India’s Compliance Overhaul: A Catalyst for Startup Homecomings
In a significant regulatory shift, India has scrapped a time-consuming compliance step that previously hindered foreign-based Indian startups from returning home. This change is expected to accelerate the pace at which these companies, many of which have been domiciled abroad for better access to capital and favorable tax regimes, shift back to India to participate in the burgeoning initial public offering (IPO) market. According to bankers, lawyers, and investors, this move is poised to reshape the landscape for Indian startups eyeing the domestic market.
The Regulatory Change: Streamlining the Reverse Flip Process
As of last month, foreign-based companies no longer require approval from the National Company Law Tribunal (NCLT) for a "reverse flip" merger with their domestic subsidiaries. This regulatory change drastically reduces the time required for the process from an arduous 12 to 18 months to a more manageable three to four months. The streamlined process is designed to facilitate swift and efficient scheme approvals without the need for court intervention, making it an attractive option for startups looking to return to India.
The Homecoming of Startups
The allure of India’s IPO market is drawing many startups back home. Companies like Razorpay, Pine Labs, and KreditBee are already in advanced stages of completing their reverse flips, while others such as Zepto, Eruditus, and InMobi are also preparing for the merger process in anticipation of future IPOs. The shift is not merely a logistical decision; it reflects a broader sentiment among entrepreneurs who see India as a familiar and supportive environment for their businesses.
Harshil Mathur, co-founder and CEO of Razorpay, encapsulated this sentiment, stating, "India is a home market and a place where everybody knows and understands us. From a listing perspective, it makes sense to be in India." Razorpay, which was valued at $7.5 billion in its last fundraising round in December 2021, is now looking to capitalize on the favorable conditions in its home country.
A Flourishing IPO Market
The Indian IPO landscape has shown remarkable resilience and growth. In the first nine months of this year, IPOs from startups like Ola Electric and FirstCry have raised $9.17 billion, a significant increase from $4.68 billion during the same period last year. This surge positions India as a rare bright spot for equity capital raising in the Asia-Pacific region, making the prospect of listing in India increasingly attractive for startups.
Mehul Shah, a partner at corporate law firm Khaitan & Co., noted, "With the IPO market thriving, a reverse flip makes sense." The combination of a robust IPO environment and a streamlined merger process is likely to encourage even more startups to consider returning to India.
The Challenges of Reverse Flipping
Before the recent regulatory changes, only a handful of companies, such as PhonePe and Groww, had successfully navigated the reverse flip process. These companies faced significant hurdles, including hefty capital gains taxes and prolonged timelines. PhonePe, for instance, had to pay approximately $1 billion in capital gains taxes to complete its reverse flip, a cost that co-founder Sameer Nigam described as a "very stiff shock." Such challenges had previously deterred many startups from pursuing this route.
Despite the easing of regulations, the issue of capital gains tax remains a sticking point. India’s Commerce Minister Piyush Goyal has made it clear that startups returning to India will still be subject to taxes, emphasizing that the motivation for these companies is not purely altruistic but rather driven by the potential for higher valuations in the Indian market.
The Future of Indian Startups
The return of Indian startups from abroad is not just a matter of regulatory convenience; it reflects a broader trend of increasing confidence in the Indian market. The Reserve Bank of India and other regulatory bodies have shown a preference for local firms, particularly in sectors like fintech, where operational licenses are crucial. Additionally, stricter scrutiny of foreign investments has raised compliance risks, further incentivizing startups to establish a presence in India.
As the IPO market continues to thrive, the appetite for tech stocks among Indian investors, including retail investors, remains strong. This creates a favorable environment for startups looking to make their mark on the domestic stage.
In conclusion, India’s recent regulatory changes are set to catalyze a wave of homecomings among startups previously based abroad. With a flourishing IPO market and a more streamlined process for reverse flips, Indian entrepreneurs are increasingly recognizing the advantages of returning to their roots. As the landscape evolves, the future looks promising for both startups and investors in India.