Startup

Reverse Flipping: India’s Fast-Tracking of Start-Up Mergers

In a Landmark Move, India is making it easier for overseas start-ups to “reverse flip” and return their headquarters to the country. A notification from the Ministry of Corporate Affairs, published on Tuesday, ushered in new rules that essentially made mergers between an overseas-incorporated start-up and its wholly-owned Indian subsidiary easy.

Now, removing the need for NCLT approval while pushing through with approvals related to the RBI speeds up what is being called “reverse flipping”, the process where start-ups set up overseas decide to go back to India. It sees this change as a strategic shift to bring in more innovation and a business-friendly atmosphere, especially for companies most anxious to break into the fast-expanding market with the friendlier regulatory environment in India.

The blog will discuss reverse flipping in detail, the changes brought about by the MCA due to the new regulation, and how this move is predicted to affect India’s start-up ecosystem, investors worldwide, and entrepreneurs.

Brief Understanding of Reverse Flipping

Reverse flipping is a term increasingly used in startups and Venture Capital. Simply, it refers to the fact that a company first incorporated in some foreign country is now relocating or “flipping” to its home market. For an Indian startup, that would mean the transfer of headquarters or main operations from a foreign jurisdiction like the US or Singapore to India. The factors that could explain this trend include:

Access to Capital

Indian capital markets have become more amiable towards the needs of start-ups in general, with active investors and a better risk appetite for sectors such as technology, fintech, and e-commerce.

Regulatory Simplification

The regulatory environment in India is becoming increasingly friendly for startups, with governmental initiatives and reforms smoothing the way for a decrease in bureaucratic obstacles.

Valuation Advantage

Indian markets are seeing better valuations, so the prospect of a domestic listing or operating base is stronger for homegrown start-ups.

Government Support

With support from policies like Start-up India and various fiscal policies, the Government of India has been proactively encouraging innovation and entrepreneurship.

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 Many Indian entrepreneurs prefer incorporating their start-ups outside India for various reasons, such as the easy availability of venture capital, easier exits, and tax breaks. With more robust infrastructure in support, the most conducive factor facing India’s start-up ecosystem is the increase in the number of returning start-ups to India to leverage local growth opportunities.

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The New Regulations for Reverse Flipping                    

The most significant regulatory change the Ministry of Corporate Affairs brought under the new rules decreases the time and complexity for a foreign ‘start-up’ to set up its base in India comparatively. According to the notification, reverse flipping would no longer require approval from NCLT, which was a major pain point earlier. Instead, such mergers or amalgamations shall require only two key approvals:

· Approval from the Reserve Bank of India

The foreign company needs to obtain approval from the RBI for the merger with its Indian subsidiary. Foreign exchange regulation and asset transfer across national boundaries are considered sensitive issues, and the RBI’s oversight function ensures that the transaction between the two countries does not bypass the country’s financial regulatory system.

· Government Approval Under Section 233 of the Companies Act

The resultant Indian subsidiary from the merger should get approval from the government under Section 233 of the Companies Act, 2013, along with Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Such approvals ensure that the mergers meet domestic legal and financial standards. In their place, Rules 5 to 25A of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024, are expected to result in a higher number of startups returning to India by removing one of the major hassles in the administration.

Why was the Approval from NCLT acting as a Bottleneck?

The NCLT has established an enviable position in India’s corporate governance architecture but has been grappling with a backlog of cases in recent years. As a result, obtaining approval for mergers from the NCLT, particularly in cases involving cross-border amalgamations, has proved time-consuming, sometimes for as long as many months.

Delays for a startup in fast-moving industries like technology or e-commerce could amount to lost opportunity, slower scaling plans, and even higher costs. By eliminating the NCLT from this specific process, the Government of India has made this route of reverse flipping much smoother, reducing time and consumable resources.

According to experts, this will help the new-age start-ups-most of which have been faring better in Indian capital markets than in overseas markets-and the simplified regulatory framework and better valuation opportunities will make India the first choice for such corporate “homecomings”.

Role of the Reserve Bank of India in the Process

Therefore, the Reserve Bank of India will be important in ensuring that the reverse flipping is done within the letters and spirit of India’s foreign exchange regulations. The RBI is expected to be concerned mainly with the flow of funds and assets between the foreign entity and its wholly-owned Indian subsidiary.

This becomes all the more important because most merger proposals involving a cross-border transaction also include issues of capital movement, compliance with FEMA, and larger implications for India’s balance of payments.

Features of RBI’s Role Regarding Reverse Flipping

The features of Reserve Bank of India’s role regarding reverse flipping are:

FEMA Compliance

One of the major tasks of RBI will be to ensure that the merger complies with the FEMA laws relating to the issue and transfer of shares and assets and any foreign investment in the company. This helps ensure that no currency or equity laws are violated during the merger process.

Compliance under FEMA ensures that all foreign investments and asset transfers adhere to Indian currency regulations, safeguarding against violations during mergers.

