Reverse Flipping

Reverse Flipping: Is it Time to Return Home?


In the last few years, several Indian companies shifted their ownership structure outside India due to a host of reasons, including overseas listing and access to international capital markets, a more protective intellectual property (“IP”) environment, attracting human capital in offshore jurisdictions and tax concessions offered by offshore jurisdictions.

However, externalization has come with its own challenges. An upswing in operational costs, risk of the foreign entity being regarded as managed and controlled from India which entailed tax implications, aspirations for India listing in a fast-changing global scenario in which international capital markets have been relatively less attractive and tax litigations owing to the complexity of an externalized structure are certain reasons that have necessitated a re-think. Also, the adoption of multilateral instruments and changes in double taxation treaties has added tax complexities for externalized structures. In addition, the Indian Government has taken steps for attracting companies to bring ownership back to India including tax incentives offered in GIFT city and initiatives to provide a more tax friendly environment to investors such as proposed exemption from angel tax for certain non-resident investors and start-ups.

Though reverse flips remain work in progress, Walmart backed PhonePe has already re-domiciled to India and several other companies are in the process of implementing, or otherwise considering, reverse flips.

While the simplest way to achieve a reverse flip may be a share swap / share sale, this requires an evaluation of tax implications in the hands of investors and promoters. Shareholders would be subject to tax on the excess of fair value of the shares of the Indian company over the cost of shares held in the foreign company. However, there could be an exemption under the applicable tax treaty, for example, for investors from the Netherlands or Singapore (if the shares of foreign entity were acquired prior to March 31, 2017).

It is also worthwhile to consider future tax implications at the time of exit taking into account the grandfathering benefits under the applicable tax treaty for certain investors. For example, exit from a foreign entity by a Singapore investor could be tax exempt if shares were acquired before March 31, 2017; however, such exemption may not be available post reverse flip as the prior period of holding would be lost. Separately, there could be a tax impact for the Indian company as well, for example, losses of the Indian company may lapse due to change in shareholding.

Another alternative could be an inbound merger, i.e., amalgamation of the foreign company with the Indian company. As consideration, the shareholders (investors and promoters) of the foreign company would receive new shares of the Indian company. Section 47(vi) of the Income Tax Act, 1961 (“IT Act”) provides an exemption from tax for any transfer of capital assets by a transferor company to a transferee company by way of a scheme of amalgamation, wherein the resulting company is an Indian company. A similar tax exemption has also been extended to shareholders of the transferor company. Thus, the IT Act provides tax exemption to the capital gains arising for the transferor company and its shareholders in the case of inbound mergers by treating such mergers as tax neutral, provided it fulfils the conditions prescribed.

The regulations in respect of inbound mergers are prescribed under Section 234 of the Companies Act, 2013 and the Companies (Compromises, Arrangements and Amalgamations) Rules 2016. In terms of such provisions, cross-border mergers require approval of the Reserve Bank of India (RBI). In this regard, cross-border regulations were issued by RBI in 2018 which provide that merger transactions shall be deemed to have been approved by RBI if they fulfil specified conditions. Apart from RBI clearance, certain other aspects that would need to be considered for implementation of inbound mergers include implications under Indian competition law, stamp duty and registration and any other regulatory approvals.

One key regulatory approval to consider is the requirement to seek approval from Government of India if the companies involved are engaged in a business / sector requiring prior approval under the Foreign Direct Investment (FDI) Policy. For instance, in case of pharmaceutical companies, an inbound merger may necessitate approval from RBI / Department of Economic Affairs.

In summary, timing the reverse flip remains critical, as a significant increase in the value of an externalized company before undertaking the reverse flip may entail substantial tax cost.

This insight has been authored by Rajat Sethi (Partner), Sumit Bansal (Partner) and Shivani Chhabra (Associate). They can be reached at, and, respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.