PhonePe Reverse Flip to India: Unraveling the Strategic Shift and its Impact

First Published on 21st August, 2023

The Reverse Flip

What is Reverse Flip?

“Reverse flip” or “re-domiciliation” refers to a corporate restructuring process in which a company changes its country of domicile or legal registration from one jurisdiction to another.

Background

• PhonePe was incorporated in 2015 in India
• In April 2016, PhonePe was acquired by Flipkart. As part of the acquisition, PhonePe flipped its structure to Singapore
• In 2018, PhonePe became a part of Walmart after it acquired Flipkart
• In October 2022, PhonePe announced that it has moved its domicile to India (reverse flip) for following key reasons:
  • PhonePe wants to focus on India markets for the next couple of decades. PhonePe is a digital payments company that operates primarily in India. By redomiciling to India, PhonePe can be more responsive to the needs of its customers and partners.
  • The Indian government has been tightening regulations for digital payments companies in recent years. By redomiciling to India, PhonePe can be more easily compliant with these regulations.
  • To be better positioned for an IPO. PhonePe is expected to go public in the next few years

What Happened?

Steps undertaken

• PhonePe moved all businesses and subsidiaries of PhonePe Singapore to PhonePe India directly
• PhonePe created a new ESOP plan at India level and migrated all group employees to this new plan
• IndusOS, owned by PhonePe, also shifted operations from Singapore to PhonePe India

Key Consequences of Reverse Flip to India

• Lapse of accumulated losses of USD 900 million
  • PhonePe stands to lose the chance to offset its USD 900 million (~INR 7,380 crore) of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act, 1961
  • As per the provisions of Section 79, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred
• Reset of ESOPs to zero vesting with 1 year cliff
  • All employees of PhonePe were migrated to the new India level ESOP plan which stipulates a minimum 1 year cliff.
  • Thus, the employees vesting status was reset to zero with a 1 year cliff
• Tax payout by investors of almost INR 8,000 cr
  • PhonePe investors, led by Walmart, sold their stake in the Singapore entity and invested in PhonePe India
  • This means that there was a capital gains tax event in India for the the investors leading to a tax-pay-out of almost INR 8,000 cr

Other Startups looking at Reverse Flip

• Razorpay is in process to move its parent entity from the US to India
• Groww is planning to move its domicile from the US to India
• Pepperfry has reverse flipped their structure to India via amalgamation

Source:

https://economictimes.indiatimes.com/tech/technology/phonepe-shifts-headquarters-from-singapore-to-india/articleshow/94621544.cms

https://www.bqprime.com/business/after-phonepe-razorpay-kicks-off-reverse-flipping-process

https://en.wikipedia.org/wiki/PhonePe#:~:text=10%20External%20links-,History,the%20CEO%20of%20the%20company

https://inc42.com/features/unicorn-desh-wapsi-reverse-flipping-is-the-new-startup-sensation