Besides being among the leading startups in India, what do PhonePe, Groww, Zepto, and Pepperfry share in common?  Each of them has returned home.  These companies, after initially opting for incorporation abroad, have now redomiciled in India, becoming part of an expanding roster of startups adopting the concept of “reverse flipping”.

Reverse flipping fundamentally involves relocating a company’s legal headquarters back to India after it had been moved overseas.  This does not happen just once.  In reality, it is rapidly turning into a noteworthy trend within the Indian startup ecosystem.

The story was quite different not long ago. A large number of Indian startups opted for incorporation in jurisdictions such as Singapore, the US, or the Cayman Islands. This initial exodus was propelled by several persuasive factors, including access to global capital, strict intellectual property laws, a beneficial regulatory environment, tax considerations for both companies and international investors, and simplified compliance processes. Relocating to another country seemed like a clever and calculated decision.

But the situation is changing.  The capital market in India has progressed significantly, the regulatory environment is developing, and the domestic consumer base is robust as never before.  With the maturation of the startup ecosystem, an increasing number of founders are reassessing the appropriate positioning of their companies.

This blog examines the factors behind this change and analyzes the legal and regulatory context that renders reverse flipping not just feasible, but more appealing.

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In recent years, a growing number of startups that once set up base abroad are now making their way back to India. This reverse migration is driven by a combination of favorable regulatory changes, booming domestic demand, and a supportive startup ecosystem. The trend signals a renewed confidence in India’s potential as a global innovation hub.

The capital markets of India have developed significantly, providing enhanced valuations and IPO prospects.  During Q1 2025, India represented 22% of worldwide IPO activity, generating USD2.8 billion from 62 listings, the largest of which raised USD1 billion.  This shows that India remains a leading IPO destination even in the face of global challenges.  In March 2025, retail SIP (systematic investment plan) inflows amounted to INR259 billion (USD3 billion), indicating an increase in investor participation in capital markets.

It is anticipated that consumer expenditure in India will rise by 46% by 2030, and the gross merchandise value of e-commerce is expected to triple within the same timeframe.  Fueled by increasing internet usage, smartphone adoption, and digital payment methods such as UPI (unified payments interface), the market presents startups with significant growth potential, an expanded consumer base, and improved alignment with investor expectations, thereby making a local domicile a wise strategic decision.

India’s rise from 142nd to 63rd place in the World Bank’s Ease of Doing Business report in 2020 illustrates how the government’s attempts to digitize compliance processes have significantly lowered bureaucratic obstacles.  This transition has been bolstered by Startup India initiatives that offer simplified compliance, tax holidays, capital gains exemptions, and credit schemes such as the credit guarantee scheme.

The amendments to the Companies Act, 2013 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI rules) introduced in 2024 have simplified the process for startups to redomicile in India by streamlining approvals, reducing compliance costs, and minimizing paperwork related to foreign investment and restructuring.  Due to these changes, reverse flipping has become much more practical and supportive of founders.  Further down, these regulatory developments are discussed in detail.

Companies that want to move their domicile back to India typically do this through inbound mergers or share swaps.  Although both aim to achieve the same objective of reinstating ownership and control to an Indian entity, they vary considerably in terms of legal processes, regulatory requirements, and tax implications.

An inbound merger, as defined in section 234 of the Companies Act, is a process where a foreign parent company merges into its Indian subsidiary, resulting in the Indian subsidiary being the surviving entity.  This process is regulated by section 234 of the Companies Act, in conjunction with rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (amalgamation rules), and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (cross-border regulations), issued by the Reserve Bank of India (RBI).

Before the 2024 revision of the amalgamation rules, inbound cross-border mergers needed to be sanctioned by the National Company Law Tribunal (NCLT) as per the Companies Act.  As of 17 September 2024, the amalgamation rules permit certain reverse mergers—specifically, those in which a foreign holding company merges into its Indian wholly owned subsidiary—to qualify for the fast-track route under section 233, contingent upon the fulfillment of the following conditions:  (a) prior to the merger, approval from the RBI is secured;  (b) the transferee company (Indian subsidiary) meets all fast-track criteria as per section 233;  (c) an application directed to the regional director;  and (d) a particular declaration is submitted if the foreign holding company is situated in a country that shares a land border with India.

