Summary: Companies undertaking a reverse flip with an eye on an India IPO may need to navigate a complex web of potentially time-sensitive legal and regulatory issues, which may impact the company’s legal, financial, and compliance frameworks and give founders, investors, and the management lots to consider. If not planned carefully, issues may become bottlenecks or roadblocks during the IPO process. Companies should anticipate Indian regulatory expectations to align moving parts well in advance for a successful and timely IPO.
Introduction
India Inc. has witnessed a trend of startups with primarily Indian businesses incorporating / relocating abroad – in jurisdictions like Singapore or Delaware – to access global capital, leverage flexible ESOP frameworks and favourable tax and regulatory regimes. This offshore structure is common among startups seeking cross-border fundraising with dollar-denominated valuations and potential US listings.
However, with deepening public markets and evolving IPO rules centered around ease of doing business in India and tax considerations, this trend is seeing a reversal. Companies domiciled abroad are repatriating, providing the optical and strategic upside of being domiciled where their core market and operations are located. The Government of India has also demonstrated an intent to facilitate cross-border mergers by streamlining the regulatory framework for reverse flips and simplifying capital reintegration.
Of the several factors driving repatriation, one stands out: exit through the IPO and Indian public markets. Companies are increasingly undertaking inbound mergers to unlock domestic public markets, which potentially offers strong investor appetite, better valuations, and brand visibility among domestic consumers.
Below are some key considerations for founders, managerial personnel, and shareholders of companies eyeing an India IPO post-repatriation:
Capital Structure and Corporate Identity
- Participation in the IPO: Reverse flips may be undertaken through share swaps or cross-border inbound merger by the NCLT route or regional director approval. Under the NCLT route, the foreign entity (“Foreign Co”) merges into the Indian entity (“Issuer”), transferring the Foreign Co’s entire business to the Issuer, and in consideration the Issuer issues securities to the Foreign Co’s shareholders. Post the merger, the Foreign Co’s shareholding in the Issuer stands extinguished and the Foreign Co’s shareholders become the Issuer’s shareholders. These shareholders can participate in the IPO, monetise their holdings and receive proceeds from the public offering. Such shareholders should evaluate whether their securities satisfy the eligibility conditions prescribed under Indian law for participation in the offer for sale. Further, the Ministry of Corporate Affairs has allowed fast-track mergers of a foreign holding company with its Indian wholly owned subsidiary through the fast-track route. For more on this, see Aa Ab Laut Chalein!: Key Considerations for ‘Reverse Flips’ | India Corporate Law.
- Conversion to public limited: The regulatory conversion process to a public limited company with the RoC can be time-consuming and unpredictable. To avoid delays between merger approval and draft offer document filing, the scheme can provide that the Indian transferee company will stand converted upon the merger’s effective date, helping reduce the timeline between the merger and filing.
- Dematerialisation of shares: SEBI has recently amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”), to mandate dematerialisation of an issuer’s existing securities held by some specified categories of shareholders, before draft offer document filing. Accordingly, the issuer should consider issuing all securities pursuant to the merger in dematerialised form.
- Press Note 3 compliance: Issuers often undertake bonus issuances / stock-splits to adjust their per-share value before an IPO. If the offshore entity has shareholders in countries that share a land border with India, such corporate actions could require approvals from the Government of India, under Press Note No. 3 (2020 Series), affecting timelines and structuring decisions. This should be assessed upfront and may also depend on government policy going forward.
- Convertible securities: Under the SEBI ICDR Regulations, all outstanding convertible securities, such as compulsorily convertible preference shares (“CCPS”), must be made fully paid-up and converted into equity shares before filing the red herring prospectus (“RHP”). CCPS holders intending to sell their holdings in the IPO must ensure that the resultant equity shares meet the regulatory eligibility criteria, including the one-year minimum holding requirement. In a welcome relief for reverse-flip structures, SEBI has amended the SEBI ICDR Regulations to allow the holding period of convertible securities at the Foreign Co level to be included towards this one-year requirement, easing exits for legacy investors.
- Other securities: Certain differential instruments like warrants may not be continued at all and must be extinguished before draft offer document filing. Others, like RSUs and SARs, may pose compliance challenges in India before filing. Companies should assess whether to eliminate these offshore or migrate and solve for them within the Indian regulatory framework before the IPO process.
