Article on Reverse Flipping
What is Flipping or Externalising and Why do Companies opt for the same?
Flipping or Externalising means an Indian Company moving its headquarters from India to a Foreign Country. Despite this shift, the company continues its day-to-day operations in India. Over the last few years, Indian Startups have increasingly adopted this strategy for getting access to investment from overseas investors, access to larger markets and favorable customer base, beneficial regulatory environment and to benefit from listing on International Stock Exchanges. Razorpay, Groww, Zepto, Pine Labs, and Meesho are the few companies that have previously opted for externalizing.
What is Reverse Flipping or Internalising and why companies are opting for the same?
Reverse Flipping or Internalising means an Indian Company which earlier flipped, is moving its Headquarters back to India. Today, many Indian startups that had previously relocated their headquarters abroad are now returning to India. This is due to the advantages arising from the changes made in India’s economic policies, such as tax incentives & funding support, and largely retail investors have shown great interest in investment in risk capital like in the stock market.
Why is this trend of reverse flip increasing?
The acceleration in the growth of the Indian market resulting in increased opportunities for businesses in India has also been one of the reasons for reverse flipping by such companies. Groww and Phonepe are a few of the notable companies that have reverse-flipped. Other startups such as Razorpay, Meesho, and Pine Labs are also considering to internalize.
Indian stock exchanges have experienced a rise in new listings from Companies that have relocated back to India. This trend is largely attributed to beneficial IPO environments and growing investor enthusiasm for the shares of companies re-entering the Indian market.
It shall be noted that now Indian Companies will also be allowed to list directly on the IFSC Exchange in GIFT City. This move provides access to international capital markets and could potentially boost their valuations, being one of the reasons to get their headquarters back in India.
How: Methods of reverse flipping:
An entity can revere flip by any of the following methods:
a) Share Swap Arrangement
By implementing this method, the shareholders of the foreign entity swap their shares held in the foreign entity with the shares of the Indian entity.
b) Inbound merger
By implementing this method, a Foreign Company merges with an Indian Company, and the resulting Company becomes an Indian Company. For Inbound mergers, the Companies have to comply with the Companies Act, 2013 along with the rules therein, Foreign Exchange Management Act, 1999, and its regulations, including the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018.
Crucial factors to be kept in mind for Reverse Flipping:
- Evaluating the potential growth within the home market is crucial. The Companies need to examine factors such as market size, demand patterns, and competitive forces to assess whether relocating back will offer significant advantages.
- Comprehensive Planning, Strategic Analysis, and Meticulously Structuring the transaction, are some of the essential factors for successfully internalizing the Company.
- Being Compliant with all the applicable laws and regulations including the Companies Act, 2013 and rules made thereunder along with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
- Understanding the Taxation aspects, regime, and implications of the same.
- Securing Regulatory Approvals and meeting the requirements set by different regulatory bodies.
Recommendation of reforms required for bringing back the Growth:
- Amendment in the Companies Act to carve out some more exemptions from stringent compliance and governance, to such Indian Companies formed under reverse flipping, recognizing the issue of SAFE Instrument and SPAC Companies (Sole Purpose is Acquisition of Company) and invest IPO Proceeds therein as such instruments are popular in foreign jurisdictions.
- Provide additional limits of LRS (Liberal Remittance Scheme) to resident Indians to invest in such companies.
- Provide exemption from the Stamp duty for the transfer of assets and shares while doing reverse flipping.
- Fast Track window for formation, merger, and exit of such companies
- Simpler, faster, and efficient Dispute Resolution process
- Establishing Advance Ruling Authorities
Conclusion
Flipping/ Externalising and reverse flipping/Internalising highlight the adaptive strategies that are employed by the Companies to optimize their global presence. While flipping seeks international advantages, reverse flipping represents a strategic shift of focus back to the home country, leveraging the advantages of a supportive local environment.
The recent increase in reverse flipping underscores how the evolution in local policies, market expansion, and increased interest of investors are shaping the business decisions taken by such companies. Hence, when a company successfully reverses flips, it serves as a compelling example of how companies can benefit from re-evaluating their global strategies and capitalizing on favorable domestic conditions.