Reverse Flipping in 2023: What’s persuading startups to shift domicile to India?

Startups in India have been creating immense value for the Indian economy. As per the Economic Survey 2022-23, “India ranks amongst the largest startup ecosystems in the world. An impressive 9 lakh+ direct jobs have been created by the DPIIT recognized startups (self-reported), with a notable 64 percent increase in 2022 over the average number of new jobs created in the last three years.”

The Economic Survey also noted that many Indian startups choose to incorporate their companies in a foreign jurisdiction and have a subsidiary in India. This is termed “Flipping” and involves transferring the ownership along with Intellectual Property (IP) and any other data to the overseas company. Many Indian startup founders find it attractive to register their companies in the US, Singapore, and other jurisdictions due to several reasons.

  • Investor preferences- Many international investors prefer to invest in companies that are headquartered in jurisdictions that offer easy access to incubators, lesser regulatory framework, simpler tax codes, evolved IP protection laws, etc.
  • Better valuations- The capital markets in the US and Singapore are larger and more developed and may be able to offer better valuations and larger ticket sizes due to a deeper investor pool.
  • Tax incentives- Many foreign jurisdictions offer lower corporate tax rates as compared to India making them more attractive for founders as well as investors. In addition to this, some countries might also offer other tax incentives such as no withholding taxes when distributing dividends.
  • Market share- Some startups may decide to flip as the majority of their market share might be in a different country. Flipping to countries where the predominant customer base is located makes it easier to engage with customers.

Flipping has an adverse effect on the Indian economy. There is economic loss as the country loses on potential tax revenue. Also, these startups may hold critical consumer data and IP whose ownership is transferred to foreign entities. These not only pose a security threat to the critical data, but any future potential revenue opportunities from the IPs will not add value to the nation.

To discourage Indian startups from flipping and attract existing startups to “ Reverse Flip” or shift their domicile back to India, the government has taken several steps. For instance, PhoenPe shifted its headquarters from Singapore to Bengaluru in 2022. Some reasons for this reverse flip were a bigger customer base, a plan to launch their IPO and other regulatory reasons.

Startups considering Reverse Flipping

Startup founders are considering moving their headquarters back to India. The Economic Survey 2022-23 highlighted certain measures that can promote reverse flipping.

  • Making it easier to obtain “Inter-Ministerial Board (IMB) certification” for start-ups.
  • Easing corporate laws and lessening the restriction on capital inflow and outflow.
  • Simplification of taxation of Employee Stock Options (ESOPs)
  • Enhancing the incubation and funding ecosystem for start-ups in areas such as social innovation and impact investing.
  • Developing state-of-the-art start-up mentorship platforms in partnership with established private entities.

Efforts made by the GOI to accelerate reverse flipping

To encourage reverse flipping by startups, the Government of India(GOI), has taken several measures. The government launched the Startup India Initiative in 2016 to nurture startups in the country. Under this flagship initiative of the government, the startups that are recognized by the Department of Promotion of Industry & Internal Trade (DPIIT) get access to a host of benefits including easier compliance, tax benefits, access to funding and credit, etc.

Easy access to capital

Easy availability of capital is essential for the growth of startups. The government has launched several schemes to support the funding and credit needs of the startups. The Startup India Seed Fund Scheme (SISFS), the Fund of Funds Scheme (FFS) for startups, the Credit Guarantee Scheme for Startups (CGSS), etc are aimed at providing startups with easy access to capital. The SISFS received an allocation of Rs 283.5 crore in the union budget 2023-24. Whereas Rs. 1,000 crores were allotted to FFS in the budget. Apart from these, in a bid to promote agri-tech startups in the country, the government in the union budget 2023-24, has announced the setting up of an Agriculture Accelerator Fund to encourage innovation to improve farming productivity. Apart from these schemes, the government is focused on boosting domestic and foreign investments. To accomplish this, Goods and Service Tax has been introduced, there has been a reduction in corporate taxes, and financial market and Foreign Direct Investment (FDI) policy reforms.

Strengthening of the IPR regime

The GoI has taken several positive steps toward establishing a strong IPR regime in the country. These steps are aimed at safeguarding the IPRs and at the same time fostering innovation. These include modernizing the IP offices, using IT & technology to facilitate IP filing for startups, and reducing the number of forms for trademark as well as patent registration. The count of trademark forms have been reduced from 74 to 8 and for patent registration, there is only a single form now. These measures have put India in the top 40 innovating countries as per the Global Innovation Index (GII), 2022 report.

Ease of doing business

Several structural reforms have been carried out under ease of doing business. These include simplifying and digitizing application filing, renewals, and filing of records as well as rationalization of laws, and reduction of compliance burden. The government has reduced over 39,000 compliances and decriminalized approximately 3,400 legal provisions. Apart from this, identifying PAN as a common business identifier and deploying 100 commissioners to handle small appeals are other measures taken under the ease of doing business. These measures are aimed at reducing legal complexities and helping startup founders save time and cut costs.

Apart from the above initiatives, in her budget speech for 2023-24, the Finance Minister, Nirmala Sitharaman announced several measures to boost startups in the country. These include formulating a National Data Governance Policy which will allow startups to obtain anonymized data, setting up 3 Centers of Excellence for Artificial Intelligence, and the carry-forward of losses on change of shareholding of startups extended from 7 years to 10 years. You can read a complete analysis of the impact of the Union Budget 2023-24 on the tech and the startup space here.

Way forward

Though the government has taken several measures to facilitate reverse flipping amongst startups, there are many other steps that the government can further take to accelerate reverse flipping. These include easier access to foreign capital, easing the process of mergers and acquisitions, reducing regulatory uncertainties and tax inefficiencies, taxing ESOPs only at the time of sale and not vesting, etc. These measures will help foster innovation and growth in the country and also help valuable intellectual property within the country.

Santanu Ganguly
Chief Executive Officer
StrategINK

Disclaimer: The views expressed in this feature article are of the author. This is not meant to be an advisory to purchase or invest in products, services or solutions of a particular type or, those promoted and sold by a particular company, their legal subsidiary in India or their channel partners. No warranty or any other liability is either expressed or implied.
Reproduction or Copying in part or whole is not permitted unless approved by author.

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