By Ashwin Manikandan and Haripriya Suresh

India's Compliance Step Removal Boosts Startups' Return

BENGALURU (Reuters) – India's recent scrapping of a time-consuming compliance step will accelerate the return of Indian startups based abroad, allowing them to participate in the country's listing boom, according to bankers, lawyers, and investors.

Since last month, foreign-based companies no longer require approval from the backlogged National Company Law Tribunal for a "reverse flip" merger with a domestic subsidiary. This change effectively reduces the process time from at least 12-18 months to about three to four months.

Many Indian startups that opted to be based abroad for better capital access and lower taxes are now returning home from financial hubs like the U.S. and Singapore, driven by improved initial public offering (IPO) prospects, especially given that India does not permit dual listings.

Notable startups such as Razorpay, Pine Labs, and KreditBee are in advanced stages of completing the reverse flip; others like Zepto, Eruditus, and InMobi are also expected to finalize mergers in the coming months in preparation for IPOs, according to multiple sources.

Harshil Mathur, the co-founder and CEO of Razorpay, emphasized, "India is a home market and a place where everybody knows and understands us. From a listing perspective, it makes sense to be in India." Razorpay, valued at $7.5 billion during its last fundraising in December 2021, is looking to shift to India.

In the first nine months of this year, IPOs in India, including those by startups like Ola Electric and FirstCry, raised $9.17 billion, up from $4.68 billion in the same period last year, according to LSEG data. This growth makes India a standout market for equity capital raising in the Asia-Pacific region.

Mehul Shah, a partner at corporate law firm Khaitan & Co, stated, "With the IPO market thriving, a reverse flip makes sense. The streamlined merger process facilitates swift and efficient scheme approvals without court intervention, further supporting this strategic move."

Prior to the rule change, only a few companies such as Walmart-backed PhonePe and online investment platform Groww had executed a reverse flip. PhonePe paid about $1 billion in capital gains taxes to complete its reverse flip process, which its co-founder termed a "very stiff shock."

Additionally, industry sources noted that the Reserve Bank of India and other regulators favor local firms, contributing to startups' decisions to return home.

An IPO in India also presents a lucrative exit avenue for investors given growing public and retail appetite for tech stocks. According to Sandeep Patil, partner and Asia head at QED Investors, the interest from Indian public investors is significant.

While India has eased reverse flipping norms, expectations for capital gains tax concessions appear slim, as Commerce Minister Piyush Goyal noted that startups returning would still be required to pay taxes. He remarked, "They want to list in India because here's where you get the valuations." His office did not respond to requests for further comment.