The expert committee constituted by the International Financial Services Centres Authority (IFSCA) has submitted its report titled ‘Onshoring the Indian Innovation to GIFT IFSC’[1].In its report, the committee has examined the entire gamut of issues related to flipping of Indian startups to overseas jurisdictions and made various recommendations so as to encourage the start-ups to redomicile their headquarters to the Gift IFSC. The committee also analysed the holding company (HoldCo) structure generally used by start-ups in overseas jurisdictions and recommended a supportive tax and regulatory environment to align with the global practices to promote a vibrant HoldCo regime in the Gift IFSC.

This article discusses some of the key recommendations made by the committee in its report:

(a) Fast Track Inbound Merger: In order to shift their domicile back to India, the offshore start-ups and the investors would look for a structure or route which is tax neutral and also at the same time, can be implemented in a short span of time. Share swap and Inbound merger are the two of the possible routes to reverse flip. Though the share swap takes relatively less time, it may pose certain tax implications as well as regulatory challenges.

 While the inbound merger of an overseas company with an Indian company provides a tax neutral structure, the whole process is very time consuming and would require approval of the National Company Law Tribunal (NCLT) as well as various regulatory authorities. Further, prior approval of the Reserve Bank of India (RBI) is required if the scheme of inbound merger does not comply with the Cross Border Merger Regulations[2]. Considering these challenges, the committee has recommended that:

(i) the Ministry of Corporate Affairs (MCA) should come out with a fast-track merger process for the IFSC region.

(ii) Such an inbound merger should be kept outside the purview of the NCLT and/or regulatory approvals and the inbound merger should be allowed based on self-declaration or at a maximum, with the approval of the IFSCA.

(b) Ease of Incorporation Process: At present, the entities set up in the Gift IFSC have to obtain a certificate of registration from the IFSCA and the approval of the Development Commissioner, Gift SEZ. To ease this whole process, the committee has recommended that:

(i) MCA should design and implement a common appli­cation form (CAF) to consolidate company incorporation and IFSCA approval under one form / review. IFSCA should be the single- point nodal office for CAF.

(ii) Till the time CAF is implemented, MCA should, as an immediate step, have a dedicated desk to process the applications for incorporation of companies or setting up of branch offices in GIFT IFSC.

The committee has also emphasized the need for relaxation of certain compliances under the Companies Act, 2013 (CA, 2013).

(c) Fund Raising: The innovators need funds to implement the business ideas and grow at a larger scale. With a view to enable the Gift IFSC entities to have easy access to the capital, the committee has made the following recommendations:

(i) In many overseas jurisdictions (such as Singapore, Cayman Islands, USA), simple agreement for future equity (SAFE) notes is used by start-ups to raise funds from investors. A SAFE note is similar to a convertible note (CN), however, unlike CN, the SAFE notes are equity and not debt. CA, 2013 does not permit the Indian entities to issue SAFE notes. The committee has recommended that the Indian law should be amended to allow the issuance of SAFE notes by the Gift IFSC entities.

(ii) The committee has recommended that a variable capital like structure should be permitted for the Gift IFSC entities as it would stimulate the global asset management business in India.

(iii) The amount received against the issuance of the CNs by the start-ups is either repayable at the option of the investor or the CN has to be mandatorily converted into equity shares. At present, the CNs are not allowed to be converted into equity-linked instruments. The committee has recommended that the CN should be allowed to convert into other equity- linked instruments (such as CCPS or CCDs) which are mandatorily convertible into equity shares at a later date.

(iv) For startups to list on IFSC exchanges, the eligibility criteria, including operating revenue (i.e., $20 million in the preceding financial year) and pre-tax profit (i.e., $1 million during the preceding three financial years) benchmarks, and the requirement of three years of business operations, might pose obstacles. The recommendation is to consider relaxing these conditions to facilitate startups to raise capital.

(v) In order to enable the start-ups to access public capital in overseas jurisdictions, the committee has recommended that the start-ups should be permitted to set up HoldCo in Gift IFSC and such HoldCo should be allowed to directly list its equity on offshore stock exchanges.

