Summary: The trend of Indian businesses relocating offshore is reversing, with many now seeking to “reverse flip” to India, driven by the nation’s vibrant economy and capital markets. While the reverse flip offers significant opportunities, it requires careful navigation of legal processes, along with addressing complex regulatory, and corporate compliance aspects. Understanding these key considerations is crucial for companies contemplating a return to India.
It started with goodbye
Ease of doing business, customer preference, greater access to funding, allure of the sophisticated offshore capital markets, and favourable tax and regulatory regimes had led to many Indian businesses relocate and headquarter offshore. India’s potential remained a promise, until it began to deliver.
Homeward bound
Over the last few years, the India story has seen a resurgence, led not only by economic activity and fundraising climate, but very notably by the vibrancy of Indian capital markets. It was not surprising then that Indian capital markets held a 22 per cent share of global IPO activity in the first quarter of 2025. Fueled by this resilience and renewed sense of partaking in the India story, Indian enterprises are looking homeward again. The years 2024–25 have witnessed companies across sectors, such as fin-tech, stock broking, e-commerce and gaming, completing their flips to India.
A “reverse flip” may be achieved by an entity through either of two ways :
- Share Swap: Under this mode, the shareholders transfer the shares they hold in the overseas holding company to an existing Indian entity in consideration for which the Indian entity issues its shares to such shareholders. This is effectively an FDI–ODI share swap, and the government has only recently liberalised the NDI Rules with effect from August 16, 2024, to permit share swaps of this nature. While made with good intent, these regulations have not clarified all the issues that could accompany such share transfers, including whether residents can disinvest existing overseas investment based on the swap (given the regulations are written with non-residents in mind), whether subsidiaries can hold stakes in a parent if these were to be effected through a staggered acquisition plan, etc. This route works for some structures but not universally and may not be tax neutral as well. Where possible, this route offers speed of execution.
- Cross Border Inbound Merger:
- NCLT route: Here, the foreign entity merges into the Indian entity such that the entire business of the overseas holding entity stands transferred to the Indian operating entity, and in consideration, the Indian operating company issues its securities to the shareholders of the overseas holding entity. This structure is primarily governed by Section 234 of the Companies Act, 2013, Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (“CAA Rules”), and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (“Cross Border Regulations”), which read together provide for a deemed RBI approval regime for cross-border inbound mergers. This structure is well-established and a frequently used method for reverse flips, with successful examples being Pepperfry, Groww, Zepto, and Pine Labs. Given this mode includes the jurisdictional NCLT, it is time consuming, and depending on the jurisdiction, the NCLT orders have ranged between 5–14 months.
- Regional Director approval –recent regulatory fillip: To provide impetus to the Gharwapsi of Indian Unicorns, the Ministry of Corporate Affairs (“MCA”) on September 9, 2024, introduced sub-rule 5 to Rule 25A of the CAA Rules, pursuant to which the merger of a foreign holding company incorporated outside India with its Indian wholly owned subsidiary company can be undertaken through the fast-track route provided under Section 233 of the Companies Act, 2013. This provision has become effective from September 17, 2024. The fast-track route is an attractive option for a reverse flip, as it could potentially be concluded in three–four months; however, some teething interpretation issues with this new provision exist, including that on the requirement of RBI approval. (Please refer to our blog for more details) These are expected to be clarified over time. The MCA has recently introduced a corresponding amendment to Rule 25 of the CAA Rules for abundant clarity. Dream11 and Razorpay, have been reported to have completed their flips using the fast-track route.
Based on specific circumstances, the appropriate structure may differ for each specific company, including the laws and regulation (including tax) of the jurisdiction of its holding company, its cohort of investors and applicable restrictions, market and sector dynamics, its IPO plans, etc.
Although long drawn, the cross-border inbound merger has become the method of choice for most companies to achieve the reverse flip, including on account of potential inefficiencies in the share-swap route.
