Written by Ananya Sinha.
In May 2025, the Indian start-up ecosystem saw the successful reverse flip of Razorpay, involving an amalgamation of its US-based holding company into its Indian subsidiary. This marked the first successful reverse flip from the US to India, under the amended fast-track mechanism. Innovation and growth, which is a backbone of the Indian start-up environment, is luring companies to return home.  The common phenomenon of companies incorporating their operations abroad to tap specific benefits is known as ‘flipping’. ‘Reverse flipping’ refers to the process in which Indian companies that were originally incorporated abroad strategically relocating their legal and operational headquarters back to India. The amendment to the Companies (Compromises, Arrangement and Amalgamations) Rules, 2024 (“Merger Rules”), which led to the introduction of Rule 25(A), simplified the cross-border merger process.  This fast-track route has led to a tremendous rise in the reverse flipping process across the Indian start-up ecosystem.

The post aims to highlight, firstly, the regulatory reforms which paved the way for such structured reverse flip. Secondly, the effect of the amendment on the internalisation of the start-ups and the structuring supporting such strategic alignment. Lastly, the regulatory and financial challenges in the scheme and the essence of what future holds for such reverse flips and the start-ups overseas.  

Role of Regulatory Reforms

The 2024 amendment, which led to the introduction of Rule 25A(5), removed the need for National Company Law Tribunal (“NCLT”) approval, which was a required mandate for an overseas firm aiming to merge with an Indian firm. This has paved way for a fast-track route for merger under Section 233 of the Companies Act 2013 (“CA”),which needs only Reserve Bank of India’s (“RBI”) approval currently, reducing the complexity and the time involved in the process. The very instance that there was no change in the Cross Border Merger Rules, the deemed approval will be considered applicable herein as well.

The law in the old process permitted mergers between Indian companies and companies incorporated in certain jurisdictions outside India only through the process under Section 234 of the CA. Previously, a foreign company incorporated outside India was permitted to merge into a company incorporated in India, only if the same was effected through the provisions of Section 230, 231 and 232 of the CA and with prior written approval of the RBI. Prior to the amendment any cross-border merger, as long as it complies (a) with Sections 230-232 of the CA; (b) qualified as a “cross border merger” under the Merger Rules; and (c) was in compliance Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Cross border Merger Regulations”) and deemed to have RBI approval.

The changes have aligned with the strategies of several companies, and despite the high costs and lengthy timeline involved in the process, companies are favouring reverse flip. The key reason behind such a shift is the long-term strategic and financial benefits which has outweighed the challenges of cost and timeline. The simplification of the regulatory reforms, tax rationalisation, and relaxed compliance framework has encouraged the startups to repatriate, irrespective of the hurdles. The 2024 amendment simplified the process in a way that the fast-track route curtailed the lengthy NCLT approval previously required. A regulatory balance has been created, which is encouraging more start-ups to return to India because of the expedited timeline for the inbound merger. The recent reverse flips of Zepto, Flipkart and Meesho is an evidentiary signal of confidence for the Indian start-up ecosystem.

Structuring the Flip: Procedure & Compliance

The internalization process requires a suitable regulatory, legal and tax framework of the relevant jurisdictions. The most commonly process involved herein is (a) Inbound Merger, and (b) Share Swap. The inbound merger usually takes place wherein a foreign entity merges into an Indian entity and the assets and operations of the foreign entity is ultimately controlled by the Indian shareholders of the foreign entity, who receives shares in the Indian entity as consideration. The pre-requisite to compliance usually requires an approval from the RBI and a valuation report by a registered valuer. After the prerequisite is adhered to, the company seeks approval from NCLT by filing an application for approval. The compliance under Merger Rules and Cross Border Merger Regulations also need to be undertaken in the process.

A share swap arrangement on the other hand can be employed, wherein shareholders of the foreign entity exchange their shares in the foreign entity for shares in the Indian entity. The method provides a viable option for internalization, as it caters to specific strategic and financial objectives. PhonePe used this method for reverse flip. The regulations have not clarified the issues pertaining to share transfers, including compliances as to whether resident can disinvest existing overseas investment based on the swap or not. These compliances although offers speed of execution but at the same time create a sense of ambiguity, making the structure not universally acceptable and tax neutral as well.

