A warm welcome is in store for startups registered outside India that want to repatriate. The Indian government has eased some regulations to make this shift relatively easier.

Last week, India’s Ministry of Corporate Affairs announced that companies registered abroad and wanting to merge into their wholly owned Indian arm would only need the approval of the Reserve Bank of India. With that, the Indian government has scrapped the need for the move to be cleared by the National Company Law Tribunal (NCLT). The new mandate—officially called the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2024— will come into effect from 17 September.

Experts believe that the move will further fuel the “reverse flipping” trend, wherein Indian companies that were domiciled abroad owing to better regulatory and taxation policies are now returning to India. However, there still remains one significant hurdle. But more on that later.

First, let’s understand what changes.

Simplification: Apart from taxation policies, easy access to capital and fewer regulatory hurdles had pushed many Indian companies to move their bases overseas—a process known as “flipping” or externalization. According to Hurun Global Unicorn Index 2024, there are 109 unicorns—startups valued at $1 billion or more—founded by Indians overseas. Meanwhile, there’s only 67 such unicorns within the country.

The Economic Survey 2022-23 made note of this trend. Then an expert committee, appointed in March last year, proposed 30 recommendations to existing taxation structures, company laws, and infrastructure to make India a more attractive bet for startups. Among these recommendations was simplifying the process of mergers and acquisitions by doing away with NCLT approval.

So, last week’s tweak is to incorporate this. The government tweaked rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and added sub-rule (5), which states that in case of a merger or amalgamation between a holding company incorporated outside India and its wholly owned subsidiary company incorporated in India, prior approval of the RBI is required.

More than anything else, this rule significantly cuts the time required for companies to finish the entire process to move back. The NCLT approval required earlier made the process complicated and time consuming.

“It would take anywhere between 9-24 months earlier when the NCLT approval was sought along with RBI’s nod. Now, after the amendments, once you get the RBI approval and file the papers for merger, there is a 60-day time period given for the approval to come through,” TaxCompaas founder Ajay Rotti told The Morning Context.

Now, the transferee company has to comply with the provisions of Section 233 of the Companies Act, 2013 and file an application with the government. Along with that it needs to submit interim reports to the central government and a final report on conclusion of investigation into its application, as it awaits approval. Both companies also need to file the declaration of solvency under rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

With the process of shifting base being fast-tracked and becoming easier, the government is perhaps hoping that it will encourage more companies to return.

“A company could do reverse-flipping in multiple ways and all of which have some or other tax implications or it could be time-consuming, etc. One of the quicker ways to do it is this RBI approach. Through this route, the assets and liabilities of one company become a part of the other company in just one legal order. You don’t need to execute multiple other agreements,” Rotti added.

So, why do these companies want to come back to India?

Better Indian conditions: The primary reason is a more promising setup back home amidst a global funding slowdown. The past few years have seen several companies, stuck abroad waiting for the funding winter to subside, rushing back to India. For instance, fintech company Groww moved its base from the US to India in March this year. Razorpay, Pine Labs, Zepto, Meesho and Udaan are some startups that are considering returning.

The Indian economy is an attractive bet for homegrown startups registered in foreign countries, especially this year. At least going by the stock market boom. The first eight months of FY24 have already seen 50 IPOs mobilize Rs 53,453 crore, surpassing last year’s total mobilization of Rs 49,435 crore.

“Two or three years back, everybody wanted to make holding companies overseas because it was easier to raise money outside and people valued new-age businesses. Today they want to come back due to favourable conditions of the Indian market,” Rotti said.

We have written about this in detail in our older story on why Indian startups are moving back home.

However, while recent amendments will help make the procedural aspect smoother, these companies face yet another hurdle: hefty taxes.

Taxation remains a headache: While shifting, companies need to incur a significant expense in terms of a capital gains tax payout to the Indian government. This is based on their latest valuation—on the basis of their last funding round.

Take the case of PhonePe. In 2023, US retailer Walmart paid nearly $1 billion as long-term capital gains tax to the Indian government to shift the base of its digital payments company PhonePe from Singapore to India. At the time, PhonePe CEO Sameer Nigam had said that moving to India is treated as a capital gains event for the existing investors and hence requires a fresh valuation and tax payment. After conducting the new mark-to-market valuation, the fintech firm paid the tax on the difference.

And this heavy taxation, which could rain on the startups’ “reverse flipping” parade, is unlikely to change anytime soon.

Despite the 2022-23 Economic Survey highlighting that heavy taxation remains a burden, in March, minister of commerce and industry Piyush Goyal said that those looking to flip back will have to pay the hefty tax. “These companies went outside for their own selfishness…not because of any pressure or other reason. They wanted to do better tax planning…they enjoyed that benefit. Why they want to come back is not an altruistic motive. They want to list in India because here’s where you get the valuations. India’s growth story is unparalleled in the world and that’s why they want to come here,” he said.

So, while companies can take advantage of relaxed procedures to move back and tap into the growing market, the issue of hefty taxation remains and is likely to continue to be a big pain point.

“The recent amendments to this method is helping the companies quite a lot but the tax issue is still not addressed,” Rotti added.

Cover illustration by Devyani M/ The Morning Context