Why flipping matters

One of India's most notable and successful Angel investors Mr Sanjeev Bhikhchandani has come out vociferously against the trend of Indian startups flipping to foreign jurisdictions, particularly the US state of Delaware. 

I have linked the article above and have also summarized his main assertions against the concept of flipping below :

  1. It robs India of intellectual property and data
  2. India loses tax revenues
  3. India loses Market capitalization
  4. Indian investors get shut out
I am attempting to respectfully counter Sanjeev's comments with utmost regard for his work.

Intellectual property and Data
This is partially correct, since in a flip scenario the intellectual property ownership is passed on to the new parent company. The nuance here is that in the case of established start-ups where intellectual property has already been created this transaction happens at a certain prescribed value that brings in monies into India and is thus not a one sided transaction. In the case of fledgling start-ups, the IP is often valued next to nothing and thus India does not lose anything. 
With respect to data, My counter question is that when it is stored in an offshore AWS server, does it really matter if the Indian subsidiary or the foreign parent owns it?

Tax Revenue

Businesses that are creating businesses in India by employing people in India and are accessing customers in India do already create substantial value in terms of taxes, both direct and indirect. 

Further, in the eventual case of an exit, if more than 50% of value is derived from India the proceeds will ultimately be taxed in India. This is enabled by Indirect transfer provision that was enacted post the landmark Vodafone judgement. Therefore again, India does not lose out on tax revenue. 

Even more safeguards have been provided via the Place of effective management (PoEM) rules which dictate that any foreign business which is substantially controlled and operated from India will be considered an Indian business for tax purposes and will be subjected to tax in India. 

Tax rates in India are very competitive and measure up with the best in the world. 

With a mixture of the above and General Anti Avoidance Rules (GAAR) it is very unlikely that the Indian exchequer ends up losing revenues. 

India loses market capitalization

To this point, I have a simple poser. Does market capitalization mean value to India?

Can Flipkart list in India? 

Is access to foreign capital or foreign debt bad? 

Would Sanjeev want a look at how most funds are structured ?

Indian investors get shut out

This no doubt is an outcome of the flip. More so because of a September 2019 amendment in the RBI FAQs that restrict Indian participation in foreign entities with Indian subsidiaries. 

However, founders are making a measured call to chose between Indian investors vs their global cohorts. Even with the friction of the flip and considering that they gain no tax benefits at all. 

Should we not instead focus on tangible improvements in the ecosystem that ensures that we are able to nurture and grow these companies with a mix of Indian capital as well as Indian mentoring. Scores of start-ups gush over the quality of advisory and mentoring received from foreign incubators whilst the same quality is very rarely accessible to them in India. 

The larger question therefore is, if the Indian investor ecosystem is so great why are founders making a beeline to get money from foreign investors? 


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