Corporate re-domiciliation of Start-ups back to India

After Singapore based fintech startups ‘Pine Labs’ and ‘Phone Pe’ redomiciled their holding companies back to India, the wealth management startup ‘Groww’ has also followed the momentum and on shored from USA back to India. 

This strategic move is flourishing due to India’s vision to become the world’s third largest economy in GDP terms by 2030 fueled by the huge opportunities the Indian markets are offering (IPOs). 

The key step in the process is to find a right structure which is regulatory and tax compliant. Majorly, companies look at two routes to achieve a Reverse flip- 

a) Cross border inbound merger route: wherein vide a Scheme of Arrangement, the overseas entity merges with an Indian entity and the operations are subsumed by the Indian entity post-merger, or 

b) Share Swap route: wherein the foreign shareholders swap their shares held in the foreign entity with the shares of the Indian entity.

Under a cross border merger route:

👉 Prior approval of the NCLT is required which makes it a long-drawn process (say about 6 – 8 months). 

👉 Inbound mergers are exempt from capital gains tax in India (subject to certain conditions). 

👉 A separate evaluation of the tax and regulatory requirements of the overseas jurisdiction is also to be done. 

👉 Adherence to Cross border regulations issued by the RBI.

Under the share swap route:

👉 Simple and easy to execute by entering into a share swap agreement, making the timeline highly effective. 

👉 Shareholders would be subject to tax on the excess of fair value of the shares of the Indian company over the cost of shares held in the foreign company. 

👉 To evaluate treaty exemptions under the applicable tax treaty, for example, for investors from the Netherlands or Singapore (if the shares of foreign entity were acquired prior to March 31, 2017). 

👉 Indirect transfer tax provisions will have to be evaluated on extinguishment of shares of the shareholders of the foreign company if it derives substantial value from Indian assets. 

👉 An indemnity clause in the shareholders’ agreement can also be plugged in to say that the company would have to bear the outlay of tax cost levied on the Investors due to redomiciliation.

For the Indian entity, one may also have to evaluate the impact on the brought forward tax losses i.e., whether it would be permitted to be carried forward or lapse on account of such restructuring due to change in shareholding.

Hence, it is imperative to effectively time and structure the reverse flip.

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