The Great Indian Comeback: Legal, Regulatory and Tax Considerations

1. INTRODUCTION

The great Indian startup flip is now hitting the reverse gear. Once seen as the default route to global capital and a blueprint for scaling a startup, the flip structure is now being reconsidered. For over a decade, Indian companies resorted to a mechanism called “flipping” – where companies moved their headquarters abroad (most often to the United States of America, Singapore or the Cayman Islands) while continuing to operate primarily in India. These companies flipped for reasons such as access to capital, favourable tax treatment, better protection and enforcement of intellectual property, and sometimes due to such structuring requirements being mandated by their investors.^[i]

However, in the recent years with waves of regulatory reforms, growing investor confidence in the Indian startup ecosystem and the transformative stage that the Indian capital markets are at, many companies are now opting to reverse flip – a strategic move to relocate their headquarters back to India. Several renowned companies such as PhonePe, Zepto, Meesho, Flipkart and Groww, among others, have already completed their reverse flip, while many are actively considering a similar move.

This article examines the legal, regulatory and tax considerations that arise in reverse flip structures and analyses the evolving legal framework that has promoted this new trend.

2. STRUCTURING REVERSE FLIPS – LEGAL, REGULATORY AND TAX CONSIDERATIONS

A reverse flip can be undertaken through various structures, and choosing the right structure is critical as it impacts the company from a legal, regulatory and tax perspective. The two most common structures which companies usually adopt to undertake a reverse flip are inbound mergers and share swaps.

A. Inbound Merger

In this structure, the foreign holding company (“Foreign Hold Co.”) merges into its Indian subsidiary company (“Indian Sub Co.”) as a result of which the operations and assets of the Foreign Hold Co. are integrated into the Indian Sub Co. and the Foreign Hold Co.’s shareholders are issued shares of the Indian Sub Co. Inbound mergers are governed by the Companies Act, 2013 (“Act”), the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”) and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross Border Merger Regulations”) issued by the Reserve Bank of India (“RBI”).

Under Companies Law(i) Where the Indian Sub Co. is a wholly owned subsidiary of the Foreign Hold Co., the inbound merger can be achieved under the fast-track merger route. An amendment made to the CAA Rules in September 2024 allows the inbound merger of a foreign holding company with its Indian wholly owned subsidiary (under the fast-track route) to be made with the approval of the jurisdictional Regional Director (“RD”), eliminating the need for the approval of the National Company Law Tribunal (“NCLT”) as is required under the traditional merger process. The Indian Sub Co. will have to comply with the provisions of the Act and CAA Rules on fast-track mergers and the merger may be completed within a period of 90 (ninety) to 120 (one-hundred twenty) days.
(ii) Where the Foreign Hold Co. is incorporated in a country which shares land borders with India, a specific declaration in Form CAA-16 is required to be submitted to the RD along with the application for fast-track merger which certifies whether prior approval under the Foreign Exchange Management (Non-Debt Instruments Rules, 2019 (“NDI Rules”) is required for the transaction, and if so, a copy of such approval will need to be provided while filing the application for fast-track merger.

(iii) Where the Indian Sub Co. is not a wholly owned subsidiary of the Foreign Hold Co. the inbound merger will be governed by the traditional merger route. In such cases, the Indian Sub Co. will have to (a) prepare a scheme of merger; (b) obtain necessary board and shareholder approvals (including, where applicable, by special resolution); (c) seek no-objection certificates from its creditors (if any); and (d) obtain approval of the scheme of merger from the NCLT. This is a time-consuming process that typically takes around 9 (nine) to 12 (twelve) months.
Under Foreign Exchange Laws(i) Regulation 9 of the Cross Border Merger Regulations provides deemed approval to mergers compliant with the CAA Rules and the Cross Border Merger Regulations. However, it does not clarify whether prior RBI approval is required for mergers structured under the fast-track merger route. As a matter of practice, it is assumed that mergers under the fast-track route will not require separate RBI approval if they comply with the CAA Rules and Cross Border Merger Regulations.
(ii) The Indian Sub Co. must comply with the entry routes, sectoral caps, reporting requirements, pricing guidelines and attendant conditions under the NDI Rules while issuing shares to non-resident shareholders.
Under Tax Laws(i) Under the Income Tax Act, 1961 (“IT Act”) the transfer of capital assets of the Foreign Hold Co. to Indian Sub Co. and the transfer of shares by a non-resident shareholder in exchange of shares in the Indian Sub Co. are not considered to be taxable transfers (i.e., they are exempt from capital gains tax) if after the merger (a) all property and liabilities of the Foreign Hold Co. vests with the Indian Sub Co.; and (b) shareholders holding at-least three-fourth in value of shares in the Foreign Hold Co. (other than shares already held therein immediately before the merger by, or by a nominee for, the Indian Sub Co.) become shareholders of the Indian Sub Co.
(ii) Additionally, tax losses of the Foreign Hold Co. can be carried forward to the Indian Sub Co. provided at least 51% of the shareholders of the Indian Sub Co. retain their voting rights post-merger.