(d) Regulatory Relaxations: Any investments by the resident individuals or entities in Gift IFSC have to comply with the overseas investment (OI) framework. In order to encourage the Indian innovators to set up their base in Gift IFSC, the committee has recommended the following relaxations in the foreign exchange regulations:

(i) At present, the OI framework allows the resident individuals to make overseas direct investments (with controlling rights) in an IFSC entity, provided that such an IFSC entity does not have any subsidiary or step down subsidiary outside of IFSC. As a result, the resident individuals cannot make overseas direct investments in start-ups that have flipped back to India and have set up HoldCos in IFSC. The committee has recommended that the resident individuals should be allowed to have a controlling stake in the IFSC entities which have subsidiaries in India. This will encourage the Indian entrepreneurs to have the HoldCo structure in IFSC.

(ii) The resident individuals making investments in the Gift IFSC entities have to adhere to the liberalised remittance scheme (LRS) limit (which is, USD 250,000). The committee has recommended that the LRS limit for the purpose of investment in the Gift IFSC should not be clubbed with other investments / activities and that an additional limit of USD 250,000 should be allowed to the Indian innovators forming HoldCo structure in the Gift IFSC.

(iii) SEBI-regulated alternative investment funds (AIFs) and mutual funds (MFs) are allowed to invest in overseas entities within the prescribed aggregate limits (i.e., $1.5 billion for AIFs and $7 billion for MFs). These limits have not been increased since their exhaustion in 2022. As a result, the AIFs and MFs cannot invest in the Gift IFSC entities, thereby impacting capital access for the start-ups in Gift IFSC. The committee has recommended that the investment limits should not apply to the investments by Indian AIFs and MFs in the Gift IFSC entities. This will free up the domestic capital and will enable the start-ups to raise funds from institutional investors.

(e) Taxation Regime: From a taxation perspective, the committee has made several recommendations so that the start-ups do not face tax-related issues while reverse flipping to the Gift IFSC. The committee has recommended tax neutrality in order to incentivize the movement of offshore HoldCos in GIFT IFSC so that such relocation does not trigger any adverse tax consequences for the offshore holding companies and their stakeholders. It has further recommended to provide exemption from the capital gains tax on share transfers if certain investment percentage and ownership duration criteria are met.

 In order to encourage the flipping of the overseas HoldCos to the Gift IFSC, the committee has recommended an exemption from the angel tax provisions and an enhanced tax holiday period. Further, it has been recommended that the Indian government should issue an express clarification that the provisions related to place of effective management (PoEM) will not be triggered merely because the HoldCo is based in the Gift IFSC. This will ensure tax certainty and encourage international businesses to operate within the Gift IFSC structure. Tax exemption on dividend income received by the HoldCos from their subsidiaries is another key recommendation of the committee.

Our Thoughts

The Indian government and regulators have been making all the possible efforts to encourage and promote the start-up culture in India. These efforts have yielded positive results to some extent and consequently, the Indian start-up ecosystem has more than 100 unicorn startups. In 2022 alone, India witnessed more than 20 unicorns. A significant number of Indian unicorns have moved their headquarters outside India on account of a business-friendly tax and regulatory environment and easy access to foreign capital in a more flexible manner.

The fintech start-ups have gained traction in recent years and are driving the financial inclusion agenda of the Indian government. The RBI has recognised the efforts of the fintech start-ups and made various changes in its regulations to create a more organised fintech sector. The IFSCA has also put in place a robust framework for fintech entities to encourage innovation in financial services and to create an innovation-centric ecosystem in the Gift IFSC. Many start-ups have recently shown interest in redomiciling to India; however, regulatory and other issues can create obstacles in this process. The recommendations of the expert committee, if implemented fully, have the potential to entice the start-ups to reverse-flip to the Gift IFSC in the near future. It would be interesting to see as to how the Indian government responds to these recommendations.

Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.

Author: Dinesh Gupta, Associate Partner and Yash Jain, Associate at Clasis Law.



[2] Foreign Exchange Management (Cross Border Merger) Regulations, 2018

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