Context:
Startups such as Pine Labs, Zepto, Meesho are the latest new-age companies looking to move headquarters to India.
Relevance:
GS III: Indian Economy
About Reverse Flipping:
- Definition: Reverse flipping refers to the phenomenon where overseas start-ups relocate their domicile to India and list on Indian stock exchanges.
- Motivation: The primary motivation behind reverse flipping is the perceived opportunity for a higher valuation and increased certainty of an exit in the Indian market.
- Trend Growth: This trend has been increasingly observed in recent years as start-ups seek to leverage India’s large and expanding economy, access to greater venture capital resources, favorable tax environments, enhanced intellectual property protection, a skilled and educated workforce, and supportive government policies.
- Government Recognition: The Economic Survey 2022-23 acknowledged the concept of reverse flipping and proposed measures to expedite the process, including simplifying tax-related procedures, taxation of Employee Stock Ownership Plans (ESOPs), capital movement regulations, and reducing tax complexities.
What is Flipping?
- Definition: Flipping involves an Indian company transitioning into a 100% subsidiary of a foreign entity by relocating its headquarters overseas, along with transferring its intellectual property and other assets.
- Process: Through flipping, an Indian startup effectively becomes a wholly-owned subsidiary of a foreign entity, with founders and investors retaining their ownership stakes via the foreign entity after exchanging shares.
Harm to India from Flipping:
- Brain Drain: Flipping may lead to the migration of entrepreneurial talent away from India, resulting in a loss of innovation and expertise within the country.
- Value Creation: It results in value creation occurring in foreign jurisdictions rather than contributing to India’s economic growth.
- Loss of Intellectual Property and Tax Revenue: Flipping also entails the transfer of intellectual property and can lead to decreased tax revenues for India, as profits may be realized and taxed in foreign countries instead of domestically.
-Source: The Economic Times