Verification of Capital Inflow and Outflow

Since reverse flipping typically involves the movement of capital from foreign jurisdictions to India, the RBI will monitor how the capital enters the Indian subsidiary. This would include verifying whether ECBs, FDIs, and other financial assets abroad conform to India’s financial and investment laws.

Asset Transfer

In the event of a merger, the RBI would verify whether assets are transferred at a proper valuation to avoid violating domestic laws concerning disclosure obligations pertaining to investments and capital gains. Intellectual property rights, real estate, and all other key business assets proposed to be transferred to effect a merger would fall within its ambit.

This increased oversight by the RBI ensures that while the process is fast-tracked, it remains compliant with India’s financial laws and protects the economy and investors domestically.

Benefits of Reverse Flipping to Indian Start-ups

The changes introduced by the MCA are likely to benefit Indian start-ups in several important ways. Reverse flipping can help startups that have incorporated overseas for better access to capital or other reasons but wish to return to India now, given the country’s fast-improving business environment.

Greater Accessibility to Indian Capital Markets

It has become one of the most prominent advantages of reverse flipping, helping start-ups get better access to Indian capital markets. India has seen a growing trend of domestic investors keen on tech-driven start-ups, especially after the IPOs of companies like Zomato and Nykaa. As time progresses and more Indian start-ups become household names, domestic stock exchanges are becoming lucrative avenues for companies searching for public listings.

On the contrary, reverse listing also permits a company to actually domicile itself in India and find it much easier to raise capital through domestic IPOs and other funding mechanisms.

Favourable Valuations in India

As discussed earlier, experts have identified that for any tech-driven start-up, Indian capital markets have given better valuations than any foreign market, whether the US or Singapore. In India, the sentiment of homegrown start-ups is highly positive.

Investors are found to have a strong appetite for companies predominantly displaying an India-centric growth story. Reverse flipping helps start-ups leverage this sentiment well to achieve higher valuation, attract domestic investors, and strengthen their balance sheets.

Lighter Regulating Environment

 Indeed, the Indian government has been working towards simplifying the regulatory environment for doing business. In this direction, initiatives such as Start-up India and amendments to various corporate laws have substantially reduced bureaucratic barriers to doing business.

The proposed move to fast-track the merger approval process is an enabling signal to create a more business-friendly environment in which more start-ups could return to India with innovation, investment, and employment opportunities.

Access to Government Support and Incentives

Tax exemptions, incubators, funding schemes, and reforms on the ease of doing business are among the incentives for startups in India. Reverse flipping to India can enable a start-up to access such government schemes, giving them tremendous cost advantages over companies headquartered in jurisdictions without such support.

Challenges and Risks of Reverse Flipping

While the new regulations make reverse flipping more appealing, companies and investors should consider several challenges and risks of the process.

Regulatory Complexities

Eliminating the approval requirement from NCLT makes it easier for companies; nonetheless, they have to face approvals from RBI and several other compliance procedures. Such procedures may involve complexities pertaining to foreign exchange management, taxation, and transfer of assets across borders. Companies must sort this out with legal and financial advisors to ensure full compliance with domestic and international regulations.

Tax Implications

Reverse flipping could have significant tax implications for large companies in terms of capital gains tax, transfer pricing, and indirect taxation. For companies with huge assets or major investors abroad, it is critical to analyze the tax impact of such shifting.

Operational Changes

Headquarters relocation in India involves operational issues such as relocating employees, establishing new facilities, and managing the supply chain. Though India has a vast human resource pool and is developing infrastructure, shifting operations can be expensive and time-consuming.

Investor Sentiment

While reverse flipping can be viewed as a positive move for several Indian start-ups, international investors may still view the situation sceptically due to regulatory environments, corporate governance, or legal frameworks in India. Companies considering reverse flipping have to assess investors’ perceptions and mitigate any concerns from stakeholders about the relocation process.

In a Nutshell

Removing the NCLT approval process was a critical leap toward rendering India’s economy more competitive and innovation-driven. With more and more start-ups reverse-flipping to India, the Indian economy would see increased activities in sectors like technology, e-commerce, fintech, and healthcare. These sectors are, among others, now in a position to gain from an easier regulatory regime, access to capital, and incentives offered by the government.

In the long run, this could spur more and more companies to perceive India not just as an emerging market but as an emerging base of operations. With a growing consumer base, a friendly regulatory environment, and increasing government support, India is becoming a hub for start-up innovation globally.

In a nutshell, reverse flipping is a serious strategic change for Indian start-ups, bringing along challenges and opportunities in its wake. As the process gets smoother and simpler, we can expect many Indian-founded, globally-headed start-ups to return to India, complete within all the fields, including innovation, investment, and job creation. The changes brought in by the Ministry of Corporate Affairs and the Reserve Bank of India mark a critical evolution in India’s start-up ecosystem, further positioning the country as a global player in entrepreneurship and innovation. Ready to take your startups to the next level? Visit our website, to explore startup services today and take advantage of India’s vibrant entrepreneurial ecosystem.

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