Why Are Unicorns Trotting Back to India? At least 20 existing unicorns want to come back to India and domicile here, said PhonePe's Sameer Nigam

In the last few years, we have seen many Indian unicorns and late-stage startups getting headquartered outside India. According to media reports, 24 unicorns either flipped or were incorporated abroad. Crypto and SaaS startups in particular have made the US, Singapore and the UAE their growth havens. The key factors pushing these startups to take the overseas leap are lower corporate tax rate regimes, zero capital gains tax rate, matured IP protection laws, and better regulatory clarity.

Even though building for Bharat has been the passion of Indian entrepreneurs, many preferred pursuing that dream from outside India. For many, this allows them to publicly list overseas with higher valuations.

However, the trend seems to be reversing now. Startups are making India their domicile again. It all started in October last year with PhonePe moving its registered entity from Singapore to India. In fact, in January this year, Sameer Nigam, co-founder and CEO, PhonePe even said that at least 20 existing unicorns want to come back to India and domicile here. "They have reached out to us, if regulations get much easier," he said in this interview. Fintech unicorn Razorpay is also moving its parent entity from the US back to India, according to an Economic Times exclusive report. Groww, another fintech unicorn, is also looking to shift, says a report by Entrackr.

Ghar wapsi

As mentioned above, Indian Unicorns have been relocating their headquarters to Singapore, the UAE, and the US due to the attractive features of these countries, such as lower corporate tax rates, zero capital gains taxes, relaxed regulations, and simplified compliance procedures. Then why the reverse flipping now?

India's booming economy and market have a huge role to play. "This offers significant growth opportunities for these companies within the country itself. By establishing their main offices in India, these unicorns can better access the vast consumer base and leverage the potential for expansion. Additionally, having a presence in India allows these companies to gain a deeper understanding of the local market dynamics, consumer preferences, and cultural significance, which can greatly enhance their strategic planning and improve their products and services," said Kavit Sutariya, general partner, CapFort Ventures.

Another reason voiced by experts is that as companies mature and the tax holiday/ tax break comes to an end, the companies realize that running an overseas base with a different consumer market and delivery/operations from India does not make sense, given the number of reporting and compliances. "For example, a company registered out of Singapore with US / European clients and the operations/delivery center out of India leads to multiple compliances which can offset the tax gains," said Ashwani Singh, managing partner and CIO, 35North Ventures.

Also, with the Indian IPO market opening up, it becomes an easier mode of exit for funds compared to a Singapore or Dubai-registered company. Domestic allocators have thus become receptive to venture as a competitive asset class. "With recent policy revisions by market regulators, the Indian public markets are beginning to become more accessible for fast-growing tech startups, even for those who may have yet to get to repeatably profitable scale. Domestic markets have demonstrated depth and conviction on businesses where other metrics are strong, and even rewarded these businesses with higher price multiples than those available to counterparts in overseas markets," said Ravi Srivastava, Partner, Leo Capital.

Moreover, by being headquartered in India, companies can also leverage this talent pool and access a diverse range of skills and expertise. "Investors recognize the value of accessing and retaining top talent, making India an attractive destination for headquarters," said Somdutta Singh, founder and CEO, Assiduus Global.

Role of regulators and investors

The Economic Survey 2022-23 promised that steps would be taken to accelerate reverse flipping of Indian startups. Looking at startups coming back now, does it mean these steps are being implemented? "Regulators and governments are collaborating to ensure a seamless journey for all startups. An example of such an effort is the IFSC GIFT City, mentioned above, where the Indian government is consistently striving to establish it as the top choice for various sectors, such as financial services, education, fintech, aircraft, ship leasing, and ESG, among others," added Sutariya.

Adopting tax changes, streamlining regulatory procedures, and improving the business environment are some of the steps taken by the Indian government. "Overall, favorable government regulations, the expansion of the Indian startup ecosystem, the sizeable local market, and the changing global tax landscape can be blamed for the trend's reversal. The potential of India as a center for innovation, development, and profitability has been unlocked thanks to a combination of these factors, which have rekindled interest among Indian unicorns and late-stage businesses," said Somdutta Singh.

The uncertainties surrounding global trade relations may also have played a role in influencing these unicorns to decide to return to India. "The Indian government has provided numerous incentives to businesses, particularly startups operating in the fintech and venture capital sectors, enabling them to conduct their operations globally from the IFSC located in India. The current state and structure of the IFSC appear to be the most viable choice for Indian startups to facilitate fund transfers and sustain uninterrupted global operations," added Sutariya.

Over recent years, the Indian government has undertaken numerous initiatives to boost startup growth and enhance the ease of doing business within the country. These initiatives encompass policy reforms, regulatory simplifications, and targeted tax incentives for startups and unicorns. "The proactive support displayed by the Indian government toward fostering the growth of the Indian startup ecosystem has also gradually altered investor sentiment. While the 'flipping' phenomenon was a common requirement by certain investors in the past, the evolving landscape and emergence of numerous success stories within the Indian startup ecosystem have led investors to acknowledge and appreciate the immense potential and value of startups headquartered in India," said Sanjay Gandhi, Head – Legal & Compliance, Artha Venture Fund.

The flipping often was a requirement for investors who felt that they could have better control or governance enforcement if the company is registered overseas. As Indian startups mature, the business climate improves and governance and legal enforcement become easier in India, the investor confidence has also improved. They are way more confident about having India as a domicile. "Rejuvenated Indian capital markets now allow the investors a more defined exit for larger companies via the IPO route which is not lucrative in say UAE or Singapore. Lowering the period for long-term capital gains on the unlisted stocks is also a trend in the right direction," said Ashwani Singh.

Roadblocks

The major hurdles are threefold, Taxation of ESOPs – Vested and unvested shares, legal unwinding of structures and adhering to ROC compliances and taxation of overseas shares which leads to a tax incidence are paramount. PhonePe investors paid INR 8000 crore in taxes to shift its domicile to India from Singapore. "If you want to move to India as a domicile, we have to do a fresh market valuation and pay tax on the delta. Our investors have paid almost Rs 8000 crores in taxes just to allow us to come back to India," said Nigam, at a YouTube Live.

"Startups may encounter taxation-related challenges when moving back to India. Understanding and complying with the tax structure, including corporate taxes, goods and services tax (GST), and other levies, can be complex. Managing financial aspects, including repatriation of funds, foreign exchange regulations, and transfer pricing, requires careful planning and compliance," said Somdutta Singh.