SECTION A: Foundational Concepts
What does “flipping” an Indian company mean?
Flipping refers to a corporate restructuring whereby an Indian company (I.Co) is reorganised such that a foreign holding company (F.Co) becomes the principal value-holding entity.
Depending on the chosen structure, existing shareholders of the Indian company restructure their shareholding and/or economic ownership—through suitable structuring mechanisms (as detailed in Section B and Annexure A)—to participate in the equity and future upside of the foreign holding company.
Importantly, a flip does not always involve a direct share exchange, and multiple structuring alternatives are used in practice to achieve the intended economic outcome.
Why do startups typically consider a flip?
Startups consider a flip for a combination of strategic, commercial, and legal reasons, including:
• Access to global VC and PE capital, although strong companies and founders can raise capital in any jurisdiction
• Global M&A exits or overseas IPOs, noting that market trends show some companies also exploring ‘reverse flips’ for Indian IPO readiness
• Stronger and more predictable IP protection regimes in certain overseas jurisdictions
• Closer alignment with international customers, partners, and acquirers
• Valuation benchmarking against global peers (particularly for technology-led businesses)
A flip is therefore a strategic choice, not a prerequisite for success.
Does the core operations and/or business move out of India after a flip?
– No.
In most flip structures:
• Operations, employees, customers, and revenue remain in India
• India continues to function as the primary operating and execution hub
• Only the shareholding, fundraising, and exit layer is positioned overseas
The flip typically impacts ownership and capital structure, not day-to-day business operations.
Is flipping mandatory for raising foreign capital?
No.
Foreign capital can be raised directly into India under the FDI framework, subject to sectoral conditions and pricing norms. However, many global funds prefer investing into an overseas holding structure, particularly at Series A/B stages and beyond, due to:
• Familiar legal frameworks
• Investor mandate considerations
• Exit structuring convenience
That said, a flip is a preference-driven decision, not a regulatory necessity.
Which types of companies are better suited for a flip structure?
Flip structures tend to work better for business models with inherently global characteristics.
Better suited for:
• SaaS and technology-led companies
• Businesses with predominantly international customers
• IP-driven models where value is linked to software/platforms/technology
• Companies whose likely acquirers are global players
Less effective (and often reversed) for:
• Consumer-driven, India-focused businesses
• Businesses where customers, regulation, and value creation are overwhelmingly India-based
Publicly reported examples of companies that have redomiciled back to India include PhonePe, Groww, and Zepto, reflecting an India-centric operating and capital markets alignment.
Accordingly, the decision should be driven by customer geography, revenue mix, regulatory exposure, and exit strategy—not market fashion.
SECTION B: Flip Structures
Are there multiple ways to structure an India → Overseas flip?
Yes. A flip is not a single legal mechanism. Different approaches are adopted depending on stage, valuation, compliance history, tax exposure, investor expectations, and exit horizon.
What is the most commonly used and preferred flip structure in practice?
Structure 1 (Most Common & Preferred): New F.Co + New I.Co (Gradual Migration Model)
How the structure works:
• A new foreign holding company (F.Co) is incorporated
• A new Indian subsidiary (New I.Co) is set up under F.Co
• The existing Indian company continues to exist independently
• Business, employees, IP, contracts, and customers are gradually migrated to New I.Co
• The old Indian company is allowed to run down and die a natural commercial death over time
Why this structure is preferred:
• No immediate share swap between Indian shareholders and F.Co
• Avoids complex FEMA approvals and pricing issues, subject to scrutiny and tax risks if the structure lacks bonafide purpose or commercial substance; where a clear commercial rationale exists (access to global capital, overseas customers, etc.), it is more defensible
• No forced exit or transfer at shareholder level
• Legacy tax, compliance, or litigation risks remain ring-fenced
• Provides flexibility on timing and migration pace
Who should use this:
• Early to mid-stage startups
• Founders seeking risk containment
• Situations where speed and certainty matter more than cosmetic simplicity
Why is the “classic share-swap flip” considered difficult and less preferred?
Structure 2: Direct Share-Swap Flip (Rare & Approval-Heavy)
How it works:
• A new F.Co is incorporated
• Shareholders of the Indian company exchange their existing shares for shares in F.Co
• The Indian company becomes a subsidiary of F.Co overnight
Why this structure is tricky:
• Requires FEMA compliance at shareholder level
• Share exchange pricing must strictly follow RBI/FEMA valuation norms
• ODI/FDI reporting complexities
• Minority shareholder consent issues
• Regulatory scrutiny on valuation methodology
• Higher risk of delays or post-facto challenges
Though conceptually simple, this structure is rarely used. It is typically attempted only when the cap table is extremely clean, shareholders are limited and aligned, and advisers have strong regulatory comfort. In most real-world Indian situations, this structure is avoided.
