Startups coming to India gain momentum in fintech, other sectors

Flipkart-backed PhonePe decided to stay in India last year after paying a billion dollars in taxes, and several others including Razorpay, Groww and Pine Labs have shown interest in doing the same, the people cited above said on condition of anonymity. Told on The companies did not respond to requests for comment.

Companies in the regulated sectors believe the change will help in compliance with local laws, while others believe it will help with the timing of listing in India.

“Regulated entities are likely to move to India to grow their businesses by following the rules and aligning their interests with the policy intent of the regulator, while consumer companies may relocate to take advantage of the attractiveness of India, especially While listing in the IPO, because the country already has a large investor base familiar with their brand, said Gopal Srinivasan, chairman and managing director of TVS Capital.

However, software companies may not shift given their US focus, Srinivasan said. According to him, Indian tax laws have been made stricter to prevent evasion, while the US focuses on facilitating business growth. He said that until India relaxes tax laws and creates a level playing field, software companies cannot grow.

Corporate tax rates do not differ significantly between India and the US; However, actions like swapping of shares 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 be based in the US,” said one tech investor on condition of anonymity.

Historically, US investors encouraged startups to be based out of India for lower taxes; However, Indian regulators prefer banking and non-banking entities to be registered locally, and RBI’s insistence on data localization is attracting many companies to India. Back in India, says Anurag Ramdasan, partner, 3one4 Capital, an early-stage venture capital firm.

For many startups, change of domicile would mean forming a company in India that would acquire the shares of the foreign entity, resulting in capital gains in India as well as in the US. Another way is to acquire an insolvent company in India and then merge with the overseas entity to reduce the outflow of capital gains. “It is easier to shift from Singapore to India than from the US to India. The tax liability is too high in the US to move out of its jurisdiction, said another investor.

Tax evasion is the main consideration for all the stakeholders; While the liability will arise at both the levels, it will be higher in the US, said a founder of one of the above-mentioned companies.

Reflecting on the move, a unicorn fintech founder said, “Tomorrow, if you go for a deeper license – for example, a banking license or a payments bank or a small finance bank license – it will have to be obtained through an Indian entity. Might be easier to do.”

For fintechs, licensing rules are a bigger reason to come to India than IPO-related reasons, said another fintech founder. Still, the cost of relocation could be costly, the founder said, adding 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 exorbitant cost, there has to be a strong reason for change, he added.

The way PhonePe moved was quick but costly, while there are cheaper ways to move that can take up to two years, he said, saving $100-200 million. “There are likely to be structures where the burden can be reduced,” he said.

Software startups have the least incentive to come to India as they do not come under regulated entities, and most of their customers are in the US. However, they may also consider Indian domicile if they choose to list in India, as such companies can fetch better valuations locally.

An investor with a domestic PE fund said most software as a service (SaaS) companies would be better valued if they were listed in India than on a large foreign stock exchange.

According to Sudip Mohapatra, partner at law firm S&R Associates, demand for tech IPOs has slowed down. “Once the current situation improves, we may see many of these companies bringing their corporate parents back to India,” he added.