Why is it in the News?

Payments major Pine Labs and quick commerce firm Zepto are among the startups looking to relocate their headquarters from foreign shores to India, to capitalize on the country's burgeoning tech landscape.

What is Reverse Flipping?

• Reverse flipping is a growing trend where overseas startups relocate their domicile to India and list on Indian stock exchanges.
  • The primary motivation behind this shift is the potential for a higher valuation and more certain exit opportunities in India's thriving economic landscape.

Several factors contribute to the rise of reverse flipping:

• Access to a large, expanding economy: India's significant market size and sustained economic growth offer foreign startups attractive prospects for business expansion and success.
• Abundant venture capital: India's substantial venture capital resources provide a strong financial foundation for startups, fueling innovation and growth.
• Favorable tax policies: The country's tax regulations encourage foreign startups to establish operations in India, helping them maximize profits and minimize costs.
• Enhanced intellectual property protection: India's robust IP protection framework fosters innovation and creativity, safeguarding the unique ideas and technologies of startups.
• Skilled, youthful workforce: The availability of a talented, young, and educated population provides startups with a valuable human resource pool to drive growth and success.
• Supportive government policies: The Indian government actively promotes entrepreneurship and innovation through various initiatives and policies, creating a conducive environment for startups.
• The Economic Survey 2022-23 acknowledged the importance of reverse flipping and suggested measures to expedite the process, including simplifying tax vacation procedures, ESOP taxation, capital movement, and reducing tax layers.
• These efforts aim to further enhance India's appeal as a destination for foreign startups and foster economic growth.

What is Flipping?

• Flipping refers to the process by which an Indian company becomes a 100% subsidiary of a foreign entity after moving its headquarters overseas, involving a transfer of intellectual property (IP) and other assets.
  • This transforms an Indian startup into a fully-owned subsidiary of a foreign entity, with founders and investors maintaining their ownership through the new overseas structure by exchanging their shares.

The process of flipping poses several concerns for India:

• The brain drain of entrepreneurial talent: As Indian startups move their operations overseas, India experiences a loss of innovative and entrepreneurial talent, which could otherwise contribute to the country's economic growth and development.
• Value creation in foreign jurisdictions: Flipping redirects potential value creation to foreign countries, depriving India of the economic benefits that could result from successful startups and innovations.
• Loss of Intellectual Property: When companies relocate and transfer their intellectual property overseas, India loses valuable IP assets, undermining the country's competitive advantage and innovation potential.
• Reduced tax revenue: Flipping also contributes to decreased tax revenue for India as companies shift their operations and profits to other jurisdictions, which may have more favorable tax policies.