Written by Pranav Athreya & Om Chandak.

Introduction 

In the past few years, a series of events have unfolded in the Indian startup scene, firms that once use to migrate overseas are now embarking on reverse journeys. Unicorns like PhonePe, Meesho, Zepto, Groww, and Razorpay, which initially registered offshore in Singapore, Delaware, or other foreign tax havens, are now ‘flipping’ back and re-domiciling in India. This flip points to the evolving regulatory and economic landscape in India, one that increasingly encourages innovation and access to capital at home. 

This article, firstly, will look back at why startups initially decided to go overseas, examining the attraction of international capital markets, easier offshore vehicles, and the initial impediments of India’s regulatory regime. Secondly, it will look at why so many startups are looking to re-domicile now. Lastly, it will examine how this reverse-flip process can be streamlined by addressing recurrent issue of Employee Stock Ownership Plans (“ESOPs”) migration.

Why Startups Left?

The term ‘flipping’ is a process where the ownership of the company is shifted overseas, although its day-to-day business continues in India. The primary motive for shifting the business ownership is a relatively favourable business environment other jurisdictions offer. Shifting the ownership overseas leads to access to global investors, easier regulatory regimes, and better tax advantages as compared to India, which ranked 119 in the Ease of Doing Business Index between 2008 to 2019.

Previously, the framework of Foreign Exchange Management Act, 1999 (“FEMA”) imposed restrictions on inbound & outbound investment. There were concerns regarding round-tripping structures. Although there was no express prohibition for this, due to regulatory concerns the court viewed it in a negative light. This deterred such structures from being implemented.

Another concern is the angel tax regime. According to Sec. 56(2)(viib) of the Income Tax Act (“IT Act”), the difference between the issue price (“unlisted entity”) and the company’s fair market value (“FMV”) is taxed under the heading of income. Calculating FMV was subjective to individual companies and regulatory bodies. This system of taxation can be seen as dispute-prone which leads to the shifting of ownership overseas.

Additionally, the rules on ‘Indirect Taxation’, pose a challenge. Under the same, if shares of a foreign company derived most of their value from assets in India, they would still be subjected to capital gains, irrespective of whether those shares are traded outside India. The Hon’ble Supreme Court in the case of Vodafone International Holding v. UOI held this deal outside the purview of India’s tax framework. The Parliament, via the Finance Act, 2012, inserted Explanations to Section 9(1)(i), which nullified the SC’s decision and made indirect taxation retrospectively applicable. The ruling put foreign investors in a difficult position, which would reduce their investment appetite in India.

Other than the reasons listed above, there are a few more worth noting. Convertible instruments under FEMA were inflexible; that is, only compulsory convertible securities were permitted under the automatic route, while optional or redeemable ones were treated as debt, requiring RBI approvals. Listing restrictions were one of the reasons that prevented Indian companies from directly accessing global markets such as NASDAQ, forcing founders to flip into countries like Singapore or Delaware for overseas IPOs. Together, these bottlenecks created incentives for startups to domicile abroad between 2010 and 2020, as foreign holding companies offered flexibility in raising funds, structuring exits, and granting employee incentives. Additionally, even after flipping, if a company wants to reverse flip, then the company has to go through the NCLT process (“in-bound merger”), which takes 12-18 months. Collectively, these concerns made overseas jurisdictions more attractive for founders.

Policy Tailwinds Driving Reverse Flips 

The recent shift from flipping to reverse flipping is rooted in the regulatory changes. Responding to the issue of round tripping and outbound and inbound investment, the government released the Overseas Investment Rules, 2022 (“OI Rules”). Under the new framework, Rule 13(1) permits Indian entities to hold or restructure foreign subsidiaries without automatic round-tripping concerns, while Rule 19 streamlines approvals through general permissions, enabling greater flexibility and certainty for cross-border expansion.

