India’s Regulatory Reforms : A game changer for IPO-bound Startups

India’s regulatory reforms are set to speed up the return of IPO-bound startups that had previously moved abroad for better capital access and lower taxes, according to bankers, lawyers, and investors. Many Indian startups, which once chose to be based overseas, are now eager to come back home as the country’s IPO market shows significant growth.

A recent regulatory change has eliminated a lengthy approval process for foreign-based companies looking to merge with their Indian subsidiaries, a move known as a "reverse flip" merger. Previously, the process required approval from the National Company Law Tribunal, which could take 12 to 18 months. Now, the time frame has been shortened to just three to four months, making it easier for startups to relocate to India.

Startups like Razorpay, Pine Labs, and KreditBee are nearing completion of their reverse flip mergers, while others like Zepto, Eruditus, and InMobi are also working on shifting back to India, as they prepare for future IPOs. Sources familiar with the matter confirmed these developments but chose to remain anonymous.

Razorpay’s CEO, Harshil Mathur, emphasized the advantage of returning to India, stating that being based in the country is beneficial from a listing perspective as it's a market where the company is well known. Razorpay, currently domiciled in the US and valued at $7.5 billion as of its last fundraising in December 2021, plans to move its base to India.

The Indian IPO market has been thriving, with startups like Ola Electric and FirstCry raising $9.17 billion in the first nine months of the year, up significantly from $4.68 billion during the same period last year, according to LSEG data. This makes India one of the few bright spots for capital raising in the Asia-Pacific region.

Mehul Shah, a partner at Khaitan & Co., stated that the simplified reverse flip process, which now bypasses court approvals, is expected to attract more startups looking to list in India. Prior to the rule change, companies like PhonePe and Groww had already completed the process, but only after facing significant challenges. PhonePe paid around $1 billion in capital gains taxes to complete the move, which its CEO described as a "stiff shock," while Groww took years to finalize its merger.

Gaurav Sood, head of equity capital markets at Avendus, noted that the recent regulatory update will encourage even more startups to reverse flip, given that several companies were already in the process prior to the change. The move back to India is largely driven by the country’s listing rules, which require companies to be locally based in order to go public on Indian exchanges. India also prohibits dual listings, and there has been limited success for Indian companies listing abroad. Furthermore, domestic regulators, including the Reserve Bank of India, prefer local firms for granting operational licenses, especially in the fintech space, and increased scrutiny of foreign investments has added compliance risks for startups.

While India has eased the reverse flipping process, there is no sign of capital gains tax relief for returning startups. Commerce Minister Piyush Goyal commented in March that startups would still be subject to taxes when relocating to India, as they are seeking better valuations in the local market. His office did not provide additional comments. Despite these tax implications, India’s growing appetite for tech stocks, driven by public and retail investors, offers a lucrative exit strategy for investors, said Sandeep Patil, Asia head at QED Investors.

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