A booming domestic equity capital market is prompting foreign-registered Indian companies from the new economy sector to move their registrations back home, even at the price of a time-consuming legal process and higher taxes.
Last week, payment systems provider Pine Labs got approval from a Singapore court to amalgamate its local entity with its Indian unit and transfer all its assets and properties, effectively moving its operations to India.
The company is backed by Sequoia Capital, Temasek Holdings, Actis, PayPal and Mastercard.
Founded in 1998, Pine Labs serves merchants in India, the Middle East and South-East Asia.
Goldman Sachs and Morgan Stanley are working on the transaction.
In March, online stockbroker Groww shifted its domicile from the US to India and is planning a US$750m–$1bn Indian IPO next year, people with knowledge of the development said. Among the companies planning a similar move are education technology company Eruditus, payment company Razorpay, online credit provider KreditBee, online grocer Zepto and e-commerce companies Meesho and Flipkart.
Razorpay and Meesho are domiciled in the US and the others in Singapore. Walmart-backed payment company Phone Pe shifted its domicile in 2022 to India from Singapore. Several of these companies were thought to be planning US IPOs, but none of them listed overseas as global technology valuations fell after 2021. Pine Labs was working with Goldman Sachs and Morgan Stanley on a US$500m–$1bn US IPO. The deal was planned for a 2022 launch but never materialised.
Fast-growing Indian companies began to domicile or register abroad around a decade ago in a process know as "flipping", as Indian-domiciled companies are not allowed to list overseas. This entailed transferring the entire capital, intellectual property and data hitherto owned by the Indian company to an overseas entity.
Benefits included lower corporate taxes in Singapore and a relative ease and flexibility to operate, as well as the potential to list in more liquid equity markets. However, with the Indian IPO market now booming, "reverse flipping" is now on the agenda.
ECM bankers expect Pine Labs, Phone Pe and Flipkart to launch IPOs over the next couple of years, although the companies have not yet made any public announcements about a local listing.
“In India, they can now expect to get better valuations and research coverage which they may not get in an overseas market. Also for most of these companies the core market is India and hence they want to list in the main market,” said Ashok K Lalwani, principal at law firm Baker & McKenzie Wong & Leow. However, he cautioned that companies have to take a carefully considered decision to move domicile. “It has to make sense from a long-term and strategic perspective.”
ECM bankers said the deepening Indian market gives issuers better visibility in India. “There is no point in being the 60th technology company in a foreign analyst’s horizon," said a Mumbai-based ECM banker. "India’s technology universe is growing and analysts are keen to showcase more companies to institutional investors.”
Manoj Bhargava, partner at law firm Sidley Austin, said Singapore has long been an attractive jurisdiction to incorporate Indian and regional businesses and will likely remain so. However, as Indian regulations permit only Indian companies to list in the domestic markets, these companies "must redomicile in India".
Government push
Market participants said there is also a subtle push from the government and regulators to make companies with Indian operations list in India.
In its 2022–23 Economic Survey, the government acknowledged that domiciling overseas brought benefits, including the lack of withholding taxes and capital gains taxes in countries such as Singapore and United Arab Emirates.
“Better protection and enforcement of intellectual property and tax treatment of licensing revenue from IP, residential status of founders, and agile corporate structures have been the reasons for 'flipping' in the past,” the document noted, adding that India needs to “simplify multiple layers of tax, the tax litigation process and procedures for capital flow” to enable reverse flipping. However, the report noted that relatively easy access to funds through vibrant private equity, venture capital and capital markets "have not only slowed down the flipping, but companies are also exploring reverse flipping".
In a report last year, law firm Nishith Desai Associates said a reverse flip can be implemented in two ways – through an in-bound merger of the foreign registered company with an Indian company or through a swap of shares, whereby shareholders of the foreign company get shares of the Indian entity. There is no capital gains tax on the shareholders if the former route is adopted. In the latter the foreign shareholders will be subject to tax in India on the delta between the value of shares of the Indian entity at the time of such a reverse flip and the cost of acquisition of the shares of the foreign entity.
Phone Pe chose the share swap route to change its domicile and ended up paying taxes to the tune of Rs80bn (US$960m), according to local media reports.