Reverse flipping is a growing trend where companies, particularly startups, that initially shifted their registration (domicile) to foreign jurisdictions, return to their home country. This move, often referred to as internalisation or reverse flipping, is motivated by developments in the home country in relation to access to capital, favourable local regulatory frameworks, tax incentives, and/or a maturing business environment in the home country.
For Indian startups, this phenomenon has gained traction in recent years. Initially, many Indian companies incorporated abroad, in countries like Singapore or the US, to tap into more favourable foreign markets and attract global investors. However, with improvements in India’s (a) ability to attract and access capital; (b) regulatory framework regarding taxation; and (c) the access to global markets , companies are now considering relocating their headquarters back to India. Some prominent examples of successful internalisation are PhonePe, Groww, and Pepperfry, while companies like Razorpay, PineLabs, Meesho, UrbanLadder, Livspace, and Zepto are in different phases of transitioning back to India.
Legal Framework Supporting Reverse Flipping
The Companies Act, 2013, particularly Section 234, along with Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, provides a legal foundation for cross-border mergers between Indian companies and foreign companies. These regulations allow foreign companies to merge with Indian companies, provided they comply with the provisions of Sections 230 to 232 of the Act, which require approval from the National Company Law Tribunal (NCLT).
Additionally, the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, introduced by the Reserve Bank of India (RBI), further simplify the process. According to these regulations, any cross-border merger that complies with the Cross Border Merger Regulations is deemed to have automatic RBI approval. This eliminated a significant bottleneck in the approval process, expediting the merging of foreign companies into Indian subsidiaries.
The 2024 Amendment and Its Impact
The Ministry of Corporate Affairs (MCA) introduced a significant amendment to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, through a notification dated September 9th, 2024. This amendment facilitates reverse flipping by allowing foreign holding companies to merge into their wholly-owned Indian subsidiaries under a streamlined fast-track merger scheme under Section 233 of the Companies Act, 2013. The amendment came into effect on September 17th, 2024.
Key changes brought about by the amendment include:
Fast-Track Mergers: The amendment allows mergers between a foreign holding company and its Indian wholly-owned subsidiary to proceed under the fast-track route provided in Section 233 of the Act. This bypasses the time-consuming NCLT approval process, allowing for faster and smoother mergers.
Prior RBI Approval: Although RBI approval remains a requirement, the amendment aligns with the Cross Border Merger Regulations, 2018, which provide deemed approval from the RBI for transactions that comply with the regulations. This reduces the need for explicit RBI approval unless otherwise required.
Form No. CAA-16 Filing: For mergers between Indian companies and those from countries sharing a land border with India (such as China), the amendment introduces the requirement to file a declaration (Form No. CAA-16) with the Central Government through the office of the jurisdictional Regional Director. This additional step ensures regulatory oversight in sensitive cross-border mergers.
Advantages of the 2024 Amendment for Reverse Flipping
The 2024 amendment makes reverse flipping more attractive for companies by:
Simplifying the Process: The fast-track merger route under Section 233 significantly reduces the time and costs involved, as companies no longer need to wait for NCLT approval.
Regulatory Streamlining: By aligning the rules with the RBI’s Cross Border Merger Regulations, the amendment ensures that compliant transactions benefit from automatic RBI approval, further reducing delays.
Promoting Ease of Doing Business: As Indian regulatory frameworks evolve and investor confidence grows, the ease of relocating foreign-incorporated companies back to India increases, supporting the government's broader aim of encouraging businesses to stay and grow in India.
The 2024 Amendment to Rule 25A marks a significant step in facilitating reverse flipping for Indian companies. By providing a faster and simpler merger process, especially for foreign holding companies and their Indian subsidiaries, this amendment aligns with India’s evolving business environment. The shift toward a more streamlined regulatory framework reflects the country’s ambition to become a more attractive destination for business operations. With this amendment, India offers a smoother path for companies seeking to re-domicile and capitalise on local growth opportunities, boosting both local business confidence and foreign investment in the long run.
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