Shareholders’ Agreements
- Investor arrangements: SEBI has specific views on certain common legacy investor arrangements in offshore holding structures. For instance, (i) liquidation preference arrangements may be impacted by the requirement to convert CCPS before RHP filing, (ii) any outstanding buyback arrangements must be settled or terminated before filing the draft offer document, and (iii) special rights (e.g., tag-along and anti-dilution) cannot survive listing and typically need to be waived in the run-up to listing. Once the Issuer lists, the shareholders’ agreement must terminate entirely, taking down all special rights with it. It may therefore not be possible or advisable to mirror all shareholder agreements at the Issuer level. Companies and investors should have these reviewed by legal counsel before the merger from the perspective of a proposed IPO and consider rationalising the Foreign Co SHA prior to the merger to reflect what is permissible in India, rather than trying to replicate arrangements at the Issuer level that may not withstand Indian regulatory scrutiny.
Financial Information and Related Disclosures
- Key performance indicators (“KPIs”): The Issuer must work closely with the merchant bankers to identify the correct set of KPIs for the draft offer document and ongoing disclosure, in line with the SEBI ICDR Regulations and relevant circulars and guidelines. These must be consistent, measurable, and aligned with what has historically been shared with investors in fundraising materials / board decks. In the reverse flip context, metrics which have been previously shared with the investors at the Foreign Co level should also be considered.
- Proforma financial statements: If a restructuring event (like the merger) results in entities becoming subsidiaries of the issuer after the latest period for which financial information is presented, this may trigger requirements for proforma financial statements to show the impact of the restructuring on the Issuer’s historical financials. This is to give investors clarity on the Issuer’s consolidated financial information had the structure been in place throughout the relevant reporting periods. This could also entail disclosure of other financial and operational metrics on a proforma basis, in addition to the disclosures on a restated basis, with such financial and operational data being presented as if the merger was implemented from the start of the financial period. Materiality thresholds as required under the SEBI ICDR Regulations also need to consider the relevant figures on a proforma basis, to determine the events and disclosures material to the issuer on a post-merger basis. Common control considerations will also need to be considered to determine the requirement to include proforma financial statements.
Promoter Identification and Minimum Promoters’ Contribution
- Promoter and promoter group: Legislation in local jurisdictions of the Foreign Co may not have the concept of “promoter” or “promoter group”, and have concepts like “controlling shareholders”. Indian law has broadly control-oriented tests for promoter identification. Identification as a “promoter” of the Issuer has significant consequences pertaining to disclosure in the IPO offer documents, ongoing post-listing disclosures to stock exchanges, and post-IPO lock-in. In some cases, private equity investors may also be identified as promoters. There may also be certain obligations under shareholder agreements on founders / promoters, as well as understanding on whether or not investors can be categorised as “promoters”. It may be easier to assess and address such concerns at the offshore level before the merger, and provide for them in the merger scheme if possible.
- Minimum promoters’ contribution (“MPC”): The SEBI ICDR Regulations require promoters to hold and lock-in at least 20 per cent of the issuer’s post-IPO capital. Shortfalls can be met by certain categories of investors, such as AIFs, banks, and insurance companies (“Relevant Persons”). SEBI has recently expanded the pool of such contributors by allowing the Relevant Persons to contribute converted equity shares towards the MPC.
Employees
- Employee stock-options: While it is important to ensure smooth tax-efficient and legally compliant migration of ESOPs granted at the Foreign Co level, pertinently, exemptions from post-IPO lock-in are only available for shares from ESOPs granted at Issuer level. Under current Indian securities law, employees who exercised ESOPs under the Foreign Co’s ESOP scheme and receive shares of the Issuer in exchange (post-merger) may not qualify for post-IPO lock-in exemptions under current Indian securities law. As such, absent any amendments, the Issuer may need to obtain relief from SEBI in the form of an exemption.
Conclusion
If not identified and addressed early, pre-merger issues could become bottlenecks or even roadblocks stalling the proposed IPO, especially if timelines are tight. From regulatory constraints on shareholder rights and instruments to SEBI’s expectations on eligibility and disclosures, each element of the reverse flip could have potential implications, making it imperative to anticipate and untangle these at the structuring stage. A forward-looking approach grounded in regulatory reality and coordinated with suitable advisors can help ensure that structural legacy issues do not stand in the way of a successful and timely IPO.
For further information, please contact:
Yash J. Ashar, Partner, Cyril Amarchand Mangaldas
yash.ashar@cyrilshroff.com
