Insights · India-US Corridor
Reverse Flip to India: Routes, Tax Cost and the Fast-Track Merger
How startups move their holding company back to India, what the 2024 fast-track merger route changed, where the tax actually falls, and how to sequence it.
A reverse flip moves a startup’s holding company from the US or Singapore back to India, usually by merging the foreign parent into its Indian subsidiary. Companies do it to list in India and to simplify regulation. Indian law can make the merger tax neutral, but the country the parent is leaving usually taxes the exit. Reported tax bills have run from about Rs 1,340 crore for Groww to about Rs 8,000 crore for PhonePe’s investors.
Key points
- Main route: inbound cross-border merger under section 234 of the Companies Act, 2013
- Since 17 September 2024 a foreign holding company can merge into its wholly owned Indian subsidiary through the fast-track route, approved by the Regional Director instead of the NCLT
- Reserve Bank approval is deemed if the Cross Border Merger Regulations, 2018 are followed
- Indian capital gains exemptions apply where the merged company is Indian and the conditions for amalgamation are met
- The foreign country’s exit tax is normally the largest cost
The routes
| Route | How it works | Main issue |
|---|---|---|
| Inbound merger | The foreign parent merges into the Indian company. Its shareholders receive Indian shares and the parent ceases to exist. | Process in two jurisdictions; foreign exit tax |
| Share swap | Shareholders exchange foreign parent shares for Indian company shares. The parent is later liquidated. | No Indian merger exemption; taxable for shareholders; liquidation tax |
The fast-track merger
Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules was amended with effect from 17 September 2024. A foreign holding company merging into its wholly owned Indian subsidiary can now use the section 233 fast-track procedure. The Indian company files the scheme with the Regional Director after notices to the Registrar and the Official Liquidator and approval by members and creditors. Prior Reserve Bank approval is required under the rule, and where the foreign company is in a country sharing a land border with India, a government approval declaration is needed. This takes months off the NCLT timetable. Three to six months is realistic where the shareholder base is cooperative.
Indian tax
Where the scheme qualifies as an amalgamation, meaning all assets and liabilities pass to the Indian company and shareholders holding at least three-fourths in value of the foreign parent become shareholders of the Indian company, two exemptions apply. The transfer of assets by the foreign parent to the Indian company is not treated as a transfer, and shareholders who receive Indian shares in exchange are not taxed at that point. Their cost and holding period carry over to the new shares.
The points that need work are these:
- cash paid to dissenting shareholders or for fractions is taxable
- losses of the foreign parent do not come into India, and the Indian company’s own losses can lapse if shareholding changes by more than 49%, unless it is an eligible startup meeting the continuity conditions
- stamp duty on the scheme varies by state and can be material
- the general anti-avoidance rule applies if the main purpose is a tax benefit
Tax in the country being exited
The US treats an outbound merger of a US corporation into a foreign company as a taxable disposal of its assets, and anti-inversion rules can apply. Shareholders who are US taxpayers are also taxed on their gain. Singapore does not tax capital gains in general, but shareholders in other jurisdictions may be taxed at home, and Indian indirect transfer rules can tax non-resident shareholders on the gain attributable to Indian assets. This is why the reported figures are so large: PhonePe’s investors paid close to Rs 8,000 crore in Indian tax when it moved from Singapore, and Groww reported paying about Rs 1,340 crore on its move from the US. The cost is a function of valuation, so a reverse flip is cheapest in a down round or early.
FEMA
- Shares issued to non-resident shareholders of the foreign parent must comply with sectoral caps, entry routes and pricing under the foreign investment rules, and are reported in FC-GPR.
- Investors from land-border countries need government approval.
- Foreign borrowings of the parent that come into the Indian company must be brought in line with external commercial borrowing rules within two years.
- Overseas assets and offices acquired through the merger can be held if permitted under the overseas investment rules; otherwise they must be sold within two years.
- Resident founders who held the foreign parent’s shares as overseas direct investment report the disinvestment.
Employee stock options
Options over the foreign parent’s shares do not convert automatically. The Indian company needs a plan approved by special resolution, and grants are made to replace the old ones with vesting credit. A private company can grant options to its own employees and those of its subsidiaries and holding company, but not to promoters or to directors holding more than 10%, unless it is a recognised startup within ten years of incorporation. Employees are taxed on exercise on the spread at that date, so the replacement should be designed to avoid creating a second tax point.
A workable sequence
- Model the exit tax in the foreign country and the Indian position for each class of shareholder.
- Obtain investor consent under the shareholders’ agreement, including who bears the tax.
- Fix the valuation and the share exchange ratio.
- Clear FEMA points on sector, pricing and land-border investors.
- File the scheme through the fast-track route, or with the NCLT if the parent is not a wholly owning holding company.
- Complete the foreign-law merger or dissolution steps.
- Issue shares, file FC-GPR, replace the option plan and update tax registrations.
For the outbound version of this decision, see Delaware flip for Indian startups. Our India-US structuring team works with US and Singapore counsel on both directions.