Reverse Flipping: Why Flipkart’s making its journey back home

Flipkart has been all over the news of late, gaining significant attention for “reverse flipping”, or simply choosing to make its way back home after being headquartered overseas in Singapore. As the company prepares to unwind its complex corporate structure and return to its roots, it’s essential to understand the intricacies of this strategic move and its implications, as Flipkart isn’t the only one to make a ghar wapsi. Other examples abound, such as Pepperfry and Phonepe moving from Singapore to India, UrbanLadder shifting from Mauritius to India, and Razorpay and Groww joining the list to reverse flip as well.

What is Reverse Flipping?

Reverse flipping, also known as de-flipping, is the process of undoing a corporate restructuring strategy called “flipping.” Flipping involves transferring the ownership of a company’s Indian operations to an overseas entity, typically in tax-friendly jurisdictions like Singapore or the Netherlands. This manoeuvre allows companies to enjoy lower tax rates and streamlined operations. However, as circumstances change, some businesses opt to reverse this process and bring their operations back to India, a practice known as reverse flipping.

Why does Flipping happen in the first place?

The primary motivation behind flipping is to capitalise on the tax benefits and operational efficiencies offered by other countries. By establishing a holding company in a tax-friendly jurisdiction, businesses can lower their overall tax burden (particularly in countries such as the UAE and Singapore) and gain access to a more favourable regulatory environment. Additionally, this structure facilitates easier fundraising from global investors and simplifies cross-border operations.

The Economic Survey 2023 notes that Indian startups are exploring ‘reverse flipping’ due to easier access to capital, changes in regulations, and the maturation of India’s capital market. This shift contrasts with previous moves aimed at benefiting from foreign tax policies. The Indian government’s efforts to improve the business environment and ease of doing business, along with developments in the IPO and public markets, have spurred this reverse flipping trend.

So why is Flipkart returning?

After nearly a decade of operating under a Singapore-based holding company, Flipkart has announced its intention to reverse flip and consolidate its operations in India. This strategic move is driven by several factors:

Policy Changes

The Indian government’s efforts to attract Foreign Direct Investment (FDI) and promote ease of doing business have made the domestic environment more appealing for large corporations.

Growth Opportunities

As the Indian e-commerce market continues to expand rapidly, Flipkart recognizes the immense potential for growth within its home country, thanks to India’s demographic dividend and strong economic growth. This makes it an alluring business and investment destination in the eyes of many.

Regulatory Clarity

Recent policy initiatives, such as the introduction of a new e-commerce policy, have provided greater clarity and predictability for online retailers operating in India, where earlier a constant flip-flopping on the policy front left businesses wary.

Branding and Sentiment

By consolidating its operations in India, Flipkart aims to strengthen its brand identity as a homegrown success story, resonating with the sentiment of domestic consumers and investors.

Plans for an IPO

Perhaps most critically, Flipkart must be headquartered in India if they are to launch their much-anticipated Initial Public Offering (IPO) in the market. Reports by in-the-know sources suggest that the $33 billion-worth firm is planning to reach profitability ahead of its IPO in 2025-26.

Drawbacks of Reverse Flipping

While reverse flipping presents numerous opportunities, it also comes with its fair share of challenges:

One-Time Taxation

The process of unwinding the complex corporate structure and transferring assets back to India may trigger significant one-time tax implications, potentially impacting the company’s financial performance in the short term. For instance, fintech unicorn PhonePe had to pay a whopping Rs. 8,000 Cr. to shift back to India from Singapore. Bearing such huge tax liabilities is obviously not everyone’s cup of tea, especially if the company is not at maturity.

Taxation of Employees and Founders

The transfer of ownership and operations could lead to taxation on employee stock options and founder shares, potentially causing friction among stakeholders and investors. This is particularly so when it comes to taxes on Employee Stock Options, which can be quite painful for employees to bear.

Lack of Continuity in Policy

Despite recent efforts, concerns persist regarding the consistency and long-term stability of policies governing e-commerce and foreign investment in India, leading to wariness among investors and the startup community. Regulatory flip-flops upset not just the startup ecosystem, but users at large. An example of this can be seen in the revocation of the auto-payment feature for recurring payments by the Indian central bank, which caused massive disruptions to payment wallets and other subscription-based startup models in addition to inconvenience to users.

Ease of Doing Business

While improvements have been made, navigating the Indian regulatory landscape can still pose challenges, particularly for large corporations with intricate operations. Simply put, ease of doing business is a major reason for brands to flip in the first place. While India has made much progress when it comes to ease of doing business, ranking 63rd out of 190 countries by the World Bank, Singapore ranked 2nd in the world over the same period, and the USA ranked 6th in the world. Clearly, there are many miles to go on India’s growth journey.

The success of Flipkart’s reverse flipping strategy will undoubtedly influence other corporations’ decision-making processes and potentially shape the future course of India’s e-commerce sector. As this narrative unfolds, it will be fascinating to observe how Flipkart and its peers adapt to the demands of an evolving business environment, striking a delicate balance between global ambitions and local imperatives.