Blog Content Overview
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://www.bqprime.com/business/after-phonepe-razorpay-kicks-off-reverse-flipping-process
https://inc42.com/features/unicorn-desh-wapsi-reverse-flipping-is-the-new-startup-sensation
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