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Unicorns flipping to avoid Indian regulations
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SME Times News Bureau | 30 Aug, 2021
Twenty four unicorns had either flipped or were incorporated abroad mostly due to foreign investors' asking.
All
of them have Indian founders who started off in India. A significant
number have operations and their primary market in India. Nearly all
have developed their IP (Intellectual Property) using Indian resources
in India (human, capital assets, government support etc.).
Experts
say flipping results in materially adverse impact on national economic
interest as the nation loses out on significant tax revenues while
ownership of critical data as well as IP is also transferred abroad.
It
effectively becomes a structure to transfer value creation from India
to overseas since most of the business is still being done in India with
teams based here too. It becomes a way for foreign investors to gain
from India's wealth of resources and advancement by bypassing its laws
and regulations.
Among the reasons for flipping is avoiding the
Indian regulatory landscape, Indian tax laws, and scrutiny by Indian
authorities.
Various international investors force their
investee companies to flip abroad and sometimes even keep this as a
condition precedent to their investment in these startups as they want
the data and IP to be headquartered overseas where they will put their
money.
Most of the business is from overseas clients and these
clients want to contract with overseas parent company only although this
is not a valid reason though because contracting with an overseas
subsidiary could serve the same purpose without flipping the company.
Moreover, Indian IT services firms like Infosys, HCL etc. have managed
to do meaningful business in various overseas territories while being
headquartered in India.
Favourable foreign policies that nations
like US and Singapore have adopted also attracts startups and
investors. Some of these policies are lower corporate tax, fixed GST,
zero capital gains tax rate, double taxation avoidance treaties, simple
majority vote on critical issues, evolved IP protection laws etc.
Unicorns also desire to publicly list overseas with the assumption that valuations are higher due to deeper pools of investors.
The
implications of flipping is that it leads to immense economic and
national loss as an Indian company becomes a wholly-owned subsidiary of
the foreign corporation despite 90 per cent value creation from India,
resulting in loss of all future tax on capital gains, public listing,
operational profits etc.
Current economic outlook is dominated
by industries that started in the 1980s and 1990s. One such sector is IT
services. Similarly, the Indian economy's future is expected to be
dominated by modern day tech disruption. If these IT giants would have
flipped abroad in their early years, India would have lost out on the
country's GDP growth attributable to these companies becoming big along
with the national pride of having such homegrown entities that create
millions of jobs a year.
Moreover, various such companies hold
critical consumer data and IP whose ownership essentially transfers
abroad. Most of these companies are growing 100-200 per cent annually
and are increasingly capturing more and more critical consumer data.
Flipping imposes a security threat on all critical data and also results
in substantial loss of possible future value creation from all
associated IPs of that company.
Flipped startups circumvent
Indian tax law and other legal regulations and gain unfair advantage
over their domestic counterparts. Due to foreign HQ structures, the
Indian government can't determine source of money backing these
companies which can result in security issues for the nation, in case
war like activities arise in future. For example, money from
neighbouring countries is only allowed in India-domiciled startups after
the requisite approvals but overseas headquartered startups do not need
any such approvals. This further incentivises flipping.
Foreign
investors are keen to take advantage of India's growing economy and
flipping makes it possible for them to circumvent coming to the country.
This sets in motion a vicious cycle then as more and more
overseas investors start seeing flipping as a legitimate ask without
concern of loss to India.
Loss of depth in Indian public markets as all these flipped startups will also list overseas.
Experts
say that among the possible ways to disincentivise flipping is the need
to simplify compliances for startups and rationalize taxation so that
their limited cash reserves and operational bandwidth are not blocked
The
need to simplify AIF registration norms and reduce current restrictions
on domestic AIFs to unlock additional capital, enable smoother
incorporation and exit norms and laws for foreign investors, create
advantages for India-domiciled startups in sectors that have sensitive
data around Indian consumers and merchants like financial services,
defence, healthcare.
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