The Parliament in its Union Budget 2024 put a step forward in strengthening the startup ecosystem and boosting investor confidence by abolishing the angel tax regime. Section 56(2)(viib) of the IT Act, previously taxed share premiums received by unlisted startups as “income,” which had led to endless disputes on valuation. It’s removal has reassured founders and investors that legitimate early-stage funding will no longer be penalised, which is crucial for the stakeholders involved.

Similarly, the issue of indirect transfer taxation was eased down through Taxation Laws (Amendment) Act, 2021. This amendment eliminated the retrospective applicability of indirect transfer tax provisions enacted in 2012.  Although the provision continues to apply to future transactions, the guarantee that India will not tax retrospectively boosts confidence.

A notable issue was the time-consuming process of National Company Law Tribunal (“NCLT”) approval for inbound mergers. The government has attempted to address the issue by way of an amendment by the Ministry of Corporate Affairs amended Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, to enable inbound mergers, including reverse flips, to be completed through the fast-track merger procedure under Section 233 of the Companies Act. This reform has significantly shortened transaction timelines by shifting approval to the Regional Director rather than the NCLT, giving startups a quicker and less burdensome pathway.

The introduction of Gujarat International Finance Tech-City International Financial Services Centre (“GIFT IFSC”) has emerged as both a practical anchor for India’s startup ecosystem. It is designed to meet the standards of the globally benchmarked financial hub. It offers attractive incentives such as: Units in the IFSC are eligible for a  100% tax holiday for ten consecutive years, exemption from capital gains tax on certain categories of transactions, and flexibility to raise foreign capital in foreign currency. Due to these incentives, GIFT IFSC is now viewed as a hybrid solution which balances both the global investor familiarity with the comfort of operating within India’s regulatory framework, thereby making it a preferred destination for reverse flips.

Mapping the Path Ahead

Indian startups,  Zepto and Meesho are undertaking reverse-flips not merely for regulatory consistency, but to set themselves up for IPO success on Indian bourses, as it eases regulatory restrictions and improves access to capital markets. Meesho, an Indian led e-commerce platform,  has received shareholder approval to raise ₹4,250 crore making it a heavyweight e-commerce listing. This is evidence of market maturity and investor sentiment, with local focus now providing credible IPO routes.

The employees are usually caught in the crosshairs of ESOP migration. In India, when a foreign company is withdrawn and an Indian company is reinstated, the law deems this as a new benefit, which leads to immediate perquisite taxation despite no liquidity event having transpired. In PhonePe‘s redomiciling, this resulted in a sizeable tax burden on employees. Vesting continuity is also impacted: service already earned under the foreign scheme might not be applied to new Indian awards.

The UK addresses this through EMI rollover relief. Replacement options provided in a takeover are based on the initial grant date, maintaining entitlement to tax-favored capital gains treatment and continuity. A similar approach exists in Australia, where, in the case of a corporate takeover, merger, or internal restructure, ESS rollover relief is afforded by the Australian Taxation Office. If there is a replacement of the old employee equity with equivalent rights in the new parent, and if the restructure satisfies the ATO’s prerequisites, namely, 100% takeover, matching economic value, and continuity of employment, the replacement does not trigger an immediate taxing point (tax is deferred until a later disposal or exercise).

A similar mechanism may be created in India either by amending Section 17(2) of the Income Tax Act, 1961, to exempt intra-group ESOP migrations related to re-domiciliation or by incorporating a “rollover continuity clause” into the SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. This, in turn, could provide that when equity awards are replaced upon a reverse flip, if economic ownership and employment continuity remain the same, no perquisite taxation shall arise, and the original grant date and vesting schedule shall be preserved.

Conclusion

This rush of reverse flips is about more than tax or legal reform; it is symbolic of the rise of India as a credible startup hub, truly committed to ease of doing business. The same startups who earlier went abroad for better access to easier capital and exits have come back, supported by improved domestic markets and regulatory trust. However, challenges persist in smooth migrations of ESOPs and lack a fast-track IPO regime. Efficiently addressing these issues would lower the load off the shoulders of founders and employees, make tax provisions fair, and retain innovation and capital within the country-manifesting this homecoming into sustained economic reality.