Why Are Fintechs Like Razorpay Making Their Return To Indian Lands?

According to sources, Bengaluru-based digital payments business Razorpay is in the procedure of relocating its parent corporation from the United States to India due to more rigid industry rules. This development comes months after Walmart-owned online payments business PhonePe relocated it’s holding company from Singapore to India.

Razorpay, supported by Y Combinator and valued at $7.5 billion, was forced to establish itself in the United States when it sought money from the Silicon Valley-based incubator. Razorpay provides merchants with payment services. Its plan to move its parent organisation comes when the Indian government has formed an expert committee to recommend steps to attract local fintech and other startups based in other countries to relocate to the International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City.

The process to shift Razorpay to Indian lands has commenced.

Razorpay has commenced the process of “reverse flipping,”. They have begun the first stage of a multi-part procedure to return its parent organisation to India. It will take time and significant money, but the management and BOD are committed. This makes sense in a highly regulated industry like financial services. Another individual stated that after relocating its parent company back to India, the payments firm might consider a prospective listing in India, adding that the plan for its IPO is still a ways off. However, the major concern is to have the company domiciled in India.

The gross transaction value of $100 billion.

The firm, launched in 2014, is in a critical period as it awaits the Reserve Bank of India’s (RBI) final payment aggregator licence. Since December of last year, the central bank has urged Razorpay, along with other extensive online payment systems like PayU and Paytm, to halt new merchant onboarding. Razorpay handles about $100 billion in gross transaction value across online and offline digital payments. It began its offline operations last year by acquiring Ezetap for around $200 million.

The minds behind the expert panel.

The group, which includes members from the central bank, fintech entrepreneurs, IFSCA, Gift City, and venture capital investors, is waiting to hear from these stakeholders. Under the Special Economic Zones Act, Gift SEZ is an IFSC. Razorpay has announced the creation of an advisory council comprised of former bankers, public officers, and an RBI deputy governor to increase the legitimacy of its brand. While it has not yet altered its board of directors, the fintech business might potentially increase its board later, according to sources.

The government-appointed expert team includes entrepreneurs like Lalit Keshre of Groww and Mr Nikhil Kamath of Zerodha, as well as RBI executive director G Padmanabhan and investors such as Siddarth Pai. The committee’s mandate is to propose strategies to attract financial businesses based outside of India to relocate to Gift City and to establish IFSC as a global innovation hub.

Why are many Fintechs making their way to India?

Razorpay was the second Indian business to be accepted into Y Combinator in 2015, just as the Silicon Valley incubator began to diversify its portfolio by including more Indian startups in its batches. ClearTax, an online tax filing tool, was chosen in 2014. As a Y Combinator firm, one must be based in the United States since they nurture the company and eventually pump in early-stage investment.

Earlier in 2023, PhonePe founders Sameer Nigam and Rahul Chari revealed that their investors, including Walmart, which owns around 80% of the company, had to pay Rs 8,000 crore in taxes in India. This was part of the long-term capital gains tax that PhonePe had to pay when its worth skyrocketed between leaving India and returning. It has gathered the names of 20+ unicorns from a list of 100 who have contacted out and are actively searching to replace them. Some investors have stated that if things improve, they would prefer to relocate to India, according to Nigam.

Pine Labs CEO Amrish Rau stated The decision (to change domicile) should not be based on valuations or taxation. It should be based on whether the great technology is being established for global or domestic markets. That is the finding that Pine Labs is now working on. Based on the results, they will determine the optimal domicile for the firm.

Taxation and legalities.

According to legal experts, there are two primary impacts of a corporation relocating to India. The foremost is a direct tax on the corporation and investors, depending on its valuation. It is possible that the entire ownership structure will need to be reorganised. Customer contracts, which may need to be altered, are another big barrier for company startups.

The hurdles faced by companies while relocating to Indian lands.

The main problem is for these digital companies to migrate the business (including intellectual property) at a current fair valuation, which would have increased due to their having customers and income in the foreign organisation. It would also have increased investments in the offshore firm, according to Ashwin Bhatt, partner at NovoJuris Legal. He said relocating to India would have more significant tax consequences for these firms and their investors. Furthermore, they must follow the new overseas investment restrictions announced by the RBI in 2022, according to Bhatt.

There are two options for entrepreneurs to establish startups: directly in the US with operations in India or establishing up here and then flipping to the US to attract venture capital. In the second situation, the Indian corporation is eventually bought by the US holding firm for a small fee.

When a company changes its legal domicile, it may face double taxes on its worldwide revenue if it is considered a resident of both nations, according to Sonam Chandwani, managing partner at KS Legal and Associates. According to her, the business must comply with Indian criteria for foreign direct investment, as well as local laws controlling corporate structure, labour, and compliance.

The government’s efforts to shift corporations in India can be viewed as an Alternative to Gift City.

The government has pushed Indian enterprises like Razorpay to consider Gift City a desirable location for global investments and capitalise on foreign market prospects. As a result, it was announced last week that KredX, an invoice discounting firm, had begun operations in Gift City.

Conclusion.

A recent poll in 2023 emphasised the importance of encouraging Indian businesses to reverse-flip like the way Razorpay is planning to do. However, existing Indian rules make reverse flipping difficult and costly.

Proofread & Published By Naveenika Chauhan