Unraveling the Flip:

Why Fintech Giants opted for the reverse flip

In a strategic shift, several prominent Indian startups, including Groww, RazorPay, and PhonePe, are opting for reverse flipping, a process that involves relocating their headquarters back to India. According to the Government of India’s Economic Survey 2022-23, this trend signifies a growing interest among Indian companies to leverage the matured domestic capital markets and gain seamless access to funding from venture capital and private equity sources.

By founderlabs

The allure of returning to the homeland is further amplified by the highly regulated nature of the Indian financial services industry, where regulatory bodies like the RBI and SEBI focus on safeguarding consumer interests through enhanced regulations. As the fintech landscape evolves, more companies are contemplating the move back home to embrace the opportunities that await in India’s thriving market.

Why Did Indian Start Ups Choose to Flip?

Before we understand the reasons for the reverse flipping, we need to talk about the benefits that these units were looking for when they decided to flip or shift their base to countries like Singapore, Dubai, and the United States. The main reasons for flipping are:

¡ Personal preferences of the promoters

¡ The major market for their product is offshore

¡ Some incubators insist on a particular domicile

¡ Access to capital markets and hope for better valuation

¡ Better protection and enforcement of Intellectual Property Laws

¡ More conducive tax laws

¡ Special incentives offered by governments of other countries

Reverse Flipping: Costs and Benefits

Of the 20 Unicorns that shifted base outside India in recent times, three have already decided to go for reverse flipping. While PhonePe last year decided to shift its headquarters back to India, RazorPay and Groww too are moving along the same lines. And what has lured them back is the prospect of going public and raising funds for their growth. These businesses have realized that the Indian capital market and the country’s vast investor base can absorb large initial public offerings. And this is better than going for smaller IPOs in the US market. Another possible reason is the uncertain situation in the wake of the failure of the SVB Bank. But the revere flip will result in significant tax payments to the exchequer. PhonePe’s shareholders have to incur long-term capital gains taxes of about $1.2 to $1.3 billion as part of this reverse flip. Groww and RazorPay investors may also have to incur a massive tax liability as a consequence of reverse flipping.

The Indian government is taking steps to encourage reverse flipping by creating a favorable environment. It has already announced exemption for investors from certain countries from angel tax. The Economic Survey 2022-23 had included certain measures like simplifying ESOP taxation, streamlining of the tax processes and easing capital flow restrictions to accelerate reverse flipping by startups.