Setting up headquarters overseas was seen as a way to enhance startups' valuation and attract capital, particularly for initial public offers abroad.
Groww has joined PhonePe, Urban Ladder & Pepperfry in relocating its holding company to India, indicating a growing trend among startups looking to capitalise on India's growing economy, explain Sumit Sinha & Ashima Dewan.
l Growing trend of startups relocating to India
RECENTLY, GROWW CEO and co-founder Lalit Keshre announced on X that the fintech had completed its domicile transition back to India. With Groww deciding to relocate to India, it joins the likes of PhonePe, Urban Ladder and Pepperfry who have relocated their holding companies back to India. It has been fairly common in the startup space for founders to establish their holding companies outside India despite primarily operating from India. This strategic approach is aimed to improve valuations and capitalise on corporate and tax benefits from host nations. While India has emerged as the third largest ecosystem for startups globally, it was ranked 62nd at the World Bank's Ease of Doing Business basis the last conducted rankings, which possibly is a reflection of a somewhat complex regulatory framework in the country.
However, as evident from the recent trends, this is now changing and founders are not only looking to establish in India but also flip the existing structures to relocate the holding companies back to India.
l Why startups prefer to keep their registered office abroad?
SETTING UP HEADQUARTERS overseas was seen as a way to enhance startups' valuation and attract capital, particularly for initial public offers abroad. For example, Freshworks, originating from Chennai was headquartered in USA and achieved a billion-dollar valuation with investments from top-tier venture capital firms and was subsequently listed on Nasdaq, becoming one of the first Indian product companies in the SaaS space to do so. In the past few years, due to ever-elusive funding, lack of supportive infrastructure, complex regulatory and tax regimes, a number of founders with startups operating in India decided to keep their registered office abroad. Startups in unconventional sectors like blockchain, crypto and gaming, especially, find India's regulatory ambiguity unsettling, prompting them to establish their headquarters overseas.
l Advantages of a foreign address
CERTAIN FOREIGN JURISDICTIONS tend to offer a more favourable regulatory and tax framework, facilitating easier incorporation, labour law related compliance, and contract enforcement. There are also fewer restrictions on the inflow and outflow of capital, which coupled with the reasons stated above, incentivises founders to park the intellectual property (which is typically the key aspect in a startup ecosystem) and key customer relations in such jurisdictions.
For instance, Singapore implemented tax exemption schemes for eligible startups and partial tax exemption for companies. All these incentives together attract founders to set up their ventures in such jurisdictions.
Additionally, from an investor's perspective, investing in tax-efficient jurisdictions with settled jurisprudence, lowers the tax uncertainties thereby resulting in lesser and more accurate tax provisioning at the time of exit.
l Benefits of moving to India
WITH INDIA RECOGNISING the need for improved ease of doing business and the pivotal role of startups in fostering innovation, various targeted schemes and initiatives have been introduced by the government. The Fund of Funds for Startups and Credit Guarantee Scheme for startups supports seed funding and successive credit needs. Further, the current geo-political situation along with the global trend to diversify manufacturing supply chains presents an opportunity for India. Another attraction is the Gujarat International Finance Tec-city with its investor-friendly norms for capital inflows and taxation. Additionally, relatively easy access to capital through a vibrant private equity/venture capital ecosystem, changes in overseas direct investment regulations, and the growing maturity of India's capital markets have not only slowed down the flipping, but companies are also exploring "reverse flipping".
l Tax and other implications
DEPENDING ON THE structure of the entity and strategy adopted for a reverse flip, there are various challenges. For example, PhonePe's shareholders had to pay capital gains tax pursuant to swap of shares in order to implement the reverse flip. Further, its employees had to be migrated to a new stock option plan of the Indian entity, which resulted in reset of the vesting period with a one-year cliff. Firms undertaking a reverse flip also stand to lose the benefit of offsetting accumulated losses. If some of these aspects could be addressed, more startups would be incentivised to flip their structures. Startups do have the option of structuring the reverse flip as an in-bound merger, i.e., the overseas entity will merge with an Indian entity thus allowing the former's shareholders to claim exemption from tax resulting from such transaction. However, an in-bound merger process has its own challenges and complications.
Originally published in The Indian Express
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.