Raising red flag over ‘flipping’ by some of the country’s best known startups, Swadeshi Jagran Manch has cautioned that Indian companies opting foreign jurisdiction for incorporation potentially poses security threat due to practically no scrutiny of source of fund and transfer of critical data on Indian consumers abroad. Ashwani Mahajan, National Co-Convener of SJM – a wing of the Rashtriya Swayamsevak Sangh, says unicorns with over USD 1 billion valuation ‘flipping’ means avoiding Indian regulatory oversight and loss of revenue to the country.
“India has been proud of its startups creating immense value and adding to the GDP of the country. But our happiness remains short-lived when we find that they have not remained Indian any more. Most of these high ticket startups have flipped away and are no longer Indian companies in essence,” he told PTI. Flipping means a transaction where an Indian company incorporates a firm in a foreign jurisdiction, which is then made the holding company of the subsidiary in India. The most favourable foreign jurisdictions for Indian companies are Singapore, the United States and the United Kingdom.
He demanded an overhaul of the system – from policy and regulations, to access to capital to push entities to register in India. “The differential policies discriminating indigenous and attracting foreign entities need to stop,” he said. “However, to ultimately discourage Indian startups to flip, we need to take some tough measures as well, including declaring those who flip, a foreign company.” One of the best examples of a flipped company is domestic e-commerce giant Flipkart. The promoters of the firm, which ultimately attained market valuation of USD 20 billion, flipped away from India and registered their company and other associated companies in Singapore. And the set of companies were sold to Walmart, leading to transfer of Indian retail market share to a foreign company.
“It is interesting to note that several hundreds of Indian unicorns have either flipped or were incorporated abroad, which have Indian founders who started off in India. Amongst them majority have operations and primary market in India. Nearly all have developed their intellectual property (IP) using Indian resources (human, capital assets, government support, etc.),” he said. Flipping, he said, essentially leads to unicorns avoiding the Indian regulatory landscape and the country’s tax laws and scrutiny by authorities.
“Various international investors force their investee companies to flip abroad and sometimes even keep this as a condition precedent to their investment in these startups as they want the data and IP to be headquartered overseas where they will put their money,” he said. Mahajan said ‘flipping’ leads to “immense economic and national loss as an Indian company becomes a wholly-owned subsidiary of the foreign corporation despite 90 per cent-plus value creation from India, resulting in loss of all future tax on capital gains, public listing and operational profits.” Stating that ownership of critical data as well as IP is transferred abroad, he said most of these companies are growing 100-200 per cent annually and are increasingly capturing more and more critical consumer data.
“Flipping imposes a security threat on all critical data and also results in substantial loss of possible future value creation from all associated IPs of that company,” he said. Also, flipped startups circumvent Indian tax law and other legal regulations and gain unfair advantage over their domestic counterparts. “It effectively becomes a structure to transfer value creation from India to overseas territories since most of the business is still being done in India with teams based here too.” More importantly, flipping poses security threats. “Due to foreign HQ structures, the Indian government can’t determine the source of money backing these companies which can result in security issues for the nation in case war-like activities arise in future. For example, money from neighboring countries is only allowed in India-domiciled startups after the requisite approvals but overseas headquartered startups do not need any such approvals.” It also gives unfair advantages to foreign investors. “Foreign investors are keen to take advantage of India’s growing economy and flipping makes it possible for them to circumvent coming to the country (which they should have done). This sets in motion a vicious cycle as more and more overseas investors start seeing flipping as a legitimate ask without concern of loss to India,” he said.
As these flipped startups will also list overseas, Indian public equity markets will lose depth. “It becomes a way for foreign investors to gain from India’s wealth of resources and advancement by bypassing our laws and regulations,” he said. Mahajan said flipping is the perfect example of India rolling red carpet to foreigners and showing red tape to indigenous players. “The foreign entities get exemptions during land allocations in various states, but indigenous players are left to fend for themselves. Flipped entities get access to easy and cheaper access to capital and it’s much easier to take money out as well (using DTAA),” he said. “Even Indian funds pay higher capital gains tax than their foreign counterparts investing in India.” One of the methods for implementing a ‘flip’ transaction is through a share swap. Under this exercise, after the Indian promoters have incorporated an international holding company the shares held by the shareholders of the domestic company are swapped with the shares of the overseas holding company. As a consequence, the shareholders of the domestic company become shareholders of the overseas holding company.
In place of a share swap, a flip structure can also be executed when the shareholders of the Indian company acquire shares of the overseas holding company and the holding company acquires all the shares of the Indian company from its shareholders.