Startups heading to India are gaining momentum in fintech and other segments
MUMBAI/NEW DELHI : Several Indian fintech startups domiciled abroad are considering shifting their base to India, investors and startup founders said, as they seek to gain the confidence of regulators and prepare for public markets. Despite the hefty tax bill on such shifts, several sectors such as consumer tech and health tech may consider a similar move in the near future, they said.
MUMBAI/NEW DELHI : Several Indian fintech startups domiciled abroad are considering shifting their base to India, investors and startup founders said, as they seek to gain the confidence of regulators and prepare for public markets. Despite the hefty tax bill on such shifts, several sectors such as consumer tech and health tech may consider a similar move in the near future, they said.
Flipkart-backed PhonePe decided last year to stay in India after paying $1 billion in taxes, and several others, including Razorpay, Groww and Pine Labs, have shown interest in doing so, the people cited above said on condition of anonymity. The companies did not respond to requests for comment.
Flipkart-backed PhonePe decided last year to stay in India after paying $1 billion in taxes, and several others, including Razorpay, Groww and Pine Labs, have shown interest in doing so, the people cited above said on condition of anonymity. The companies did not respond to requests for comment.
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Companies in regulated sectors believe the shift will help compliance with local laws, while others believe it will help at the time of listing in India.
“Regulated entities are likely to move to India to scale their businesses by complying with regulations and aligning their interests with the regulator’s policy intent, while consumer companies may move to take advantage of India’s attractiveness, especially while going public, as the country will already have a significant investor base familiar with their brand,” said Gopal Srinivasan, chairman and managing director of TVS Capital.
However, software companies cannot change given their American focus, Srinivasan added. According to him, Indian tax laws are designed to be tough to prevent evasion, while the US focuses on facilitating business growth. Unless India eases tax laws and creates a level playing field, software companies may not relocate, he added.
Corporate tax rates are not significantly different between India and the US; however, actions such as share swaps attract capital gains tax in India but not in the US. Similarly, US funds can distribute shares to their limited partners without capital gains liability. “Therefore, it makes sense for foreign VCs to encourage their founders to live in the US,” said one tech investor on condition of anonymity. This is especially true for companies supported by Y-Combinator, an American startup accelerator.
Historically, US investors encouraged startups to settle outside India for lower taxes; However, Indian regulators prefer banking and non-banking entities to be locally registered, and the RBI’s insistence on data localization is driving many companies to India. “Starting with fintechs, the wave of data localization will require other companies across segments like healthcare to come back to India,” said Anurag Ramdasan, partner, 3one4 Capital, an early-stage venture capital firm.
For many start-ups, the change of domicile would mean setting up a company in India that would buy the shares of the foreign entity, resulting in capital gains in India as well as the US. Another way is to buy a bankrupt company in India and then merge with the foreign entity to reduce the outflow of capital gains. “It is easier to switch from Singapore to India than from the US to India. The tax liability in the US to move out of its jurisdiction is high,” said another investor.
Tax leakage is the main concern for all stakeholders; However, the liability will arise at both levels, but steeper in the US, said the founder at one of the companies mentioned above.
“Tomorrow, if you go for a deeper license — say a banking license or payments bank or small finance bank license — it might be easier to get it through an Indian entity,” said a unicorn fintech entrepreneur who is considering the move.
For fintechs, licensing rules are a bigger reason to move to India than IPO-related reasons, said another fintech entrepreneur. Still, the cost of shifting could be costly, the founder said, adding that it could cost his company between $700 million and $1 billion. Some of the burden is on the company and the rest on the investors. Given the high costs, there must be a strong reason for the shift, he added.
The way PhonePe switched was quick but expensive, while there are cheaper ways to switch that take up to two years, he added, saving $100-200 million. “There will probably be structures where the burden could be lower,” he added.
Software startups have the least incentive to move to India as they do not fall under regulated entities and most of their customers are in the US. However, if they choose to list in India, they can also look at an Indian domicile as such companies can get better valuations locally.
An investor with a home-grown PE fund said most software as a service (SaaS) companies would be valued better if they were listed in India rather than a major foreign exchange.
According to Sudip Mahapatra, a partner at S&R Associates, a law firm, demand for tech IPOs has slowed. “As the current situation improves, we are likely to see more of these companies returning to India,” he added.
