Razorpay, the US-based payments giant valued at $7.5 billion, is making a strategic shift to Indian shores. This move, driven by a desire to optimize its tax structure, places Razorpay at the forefront of a growing trend – the homecoming of Indian startups that were initially incorporated abroad.
Tax Advantages Drive Restructuring
The impetus behind Razorpay’s restructuring lies in India’s “flipback tax.” This tax applies capital gains tax to the transfer of shares in a foreign company to an Indian resident. By becoming an Indian company, Razorpay can significantly reduce its overall tax outgo. Consulting firm Deloitte is collaborating with Razorpay to navigate this restructuring process, which is estimated to save the company a staggering $200 million in taxes.
Following Groww’s Footsteps
Razorpay isn’t the first company to embark on this journey. Online stockbroker Groww recently completed its own domicile shift to India, reportedly incurring a tax expense of around $60-70 million. Razorpay’s restructuring is expected to mirror this approach. All its Indian units will be consolidated under a single local holding company called Razorpay Software India Pvt Ltd, creating a structure similar to Groww’s.
Popular Routes for Domicile Shifts
Industry experts have identified two common methods for companies to make this homecoming move:
- Share Swaps: Shareholders of the foreign entity exchange their holdings in the foreign company for shares in the newly formed Indian entity. This method facilitates a smooth transition of ownership.
- Inbound Mergers: The foreign entity merges with its Indian counterpart, effectively dissolving the overseas entity and solidifying the Indian presence.
Why the Return to India?
Several factors are propelling this trend of startups returning to India:
- Regulatory Alignment: Fintech firms, like Razorpay, are particularly motivated to ensure compliance with Indian financial regulations. These regulations often favor companies and their subsidiaries to be based in India.
- IPO Prospects: Many startups believe that a domestic listing offers a more favorable environment for a successful initial public offering (IPO) compared to foreign markets. The familiarity with the Indian market and potential for higher valuations are significant considerations.
- Investor Interest: The Indian public markets are currently a hotbed of activity, attracting investors with potentially higher valuation multiples compared to some saturated foreign markets.
Zepto Waits in the Wings
Quick-commerce platform Zepto serves as another prime example. The company has received board approval to move its domicile from Singapore to India, but awaits the finalization of its fundraising round before officially making the switch.
A Turning Point for the Indian Startup Ecosystem
This trend of returning startups is expected to have a positive ripple effect on the Indian startup ecosystem:
- Enhanced Regulatory Compliance: By having startups headquartered in India, there will be greater ease in regulatory oversight and adherence to local financial regulations.
- IPO Boom: A larger pool of established startups opting for Indian IPOs could lead to a surge in domestic stock market activity and liquidity.
- Investor Magnetism: The success stories of these returning startups could incentivize further investment in the Indian startup landscape, fueling its growth and vibrancy.
Razorpay’s decision to restructure and return to India marks a significant turning point. It underscores the growing maturity and attractiveness of the Indian startup ecosystem for both domestic and global investors. As more startups follow suit, we can expect to see a surge in regulatory compliance, domestic IPO activity, and overall investment in the Indian startup scene. This homecoming trend has the potential to propel the Indian startup ecosystem to even greater heights.
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