Reverse Flipping: The rise & rise of internalization

Over the last decade, as India’s economy expanded, a trend of “flipping” also seemed to pop up - Indian startups, like Groww, Razorpay, Meesho and PhonePe chose to set up and incorporate holding companies in foreign jurisdictions like Singapore, US (Delaware) and Cayman Islands. The idea was simple: easier access to capital and flexible holding structures.

In these cases, although the operations remained India - centric, the parent legal entity was offshore. But as these startups started to scale, the Indian capital environment kind of evolved, and the very same structures became inefficient, and costly.

Most global VC funds, especially those based in Silicon Valley or Southeast Asia, preferred dealing with entities structured under familiar legal frameworks like Delaware or Singapore Company Law. And these advantages also came at a cost. A startup headquartered in India but structured in Singapore created lot of resistance – taxation on indirect transfer, GAAR exposure, and lot of concerns around “place of effective management”.

Reverse flipping – or the act of bringing back a startup’s domicile from an offshore jurisdiction back to India – is now gathering momentum. Recent moves by companies like Meesho, Groww, PhonePe, and Pepperfry signal a clear shift in strategy. With IPOs on Indian bourses becoming more attractive and regulatory reforms making the process easier, startups are now realigning their domicile with their market.

For instance, Meesho, originally incorporated in the US, recently completed its reverse flip to India and has filed a DRHP (Draft Red Herring Prospectus) with SEBI for its IPO. According to reports, this internalisation has cost Meesho nearly $280 – 300 million in tax outflows, due to capital gains taxes on share swaps. However, the strategic payoff – an Indian listing and better alignment with Indian investors and users - is expected to outweigh these costs.

Anatomy of a Reverse Flip

Reverse flips are usually executed through:

• Inbound Mergers: Where the foreign holding company is merged into the Indian operating entity, the assets and operations of the foreign entity are eventually owned and controlled by the Indian entity, and the shareholders of the Indian entity are issued shares of the Indian entity as consideration. This requires NCLT approval (under Sections 230-234 of the Companies Act, 2013) and RBI approvals (RBI Cross Border Merger Regulations, 2018) but is tax-neutral under Section 47(vi) if all conditions are met. This is best suited for wholly owned structures and seems to be a simple form of internalisation.

• Share Swaps: Where foreign shareholders exchange shares of the offshore Holdco for shares in the Indian company. This route is quicker but typically triggers capital gains taxes under Section 9(1)(i) – indirect transfer provisions and is generally common where IPO timelines are tight. In case of a share swap, the Indian company needs to adhere to FEMA (NDI Rules), 2019, FEMA (Overseas Investment Rules), 2022, Income tax Act, 1961, and the rules and regulations therein.

• Slump Sale and Liquidation: Less common due to complexities and tax inefficiencies, this involves transferring the business and then liquidating the offshore entity. The business is sold to the Indian entity, and the foreign company is liquidated post-sale.

Each method comes with its own regulatory, legal, and tax implications. FEMA compliance (NDI, ODI), Press Note 3 scrutiny, SEBI’s lock-in rules, and ESOP restructurings all need careful navigation.

The Indian government has proactively enabled this trend:

Reform	Impact
Section 233 Amendment	Enables fast track cross-border mergers
Angel Tax Exemption	Exclusion for DPIIT-registered startups
GIFT City Expansion	Middle ground for IP structuring or dual listings
Press Note 3 Clarifications	Beneficial ownership disclosures tightened

The cost of coming home – Tax implications

The biggest hurdle in a reverse flip is taxation.

If the reverse flip is implemented by way of an inbound merger, the shareholders of the foreign amalgamating company will be able to claim exemption from capital gains tax arising out of such transfer, subject to the transaction qualifying as an ‘amalgamation’ as per Income Tax Act, 1961.

Therefore, in case a reverse flip implemented by way of cross border merger, which does not meet the definition/ conditions set out under the IT Act to be considered as an exempt transfer, it would tantamount to cancellation of shares of the foreign company as held in the Indian company and consequently, capital gains upon extinguishment of such shares may be taxable in the hands of the foreign company.

In the case of a share swap, the foreign shareholders will be subject to tax in India on the difference between the value of shares of the Indian entity at the time of such reverse flip and the cost of acquisition of the shares of the foreign entity. However, the determination of acquisition costs and the valuation of the Indian entity are often points of contention between businesses and tax authorities.

When foreign shareholders swap their shares for Indian shares, they typically trigger capital gains tax in India - especially where the value of foreign shares is derived substantially from Indian assets (Sec 9(1)(i)).

Therefore, in case of a reverse flip by way of swap of shares, the indirect transfer tax provisions shall have to be evaluated from the perspective of extinguishment of shares of the shareholders of the foreign company. The source rule under Indian tax law taxes any share that derives > 50% of its value from Indian assets. This has led to large tax bills:

PhonePe: Reported tax outgo of nearly INR 8,000 crore – the highest ever reverse flip tax in India

Groww: Paid over $160 million during its redomiciliation in restructuring and tax liabilities

Meesho: Estimated to have incurred $28-30 million in capital gains tax as part of the flip

Consequently, investors are likely to push for robust exit provisions, such as quick IPO, to recoup their investments, amplifying the pressure on the Indian entity’s short-term performance. This focus on near-term exit strategies may, however, compromise, the company’s ability to take a long-term strategic view, potentially affecting its growth trajectory and market positioning.

Tax treaty benefits that were previously available to foreign shareholders may not necessarily be available to them in the resultant Indian company, unless India has signed a Double Taxation Avoidance Agreement (“DTAA”) with the country they are residents in.

For example, any investment in the shares of an Indian entity until April 1, 2017, by an entity resident in Singapore was grandfathered from capital gains tax in India. Accordingly, any capital gains arising from the alienation of such investments (if such investments are made after April 1, 2017) will be subject to capital gains tax in India as per the DTAA between India and Singapore.

Exit for Investors

Foreign VC/PE funds often have a fixed horizon for exit. As IPOs become a dominant exit route, alignment with Indian public market expectations is key. Offshore structures introduce uncertainty, require additional regulatory disclosures, and may limit participation by domestic investors.

Reverse flipping therefore becomes not just a compliance or cost issue, but a strategic imperative to ensure exits. There are also some risks involved wherein IPO pricing may be aggressive to recover reverse flip tax costs or where some early shareholders may not be able to offload shares quickly due to SEBI’s 6-month lock-in.

Parting thoughts

Reverse flipping may be costly - but it sends a strong signal to the market: Indian startups are ready to grow, raise capital, and list in India.

For founders, this is about control and credibility. For investors, it's about exit visibility. And for the public, it's about finally owning a stake in the country’s most valuable tech stories.

The flip is now back home - and it's here to stay.

If you would like to learn more or require assistance structuring transactions, talk to us at contact@dissent.one.