Knowing the map is not enough!
Each enterprise may have its own nuanced fact patterns, but a few common considerations that need a solution have been set out as follows:
- Capital Structure Alignment and Recasting of the Shareholder Rights:Given the holding company would now be India, the shareholders agreements and instruments held by shareholders would need to be relooked at from the Indian legal framework perspective. However, there may be some challenges in mirroring shareholder rights in India due to restrictions under applicable laws in India, including Foreign Exchange Management Act, 1999 (FEMA), embargo on assured returns / restrictions on forward-looking deferral constructs.
- Assessment of Foreign Direct Investment–Related Conditions: Since a reverse flip would result in the investors (including foreign investors) / potential stock holders directly holding shares in an Indian company, holding by foreign investors needs to be in accordance with the pricing guidelines, entry routes and approval requirements, sectoral caps, and attendant conditions, including reporting requirements, for a foreign investment as set out in the Foreign Exchange (Non-debt Instrument) Rules, 2019 (“NDI Rules”), as well as in compliance with Press Note No. 3 (2020 Series), which regulates investments from / beneficially held by investors from land border countries, without prior approval.
- Employee Stock Options–Related Issues: Ensuring smooth transition of employees and employee benefits such as ESOPs from the foreign holding company to the Indian operating company is key. Indian law has eligibility conditions on who could be ESOP holders, and planning for ESOP migration / cancellation/ settlement could be a critical path item.
- Regulatory Approvals: In addition to the shareholders’ and creditors’ approvals and the NCLT’s sanction to the Scheme, it is necessary to evaluate the applicability of other regulatory approvals, such as sector-specific approvals from regulators, including the RBI, the Insurance Regulatory and Development Authority of India (“IRDAI”), or approvals from the Government / RBI under NDI Rules, notification to the Competition Commission of India (“CCI”), particularly for new-age businesses in view of the recent deal value threshold amendments.
- Eye on Listing: For many startups, the reverse flip may be the first step towards a near-term IPO. However, the impact of the structure for the reverse flip, including shareholder instruments, rights and obligations, etc., should be thought through upfront. This will ensure that the end-state structure does not impact IPO eligibility / readiness.
- Other Potential Considerations: Other nuances to consider include the following:
- Compliance by the end-state structure (post the reverse flip) with the (i) layering rules applicable to both domestic and overseas investments; (ii) limit for total financial commitment under the overseas investment regime (i.e., 400% net worth of the Indian holding company relevant for groups with overseas investments / financial commitments like loans and guarantees).
- Under the Cross-Border Regulations, upon merger, any borrowings / guarantees provided by the foreign holding company would become the borrowings / guarantees of the Indian entity. These need to comply with the FEMA framework for External Commercial Borrowing within a transitional period of two years. Lender engagement may be required in view of the two-year moratorium under the Cross-Border Regulations on payments from India and potential alternatives. All security creation (like offshore debt guarantees, share pledges on Indian company shares) will need to be evaluated from the exchange control framework.
- Similarly, any other assets transferred to the Indian entity pursuant to the merger not permitted to be held by an Indian entity under FEMA will need to be disposed within two years and sale proceeds remitted back to India.
Concluding Remarks:
India’s position as a macro-economic bright spot in the global economy is not transient. The recent successful reverse flips have set in motion a yearning to return home and be part of the Aatmanirbhar Bharat vision. Given that this phenomenon is fairly recent, some issues and regulatory gaps may arise, which makes it important for the government and regulators to proactively act as enablers. The recent amendments to the Companies Act, 2013, is a clear statement that reflects this intent. While it is evident the nuances of each company’s journey back will be specific to its business, sector, the growth cycle, and the industry direction and headwinds / tailwinds, it is also clear that there is a path to return home.
For further information, please contact:
Harish Sekar, Partner, Cyril Amarchand Mangaldas
s.harish@cyrilshroff.com