Is there a structure used for late-stage or near-exit companies?
Structure 3: Dual-Entity / Split-Economics Structure (Advanced & Late-Stage)
How it works:
• Existing Indian company continues unchanged
• A new F.Co is incorporated for future growth
• Economic rights are bifurcated contractually:
– Value up to the date of flip / existing valuation remains with the Indian company
– Incremental upside post-flip accrues to F.Co
Key feature:
Exit economics are split between:
• Indian entity (historical value)
• Foreign entity (future value creation)
Why this structure is used:
• Avoids crystallising large capital gains immediately
• Preserves existing investor economics
• Allows overseas fundraising without disturbing legacy value
• Useful when full migration is tax-inefficient
Who should use this:
• Late-stage startups
• High valuation companies
• Near-IPO or strategic exit situations
• Companies where a clean flip is commercially impractical
Can structures be customised beyond these three models?
Yes. In practice, most flips are hybridised versions of the above: partial migrations, deferred IP transfers, contractual value sharing, and transitional service arrangements. The final structure is typically a commercial compromise between tax efficiency, regulatory safety, investor comfort, and operational continuity.
Is there a “best” structure that works for everyone?
No. However, in the Indian regulatory and tax environment:
• New F.Co + New I.Co is the default starting point
• Share-swap flips are exceptions, not the rule
• Dual-entity structures are specialised tools, not general solutions
SECTION C: Tax Implications
Does a flip trigger tax in India?
Potentially, yes — but it depends entirely on the structure adopted. Tax implications vary significantly across share swaps, migration models, and dual-entity structures. There is no single tax outcome applicable to all flips.
In the preferred structure (New F.Co + New I.Co), is there an immediate tax trigger?
Generally, no immediate shareholder-level tax trigger because there is no share transfer or exchange at inception. However, tax exposure can arise later depending on how business/IP is migrated, inter-company arrangements, and exit design.
Why are share-swap flips tax sensitive?
A direct share exchange is typically treated as a transfer, which can trigger capital gains at the shareholder level. Exemptions are limited and fact-specific, and valuation methodology is often heavily scrutinised.
How is tax handled in a dual-entity / split-economics structure?
Tax planning focuses on preserving historical value in India while attributing future upside overseas, supported by contracts and commercial rationale. This requires careful drafting and may attract higher scrutiny.
Can Indian tax authorities challenge a flip?
Yes. Challenges may arise where commercial substance is weak, IP/revenue attribution appears contrived, or the arrangement appears primarily tax-driven.
Does GAAR apply to flip structures?
GAAR risk is material where the primary purpose is perceived to be a tax benefit or where substance/documentation is weak. Strong documentation of bonafide commercial objectives is critical.
SECTION D: FEMA & Exchange Control
Is RBI approval required for a flip?
Often no prior approval is required, but strict compliance with FEMA/OI rules and reporting is mandatory. Execution can still face bank/AD conservatism.
What FEMA issues are most commonly encountered in flips?
ODI eligibility, pricing compliance, reporting gaps, downstream investment rules, sectoral constraints, and bank documentation expectations are common pain points.
Does the preferred “New F.Co + New I.Co” structure avoid FEMA risks?
It reduces (not eliminates) FEMA exposure. Substance, funds flow, IP ownership, and inter-company arrangements remain sensitive areas.
SECTION E: Transfer Pricing & Economic Leakage
Why does transfer pricing become critical post-flip?
Because fundraising occurs at F.Co while execution and costs sit in India. Funds and economics must flow to the Indian subsidiary via arm’s-length transfer pricing arrangements (services/royalty/management fee models).
What is typical transfer pricing leakage in practice?
Illustration (cost-plus): If India incurs ₹0.85 cost and earns a ₹0.15 mark-up, tax at ~30% on ₹0.15 equals ₹0.045. This can create ~₹0.03–₹0.05 leakage per ₹1 (3%–5%), depending on the model.
Can this leakage be eliminated?
No. It can be optimised within arm’s-length principles and supported by documentation. Aggressive TP increases dispute risk.
SECTION F: Cost of Maintaining F.Co
What is the annual cost of maintaining an F.Co?
A practical baseline for routine accounting + corporate secretarial + compliance support is often ~USD 20,000–25,000 per year in early/mid stages, increasing with scale and complexity.
What is excluded from this estimate?
Fundraising transactions, M&A, restructurings, litigation, complex tax advisory, and jurisdiction-specific special projects are typically separate.
Are these costs permanent?
Yes. Once an overseas holding structure is created, recurring compliance costs (often USD-denominated) become structural.
SECTION G: Practical Takeaways
What is the biggest misconception founders have about flips?