Effect of Reverse Flip in the Global Indian Start-up Ecosystem

The effect of the strategic internalisation could be marked with the figures of Indian firms with market caps exceeding $1 billion reaching record levels; the Indian stock market is also seeing a surge in the retail participation. Retail investor participation has also tripled from 30 million in 2000 to close to 110 million currently, highlighting a standardization of equity investing. A landscape which was dominated by complex compliance procedures and a very limited scope for funding is now transforming into a more streamlined and entrepreneur-friendly environment.

This reflects the industry views reverse flips not as a passing phase, but a process which reflects structural realignment of the ecosystem. The Indian capital market has become irresistible for homegrown start-ups, with primary aim of the start-ups to list on the exchange, has increased the domestic listings from companies with India-focused operations. The matured capital markets, increased scrutiny by regulatory bodies and enforcement agencies, various exit options in India makes it the most lucrative option for the startups to consider it for the flips. The Economic Survey 2022-23 highlighted that about 39,000 compliances have been reduced and more than 3,500 provisions decriminalized remarkably easing the regulatory burden on startups and fostering a business-friendly environment. Indian authorities have also increased scrutiny on offshore structures, particularly the ones established for tax havens for regulatory surveillance. This combination of circumstances has provided opportunity and pragmatism in fuelling homecoming.

Regulatory and Financial Challenges & Recommendations

Firstly, one of the major challenges which companies have to face during reverse flip are the tax implications. Share swaps, which is one of the most common methods of reverse flip, are met with excessive capital gain tax liabilities for both the investors and companies under Section 9(1) of the Income Tax Act, 1961. It becomes a major issue when the entities domiciled in non-tax neutral jurisdiction such as the Unites States has to face the wrath of substantial taxes. Razorpay paid approximately Rs. 1,245 crore (around $ 150 million) in taxes to the Indian government for shifting the domicile from the U.S. to India. One way of leveraging the benefits of the tax incentives could be to establish the legal base within Gujarat International Finance Tec-City (“GIFT IFSC”), as it provides a certain tax incentive for international financial services. The establishment of presence in GIFT IFSC, however, requires careful consideration due to regulatory compliance. The Indian Government should aim to streamline such tax implications with certain incentives to reduce the cost of flip.

Secondly, the restructuring of employee stock ownership plans (ESOPs) is also required as there exists a minimum cliff of one year from the grant of option of an ESOP before the same is vested. Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014 mandates a minimum one-year gap between the grant and vesting of options, alongside specific eligibility restrictions. A careful restructuring of the ESOPs will help mitigate the tax implications for employees due to the vesting timeline during the flip. A proper restructuring will prevent the differences which exist in vesting rules that trigger perquisite taxation under Indian law, leading the ESOPs to be treated as newly granted options and not letting the beneficiaries fall prey to double taxation.

Thirdly, inbound flips in general engage the Ministry of Corporate Affairs (“MCA”) under Section 230 of the Companies Act, 2013, RBI under Rule 25A of the Merger Rules, Department for Promotion of Industry and Internal Trade (“DPIIT”) under Press Note 3 Competition Commission of India (“CCI”) under Section 4 and 5 of the Act and various other sectoral regulators. However, the approvals from the regulators are not often predictable and delay the entire transaction, which makes the advisors do inter-agency coordination and strategic planning as well for the deal to meet its end. There should be a single window clearance for such approvals making it fast-track and time efficient. Recently, Dream Sports went through the fast-track mechanism under Rule 25A, but was met with regulatory delays due to additional approvals.

Lastly, there is a need for simplification of Overseas Direct Investment (“ODI”) layering restrictions. The 2-layer cap under the ODI regime makes a strong case in principle, but in a complex international setup, a simplification of the structure would be an appreciative move and would reduce any unnecessary effect on the operations.

Way Forward

This article explores how the introduction of Rule 25A has streamlined the reverse flipping process, allowing startups such as Razorpay to shift their legal base to India through a fast-track merger route. Despite existing tax and regulatory hurdles, this movement signifies a strategic shift influenced by investor preferences, prospects of domestic listing, and India’s evolving startup ecosystem. Although the regulatory changes are encouraging reverse flip, issues with regards to capital gains tax remains a significant obstacle. The government should aim to ease the process of return, as it will help India’s appeal as a start-up hub.

According to industry figures at 3one4 Capital and Avendus, about 90% of India’s foreign domiciled unicorns will flip with several companies, which were already in the pipeline before the amendment. Reverse flips are perceived as strategic decisions now with the simplified cross-border Merger rules (within 90-120 days duration), the preference of the investors for Indian-domiciled structure and strategic alignment even overpowers the tax arbitrage. This will also serve with the investor’s purpose of IPO ambitions on domestic exchanges.