B. Share Swap

As an alternative to the inbound merger process reverse flips may be structured through a share swap. The amendment to the NDI Rules dated August 12, 2024 brought forth clarity on this structure by aligning the NDI Rules with the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and the RBI’s Master Direction – Overseas Investment, 2024 (“ODI Framework”). Prior to the amendment, the ODI Framework allowed Indian entities to make overseas direct investment against the swap of securities by issuing its own securities or by swapping the shares held by it in another Indian company (“FDI-ODI Swap”). However, NDI Rules did not allow this, and prior RBI approval was required for such transactions under the NDI Rules. The amendment now does away with this conflict and allows FDI-ODI Swaps to be undertaken without the prior approval of the RBI.

Hence, in this structure, the shareholders of the Foreign Hold Co. can swap their shares in the Foreign Hold Co. for shares in a newly incorporated Indian company (“New Indian Co.”). The New Indian Co. will be incorporated to give effect to this transaction as the Indian Sub Co. cannot hold shares of its parent company, the Foreign Hold Co. Consequently, the shareholders of the Foreign Hold Co. become shareholders of the New Indian Co., which results in the New Indian Co. becoming the holding company of the Foreign Hold Co. Thereafter, the Foreign Hold Co. is liquidated in accordance with the law of its jurisdiction, and its assets are distributed to the New Indian Co. This results in the New Indian Co. becoming the new holding company of the Indian Sub Co.

For example:

A, B and C are shareholders of X Inc. (Foreign Hold Co.), and Y Pvt. Ltd. is the subsidiary of X Inc. (Indian Sub Co.). To structure a reverse flip:

(i) A new Indian company Z Pvt. Ltd. (New Indian Co.) is incorporated;

(ii) A, B and C will swap their shareholding in X Inc. for shares in Z Pvt. Ltd. as per the agreed commercial terms and swap ratio;

(iii) As a result of this share swap, Z Pvt. Ltd. becomes the holding company of X Inc., and A, B and C become the shareholders of Z Pvt. Ltd.;

(iv) Subsequently, X Inc. is liquidated in accordance with the law of its jurisdiction and its assets (including the shares of Y Pvt. Ltd.) are distributed to Z Pvt. Ltd.;

(v) As a result of this, Z Pvt. Ltd. becomes the new holding company of Y Pvt. Ltd.

Under Companies LawThe New Indian Co. must be set up in accordance with the Act. Further, the shares issued to A, B and C against swap of shareholding in X Inc. must be issued in compliance with the provisions of the Act and rules made thereunder with regard to private placement and the issuance of shares for consideration other than cash. Once the shares are issued and allotted, the New Indian Co. must comply with the filing requirements prescribed under the Act.
Under Foreign Exchange LawsThe New Indian Co. must comply with the NDI Rules and the ODI Framework, which includes, among other things, the pricing guidelines (requiring the valuation of shares as per internationally accepted pricing methodologies) and reporting requirements, while also ensuring that the investment falls within the applicable sectoral caps and entry routes.
Under Tax Laws(i) The foreign shareholders will be liable to pay capital gains tax on transfer of shares of the Foreign Hold Co., if those shares derive value from assets located in India, however this also depends on whether there are any double taxation avoidance agreements that may apply.
(ii) For the Foreign Hold Co., the transfer of shares of the Indian Sub Co. to the New Indian Co. is not taxable, as it arises from a distribution of assets made pursuant to the Foreign Hold Co’s liquidation.