That flips are easy, one-time, and tax neutral. In reality, they permanently change tax profile, compliance cost, regulatory exposure, and exit mechanics.
What is the single most important principle?
A flip must be driven by commercial substance, not convenience. Clear documentation of business rationale, customer geography, capital access, and operating reality is key.
ANNEXURE A: Mirroring Shareholding (Founders/Investors) & ODI/OI Rules
A1. Why is “mirroring shareholding” hard for Indian resident founders after a flip?
Because an Indian resident founder needs a FEMA-compliant route to legally acquire/hold foreign securities (shares in F.Co). Post the new Overseas Investment Rules, ‘gift-based acquisition from non-relatives (resident in India)’ is not permitted, making mirroring options limited.
A2. What does the law say on receiving foreign securities as a gift (resident individual)?
Schedule III (Para 2) of the Foreign Exchange Management (Overseas Investment) Rules, 2022 provides:
• A resident individual may acquire foreign securities by gift from a person resident in India only if the donor is a ‘relative’ and is holding such securities in accordance with FEMA.
• A resident individual may acquire foreign securities by gift from a person resident outside India in accordance with the Foreign Contribution (Regulation) Act, 2010 (FCRA) and its rules.
‘Relative’ is defined in the OI Rules by reference to section 2(77) of the Companies Act, 2013.
A3. What changed in practice?
Gifts of foreign securities to resident founders are now viable mainly from ‘relatives’ (as per Companies Act definition) when sourced from a person resident in India. Gift from non-relatives (resident in India) is not permitted for this purpose. Gifts from persons resident outside India may be possible but are FCRA-linked and need careful diligence, documentation and reporting where applicable.
A4. If a founder has foreign earnings, can they acquire shares in F.Co?
Yes. If a founder acquires shares in the foreign holding company out of foreign earnings or foreign assets already held outside India, such acquisition is permissible under FEMA and falls outside the scope of LRS.
Refer Rule 4 read with Schedule III of the Foreign Exchange Management (Overseas Investment) Rules, 2022, permitting acquisition of foreign securities by a resident individual out of foreign exchange resources held outside India, subject to conditions and reporting.
If a founder does NOT have foreign earnings, is it “almost impossible” to acquire meaningful shares in F.Co?
In many real-world flip structures, it becomes commercially and regulatorily impractical, not because of the LRS monetary ceiling, but because of the nature and extent of founder ownership.
Key reasons include:
• A founder typically holds significant equity, exercises control and management, and is not a passive investor
• LRS is commonly used for portfolio-style investments (e.g., angel investors), not for mirroring a controlling or substantial founder stake
• Attempting to build meaningful founder ownership in F.Co purely via LRS often raises regulatory and commercial concerns
Accordingly, where founders do not have foreign earnings, direct personal acquisition of meaningful equity in F.Co is usually not feasible, and alternative structures (such as holding via an Indian LLP/entity via ODI, or equity-linked mechanisms where permitted) are typically explored.
A6. How do angel investors typically participate at F.Co level?
Indian resident angel investors typically invest under the LRS route (within the annual limit per individual), subject to documentation and AD bank processes.
A7. How do VC / AIF funds invest overseas?
VC/PE funds and AIFs invest through permissible routes based on SEBI registration/approvals and the overseas investment framework applicable to them.
A8. How do LLPs / Family Offices invest?
LLPs and other Indian entities can invest overseas via ODI routes (subject to OI Rules, eligibility/limits, prohibited sector restrictions, NOC requirements where applicable, reporting and documentation).
A9. What are the practical ‘mirror’ options founders use in real flips?
Typical playbook options (often combined):
• Founder holds a portion directly (where feasible)
• Remaining founder economics held through an Indian LLP/entity ODI
• ESOP / sweat equity issuance by F.Co where conditions are met
• Carefully designed contractual economics only where enforceable and defensible
A10. What are the key risks if mirroring is done incorrectly?
Key risks include FEMA contravention, inability to evidence title to foreign shares, tax exposure, GAAR scrutiny (where substance is weak), and investor diligence red flags at later rounds/exits.
DISCLAIMER & IMPORTANT NOTICE
This document has been prepared solely for educational and informational purposes and does not constitute legal, tax, regulatory, financial, or investment advice.
Flip structures and cross-border reorganisations are complex and fact-specific, and are subject to applicable Indian and foreign laws, including exchange control (FEMA), direct/indirect tax laws, transfer pricing, and anti-avoidance provisions including GAAR. Regulatory and tax authorities may scrutinise, challenge, or re-characterise transactions lacking commercial substance.
Readers are strongly advised to consult qualified legal, tax, and regulatory professionals before undertaking any transaction or relying on this material. Aritra Partners LLP and the authors assume no responsibility or liability for any loss arising from reliance on this material.
