“If you start me up, I’ll never stop” Croon the Rolling Stones in their hit song “Start Me Up”, written by Mick Jagger and Keith Richards for the band’s 1981 multi-platinum album “Tattoo You” sums up the blazing growth story of the Indian start-up ecosystem. Although there have been a fair share of challenges along the way, the growth journey has been remarkable.
Consider these facts, according to a recent report by Inc42, between January 2014 and May 2023, Indian start-ups have received funding of about USD 141 billion of which USD 66 billion was raised in 2021 and 2022. The same report also mentions that 108 unicorns call India its home with an approximate valuation of USD 345 billion. In 2021 Indian start-ups raised over USD 42 billion over 1,584 deals. The 2021 revelry does not end here; the report also notes that the year saw tech exits of about USD 17.4 billion of which eleven start-ups raised over USD 7.3 billion.
The Indian start-up eco system has largely remained resilient in the face of strong headwinds billowing in from global economic and geo-political events and conditions. However, redomiciling of several Indian start-up companies to overseas countries such as the United States or Singapore mushroomed from an elephant in the room to a major topic of contention. This led to the Indian government acknowledging the issue in its Economic Survey Report of 2022-2023 and the IFSCA sponsored committee tasked to explore and recommend onshoring Indian innovation to GIFT IFSC.
The process of redomiciling is commonly understood as “externalisation” or “flipping” which involves control over assets including intellectual property and capital are moved to overseas companies. All future fundraises and exits typically overseas as well. There are several reasons thrown up frequently for redomiciling Indian start-ups which have included lack of rupee capital in the Indian start-up ecosystem. Indian institutional capital such as banks face policy driven challenges to invest in the start-up ecosystem. Tax and foreign exchange regulations are other drivers which have promoted Indian start-ups and their founders to look for greener pastures.
The IFSCA report on onshoring innovation in GIFT City summarises the motivators for externalisation of holding structures: “[Flipping] is motivated by several compelling factors ranging from favourable tax regime, agile regulatory environment, ease of operations, prospects for better valuation with access to foreign capital markets.” The government, along with IFSCA, is working to promote GIFT IFSC as a viable alternative to bring home “flipped startups.” GIFT City has been positioned as an offshore jurisdiction in India with a legal and regulatory structure to provide a boost to the start-up ecosystem which include flexibility to transact in foreign currency, easing friction in movement of capital and business, reduction in compliances and a conducive tax framework.
The IFSCA Report identifies listing of start-up issuers on IFSC stock exchanges as an immediate area of focus and development to drive the “reverse flip” movement and push start-ups to call GIFT City their home. The Indian finance minister Nirmala Sitharaman announced in July this year that Indian listed and unlisted companies would be able to directly list their shares on IFSC stock exchanges. Direct listing on overseas stock exchanges has long been the holy grail for several new age issuers which faced resistance on grounds of economic policy, foreign exchange regulations and tax. However, relevant provisions of an amendment made to the Companies Act in 2020 went live this October which now permits the government to formulate regulations to allow Indian companies to list on select overseas stock exchanges. It is expected that in the first instance, the government will designate IFSC exchanges as a permitted “overseas exchange.” There are several advantages of a direct listing on IFSC exchanges which include benefits of dollar denominated trades which will contribute to savings on currency conversion and hedging costs for investors. The larger challenge to pull start-ups to list on IFSC exchanges is to provide these potential issuers with a pool of larger and diversified capital that is not available on the domestic exchanges. Such capital on the other hand will seek issuers of a particular calibre which results in the classic “chicken and egg” situation. However, with the release of the IFSCA Report, which is a fairly comprehensive evaluation of areas required to be reviewed (perhaps even re-imagined in some cases) to pull in start-ups to GIFT City, IFSCA and the government are plotting the correct way-points on their map to fire up the start-up movement in IFSCs.
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