(iii) In the hands of the New Indian Hold Co., the market value of the shares received is taxable. The portion of the market value up to accumulated profits will be taxed as ‘deemed dividends’, while portion in excess of the accumulated profits will be taxed as capital gains. Additionally, a change in the shareholding pattern may affect the ability of the Indian Sub Co.to carry forward tax loss like in the in-bound merger process.

3. ADDITIONAL CONSIDERATIONS

Beyond the legal, regulatory and tax considerations discussed above, the parties must also take into consideration the following factors while structuring a reverse flip:

CCI Approval: If the transaction triggers the prescribed thresholds for combinations under the Competition Act, 2002, prior approval of Competition Commission of India will be required.
Stamp Duty: The stamp duty payable on the merger order (if applicable), the instrument of share transfer, any transfer of property and novation agreements (if any) must be assessed carefully and factored in with the cost of transaction.
Novation of Contracts: A comprehensive due-diligence exercise should be conducted to review contracts executed by the Foreign Hold Co. and to determine the process for assignment or novation of contracts in favour of the surviving Indian entity (i.e., the Indian Sub Co. in an inbound merger, or the New Indian Co. in a share swap).
Compliance with Foreign Laws: The parties must also comply with the applicable corporate, regulatory, tax and insolvency laws of the jurisdiction where the Foreign Hold Co. is incorporated.
Sector-Specific Approvals: Depending on the company’s business (e.g., fintech, insurance or telecom), additional approvals may be required from the relevant sectoral regulators like the RBI, Insurance Regulatory and Development Authority of India or the Department of Telecommunications.

4. EVOLVING REGULATORY LANDSCAPE

The regulatory framework in India continues to evolve in favour of the reverse flip trend. Recent developments indicate that the government recognises that for flipped companies with primary operations in India, domestic Initial Public Offers (“IPO”) have become an attractive and compelling alternative to overseas IPOs.

In 2024 alone, India witnessed 13 (thirteen) IPOs from erstwhile startups, which raised over INR 29,000 Crores (Indian Rupees Twenty-Nine Crores) of which INR 18,000 Crores (Indian Rupees Eighteen Thousand Crores) were raised through offers for sale enabling profitable investor exits^[ii] and as of 2025, 26 (twenty-six) erstwhile startups have filed their draft red herring prospectus with SEBI.^[iii]

In line with this, the SEBI in its board meeting held on June 18, 2025, approved amendments to its regulations, which further makes the domestic IPO path for companies more attractive:

Promoters who received employee benefits (including employee stock options) at least 1 (one) year prior to the filing of draft red herring prospectus with SEBI can continue to hold such benefits and / or exercise such benefits even after being specified as promoter(s) of the company going for an IPO. Prior to this amendment, promoter(s) were required to liquidate or forego such benefits before the IPO.
Extension of the exemption to the minimum holding period to equity shares arising from conversion of fully paid Compulsorily Convertible Securities (“CCS”) received pursuant to a scheme of merger or amalgamation approved by the NCLT (for court-driven mergers) or the RD (for fast-track mergers). Prior to the amendment, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, only fully paid equity shares, which have been held by the seller for a period of at least 1 (one) year could be offered for sale during an IPO. This minimum holding period did not apply where the equity shares offered for sale were acquired pursuant to an approved scheme of merger or amalgamation by the NCLT or the RD. However, this exemption was not available for equity shares arising out of conversion of fully paid CCS received under such approved schemes, which resulted in certain investors not being able to participate in offer for sale during IPO.

These developments indicate SEBI’s intention to keep in line with the needs of the startup ecosystem and consequently promote reverse flips.

5. CONCLUSION

The reverse flipping trend indicates the growing economy of India and its maturing startup ecosystem. While the path back to India involves navigating the complexities of company law, FEMA, and significant tax considerations, recent regulatory simplifications—such as the fast-track merger route and favourable SEBI amendments—have made it a viable and attractive strategy. It reflects that the regulatory ecosystem in India is now well equipped to retain its companies and bright minds and is no longer just an outsourcing hub for foreign companies. This ‘homecoming’ is likely to accelerate as founders and investors recognize the value of being domiciled in one of the world’s fastest-growing economies, closer to their primary market and customer base.

Authors: Aishwarya H, Chinmayi Venkatesh, Vishnudath Varma

Publication Date: 17 December 2025

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