulting amount after deducting the capital losses from the capital gains is referred to as the “net capital gains”.
- Tax on capital gains is only triggered when an asset is sold or “realized”.
- Appreciating stock shares, for instance, will not incur capital gains tax until they are sold.
- Capital assets can include a wide range of possessions such as land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry. The term also encompasses rights in or in relation to an Indian company, along with management or control rights and other legal entitlements.
Flipping:
- Flipping is the process of transferring complete ownership of an Indian company to an overseas entity.
- It involves the transfer of all intellectual property and data owned by the Indian company.
- It is usually carried out at the early stages of startups, driven by commercial, taxation, and personal preferences of founders and investors.
- Some companies opt for flipping due to the predominant offshore market for their product
- Investor preferences, such as access to specific incubators, can also drive companies to flip.
Reverse Flipping:
Reverse flipping is the process of relocating the domicile of companies back to India, which had previously flipped.
Companies often reverse flip to benefit from easy access to capital from private equity and venture capital, changes in rules regarding round-tripping, and the growing maturity of India’s capital market.
Listing on Stock Exchange: Listing on a stock exchange makes a company’s shares or securities available for public trading, enabling investors to buy and sell the stock, thus providing the company access to capital and visibility in the financial markets.
Corporate Debt Market Development Fund (CDMDF): Recently launched by SEBI to provide stability to the corporate bond market during periods of stress. Supported by a guarantee from the National Credit Guarantee Trust Company and substantial funding from the mutual fund industry.
About International Financial Services Centre Authority (IFSCA):
- Establishment: IFSCA is a statutory body established in 2020 under the International Financial Services Centres Authority Act, 2019.
- Headquarters: Located at GIFT City, Gandhinagar in Gujarat.
- Role: It ensures inter-regulatory coordination within the financial sector and serves as a unified authority for the development and regulation of financial products, services, and institutions in the International Financial Services Centre (IFSC) in India.
- Prior Status: Before its establishment, the business in IFSC was regulated by domestic financial regulators such as RBI, SEBI, PFRDA, and IRDAI.
- Objective: IFSCA aims to establish a strong global connect, cater to the needs of the Indian economy, and serve as an international financial platform for the region and the global economy.