Indian start-ups are looking at reverse flipping says Economic Survey

Indian start-up companies are looking at 'reverse flipping' - not a cricket terminology - with easy access to capital from private equity and venture capitals, changes in rules regarding round tripping, and the growing maturity of India's capital markets, states the Economic Survey 2022-23.

The Survey was tabled in the Parliament on Tuesday.

According to the Indian government the above measures have not only slowed down 'Flipping' but companies are also exploring 'Reverse Flipping'.

Well, 'Flipping' and 'Reverse Flipping' are not cricket shots.

The survey said many Indian companies have been getting headquartered overseas, especially in destinations with favourable legal environments and taxation policies.

The technical jargon for this may be identified as 'Flipping', which is the process of transferring the entire ownership of an Indian company to an overseas entity, accompanied by a transfer of all intellectual property rights and all data hitherto owned by the Indian company.

"It (flipping) effectively transforms an Indian company into a 100 per cent subsidiary of a foreign entity, with the founders and investors retaining the same ownership via the foreign entity, having swapped all shares," the survey notes.

Typically, "Flipping" happens at the early stage of the start-ups, driven by commercial, taxation and personal preferences of founders and investors.

Some companies decide to "Flip" because the major market of their product is offshore.

Sometimes, investor preferences like access to incubators drive the companies to "Flip" as they insist on a particular domicile.

Some companies prefer to domicile in countries where they would like to access Capital Market later for better valuations and ticket size.

Better protection and enforcement of IP 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.

"Many investors/private equity (PE) funds are based in the US and other places. They also exert pressure on the Indian startup entrepreneurs to move out of India and house their IPRs overseas," an entrepreneur had told IANS preferring anonymity.

"Technology companies, primarily B2B, software as a service (SaaS) players and deep tech businesses tend to move out to the US and some towards Singapore. The reason they start in India to begin with is the entrepreneurial talent, active investing ecosystem, solid tech employees and most importantly the ability to develop and run pilots at competitive costs," Sarath Naru, Managing Partner, Ventureast, one of the long standing venture capital firms in India had told IANS.

According to Naru, the primary reason for them to move out is to be near their market.

"Indian market tends to be small for these businesses and not economically viable to continue to invest in technology and be competitive against global players. The US and Southeast Asia offer large ready markets and it makes most economic and strategic sense to be close to the markets," Naru remarked.

"Other than the IPR housing reason, investors like the tax regime in certain countries; lower income tax and capital gains taxes. This also attracts the startups to move and later the founders become Non-Resident Indians (NRI)," Kris Gopalakrishnan, Chairman, Axilor Ventures told IANS.

"Some of these governments give specific incentives like rent reimbursements, grants based on local employment etc. Further, the access to capital which does not invest in Indian companies. Finally, SAS companies, especially enterprise SAS, move to the US/UK to be closer to the enterprise customers," Gopalakrishnan added.

The Economic Survey said to accelerate 'Reverse Flipping', certain measures like the following are possible:

i. Simplifying the process for grant of "Inter-Ministerial Board (IMB) certification" for Start-ups

ii. Further simplification of taxation of Employee Stock Options (ESOPs)

iii. Simplifying multiple layers of tax and uncertainty due to tax litigation

iv. Simplifying procedures for capital flows: Many countries, such as US and Singapore, have easier corporate laws, with lesser restrictions on the inflow and outflow of capital and treatment of Hybrid Securities

v. Facilitating improved collaboration and partnerships with established private entities to develop best practices and state-of-the-art start-up mentorship platforms

vi. Exploring the incubation and funding landscape for start-ups in emerging fields like social innovation and impact investment.

The flipping phenomenon mentioned above reflects start-ups venturing out for short-term gains in the dynamic, uncertain geopolitical world. However, the flip can be reversed with the collective action by the government related regulatory bodies and other stakeholders.

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