This amendment simplifies reverse flipping by providing a quicker and less onerous merger option for foreign holding companies and their Indian subsidiaries.  This demonstrates the government’s unequivocal drive to make redomiciling easier, lessen regulatory friction, and return Indian-origin startups to domestic ownership, thereby bolstering India’s status as a global startup hub.  This has practically shortened timelines from over a year to just three to six months, significantly improving efficiency and deal certainty.

Moreover, following a reverse merger of this kind, foreign shareholders from the previous foreign entity transition into direct shareholders of the Indian company.  This adjustment transforms indirect foreign investment into foreign direct investment (FDI), activating adherence to the NDI rules.  All FDI norms must be adhered to in the resulting shareholding, including sectoral caps, entry routes (automatic or approval), pricing guidelines, and any conditions outlined in the Consolidated FDI Policy, 2020.

Other important factors to take into account include the handling of external commercial borrowings (ECBs) and foreign assets.  Post-merger, any existing ECBs will be considered liabilities of the Indian entity and must adhere to ECB regulations within two years following NCLT approval.  In the same way, foreign assets not allowed by the Foreign Exchange Management Act (FEMA) must be sold off within two years, with the proceeds either sent back to India or used to settle foreign obligations.  Furthermore, it is essential for companies to evaluate the tax consequences according to the Income Tax Act, 1961. This includes examining potential capital gains exposure, ensuring adherence to transfer pricing regulations, and verifying that tax benefits will continue after the merger.

Share swaps provide an alternative method for shareholders of a foreign entity to exchange their shares for shares in an Indian company, which subsequently becomes the new parent.  The foreign entity is then liquidated, resulting in its assets and undertakings being transferred to the Indian company.  The NDI rules, the Foreign Exchange Management (Overseas Investment) Rules, 2022, and pertinent sections of the Income Tax Act, 1961 primarily govern this option.

Previously, under the NDI regulations, Indian firms were permitted to issue shares to non-residents only in exchange for shares of another Indian firm and only as a primary issuance.  Under the automatic route, cross-border share swaps with foreign entities were not allowed.

This position has been revised by the 2024 amendment.  Indian firms can now offer shares to non-residents in return for shares of a foreign firm, provided they adhere to overseas investment regulations, sectoral limits, pricing standards, and necessary approvals.

This enables reverse flips via share swaps.  Unlike mergers, however, tax neutrality cannot be guaranteed and capital gains tax may apply.

Reverse flips involve considerable tax and regulatory challenges.  During PhonePe’s restructuring in 2022, a share swap resulted in a capital gains tax liability of almost INR80 billion, and losses amounting to USD900 million became unusable under section 79 of the Income Tax Act, 1961, as a result of a change in shareholding exceeding 50%.  The reverse flip conducted by Groww in 2024 also led to a tax liability of INR 13 billion.

Companies must still meticulously prepare for stamp duty, contract renegotiations, and adjustments to employee stock option plans (ESOPs), even when they obtain procedural relief through fast-track merger mechanisms.  Recalibrating ESOP, including resetting vesting schedules (like the one-year cliff in PhonePe), can jeopardize the retention of essential talent.  The drawn-out regulatory process of Pine Labs accentuates the operational and financial burdens that such transitions can impose.

Other challenges involve discrepancies in valuation, misalignments in timing with investor interests, and adherence to sector-specific FDI regulations, which render reverse flipping a decision that carries high stakes and demands considerable resources.

Reverse flipping has surfaced as a robust indicator of India’s development into a trustworthy, innovation-centric business hub, signifying a revitalized confidence in the country’s advancing legal, regulatory, and economic environment.  The legal framework for cross-border restructuring has been further enhanced by recent regulatory reforms, including streamlined merger processes and relaxed foreign exchange norms.

India’s ascent in the World Bank’s Ease of Doing Business rankings, supported by initiatives such as the National Single Window System, decriminalization of minor compliance defaults, and fast-track merger options, corresponds with its performance on the IMD World Competitiveness Index and the Global Innovation Index.

Although the process of redomiciling can involve transitional tax, legal, and human resource challenges, the long-term benefits are evident.  For startups targeting India’s consumer market, investor base, and digital infrastructure, the advantages of returning home now significantly surpass the costs involved.

Reverse flipping goes beyond a mere compliance exercise.  This is a strategic leap, demonstrating faith in India’s future.  For businesses prepared to take the lead in the next chapter of India’s economic narrative, returning home is more than just an option; it offers a strategic benefit.