Its decision to shift its parent entity comes at a time when the Indian government has set up an expert committee to suggest measures to encourage local fintechs and other startups domiciled abroad to relocate to Gujarat International Finance Tech (Gift) City’s International Financial Services Centre (IFSC), according to people in the know.
The committee — comprising representatives from the central bank, fintech founders, IFSCA, Gift City and venture capital investors — is awaiting consultation from these stakeholders. Gift SEZ is an IFSC under the Special Economic Zones Act.The flip back
Razorpay has begun the process of “reverse flipping,” said a person privy to the information. “They have kicked off the first stage of a multi-layered process to bring its parent entity back to India. It will take time and a good amount of funds, but the management and board are keen on it. This makes sense in a highly regulated sector like financial services,” said the person, who did not wish to be identified.
Responding to ET’s queries, Razorpay confirmed that it has begun the process of reverse flipping from the US to India, but declined to share further details.
After moving its parent firm back to India, the payments firm could look at a potential listing in India, said another person, adding, “The plan around its IPO (initial public offering) is still a bit far away, but the priority is to have the company domiciled in India.”
$100-billion gross transaction value
The company, founded in 2014, is in a critical phase as it awaits a final payment aggregator licence from the Reserve Bank of India (RBI). Since December last year, Razorpay, along with leading online payment platforms including PayU and Paytm, have been asked by the central bank to pause onboarding of new merchants.
Razorpay processes around $100 billion of gross transaction value across both online and offline digital payments. It launched its offline business last year through the acquisition of Ezetap for around $200 million.
To bring greater credibility to its brand, Razorpay recently announced the formation of an advisory board comprising a clutch of retired bankers, civil servants and an RBI deputy governor. While it has not changed its board of directors yet, the fintech firm could possibly expand its board later, said people in the know.
Fintechs come to India
Razorpay was the second Indian startup which made it to Y Combinator (YC) in 2015, just when the Silicon Valley incubator had begun to expand its portfolio with more Indian startups in its batches. Online tax filing platform ClearTax was selected in 2014.
“As a YC company, you are made to be domiciled in the US because they incubate you and eventually pump in early-stage funding,” said the first person cited earlier.
Cashfree is another YC-backed payments startup domiciled in the US, and it competes with Razorpay.
Earlier this year, PhonePe founders Sameer Nigam and Rahul Chari said their investors, including Walmart, which holds around 80% share, had to cough up Rs 8,000 crore as tax payment in India. It was part of the long-term capital gains tax that PhonePe had to pay as its valuation jumped manifold between moving out of India and flipping back.
“We have collected the names of over 20 existing unicorns (from) a list of 100 who have reached out and are actively looking (to move back). Some of the investors have said if this becomes smoother, they would like to move domicile here (India),” Nigam had said.
During a recent interaction with ET, Pine Labs chief executive Amrish Rau had said, “The decision (of shifting domicile) should not be based on valuations or taxation… It should be on whether the technology built is for global or domestic markets. And that is the discovery that is undergoing with Pine Labs currently. Based on those outcomes, we will decide on the best domicile for the company.”
Legalities & taxation
Legal experts said there are two major implications of a company flipping to India. The first is a direct tax on the firm based on its valuation, as well as on investors. The entire shareholding structure may need to be reworked.
The other major challenge for enterprise startups is customer contracts, which may need to be changed.
“The big challenge is around the ability of these tech startups to move the business (including IPs) at a current fair valuation, which would have gone up on account of them having customers and their revenue in the overseas entity. Also, it would have raised investments in the overseas entity,” said Ashwin Bhatt, partner, NovoJuris Legal.
He said domiciling back in India would lead to higher tax implications for these startups and their investors. Besides, they should adhere to the new overseas investment regulations notified by RBI in 2022, said Bhatt.
There are two ways in which founders set up startups — setting up directly in the US with operations based out of India or, setting up here and then flipping to the US to attract venture money. Eventually, in the second case, the Indian entity gets acquired by the US holding company at a nominal value.
“When a startup alters its legal domicile… the firm might face double taxation on its global income if it is deemed a resident of both countries,” said Sonam Chandwani, managing partner, KS Legal and Associates.
From a legal standpoint, the startup must adhere to Indian requirements concerning foreign direct investment, as well as local laws governing corporate structure, labour and compliance, she said.
Gift City alternative
The government has been pushing Indian companies to evaluate Gift City as an attractive destination for global capital and tap into international market opportunities. Last week, ET reported that KredX, an invoice discounting startup, went live with its operations in Gift City.
ET has learnt that the expert committee set up by the government comprises founders such as Lalit Keshre of Groww and Nikhil Kamath of Zerodha, along with RBI executive director G Padmanabhan and investors like Siddharth Pai.
The mandate of the committee is to suggest measures to encourage fintech startups domiciled outside India to relocate to Gift city and come up with suggestions to develop IFSC as a global innovation hub.
The Economic Survey 2023 highlighted the need to encourage Indian startups to reverse flip. However, current Indian laws make reverse flipping time-consuming and expensive.
(Graphics & illustrations by Rahul Awasthi)