[Aditya Kumar, 3rd year law student at Government Law College, Mumbai and Riya Tembhare, 5th year law student at Government Law College, Mumbai]
Introduction
India’s burgeoning economic landscape in recent years has seen an increase in the reverse flipping of companies. Reverse flip is a process in cross-border mergers and acquisitions where the ownership or controlling interest of a company is transferred from a foreign entity back to a domestic entity. The reasons for a reverse flip can include regulatory advantages, tax benefits, better access to raising capital, including capital markets, etc.
In May 2024, Pine Labs, a large fintech firm, received the Singapore Court’s approval for shifting its base to India. Through its order, the court has approved the merger of Pine Labs Limited (Pine Labs Singapore), the Singaporean entity, with Pine Labs Private Limited (Pine Labs India), the Indian entity. What makes this merger unique is that Singaporean law is very narrow when it comes to outbound mergers. An outbound merger of a Singaporean entity with an Indian entity has never been consummated before. This merger would have required a handsome number of prior clarifications and approvals from various regulators in Singapore, thus making it one of its kind. Although more details are yet to come in the public domain, with the merger process now set in motion, it creates a precedent for legal practitioners and corporations to structure an outbound merger in Singapore on the lines of the Pine Labs merger.
Pine Labs’ merger has been part of the recent growing trend of companies reverse flipping to India. Recently, companies like PhonePe and Groww have shifted their bases from the United States and Singapore, respectively, back to India. The major reason for these companies to reverse flip is to get access to the Indian capital markets and go for an IPO. They expect to make huge returns on the Indian capital market more than in any other country, thanks to the recent trends.
Reverse Flipping: Meaning and Structuring a Reverse Flip
As discussed previously, reverse flipping involves the transfer of ownership of a foreign entity to an Indian entity. This transfer includes the transfer of key assets, such as intellectual property. Thus, it is important to carefully structure a reverse flip, as it has huge tax and regulatory implications. This can be done in two ways: by a merger or a share swap arrangement.
The Cross Merger Regulations of 2018 define an inbound merger where the resultant company forming post-merger is an Indian company. This is the simplest of the two ways of reverse flipping, where the foreign company amalgamates with the Indian company, and the assets and operations of the foreign entity are then owned and controlled by the Indian entity. The other process is a share swap or share sale arrangement, where the Indian company (the acquirer) will purchase the foreign company’s shares in exchange for the shares of the Indian company.
A share swap arrangement is considered only as an alternative to a merger, considering that mergers are tax-neutral. Share swap arrangements are attractive in the sense that they do not require regulatory compliance. Transfers of shares attract capital gains taxes. Moreover, share transfers between associate companies also attract transfer pricing. PhonePe, which opted for a share swap arrangement, shifted its base back to India in 2022, paying $1 Billion in taxes in India.
India and Singapore Merger Laws
In India, the process of mergers is court-driven, meaning that the company seeking a merger has to make an application to the National Company Law Tribunal (NCLT). The acquirer company, Pine Labs India, in this merger makes an application to the NCLT along with the scheme of the merger, containing all the facts related to the merger. The NCLT then reviews the scheme and sends a notice to the relevant authorities, including the Registrar of Companies (RoC), Competition Commission of India (CCI), Reserve Bank of India (RBI), income-tax authorities, etc., and even to those regulators or authorities that are likely to be affected by or have a say in the merger. Before making an application to these authorities, the companies get approval from all these authorities beforehand. On the collective representations of these authorities, the NCLT will grant its approval.
While we have considered the Indian laws that are applicable to inbound mergers, it is also important to consider the applicable laws of the foreign country where there will be an outbound merger from the perspective of that foreign company. This adds significant layers of complexity and approval. In Singapore, Section 210 read with Section 212 and Section 215 of the Companies Act, 1967, requires approval from the statutorily prescribed majority at the scheme meeting and approval from the High Court for an amalgamation. The Singapore merger control regime is a voluntary regime. There is also no compulsion for an entity to seek approval from the Competition and Consumer Commission of Singapore, although it can investigate a merger after the transaction.
Rationale and Implications of Pine Lab’s Reverse Flip
With approval, Pine Labs Singapore is set to merge with Pine Labs India. The shareholders of the Singapore entity will become shareholders of the Indian entity. This merger would also include the transfer of key assets. While it has now received approval for an outbound merger from the Singaporean courts, it still awaits approval from the NCLT.
Pine Labs Singapore holds a 99.89% stake in Pine Labs India and is a non-applicant before the tribunal, as per the latest filings in the NCLT. It has also been submitted by Pine Labs India to the Tribunal that they have complied with all regulations dealing with the inbound merger. Additionally, as per the filings in the Tribunal, Pine Labs India also states that the intention behind the merger is "to achieve economy in operations and to achieve business synergy." The outbound merger will also help Pine Labs navigate through the tax implications swiftly, rather than a share swap arrangement where it would have had to pay a large amount of taxes, as documented through the PhonePe reverse flip.
The main purpose, thus, of a reverse flip is to achieve business optimisation. In the last few years, there have been several favourable changes in the Indian market that have contributed to an increase in the trend for reverse flipping. Streamlining regulations for business, such as the introduction of GST and IBC in 2016, has provided a more predictable and business-friendly environment. India’s rank in the World Bank’s Ease of Doing Business Index reflects the significant improvement in the environment for businesses in India. Tax reforms and incentives, such as those under the Startup India initiative, have encouraged foreign startups to relocate to India.
The swift adoption of technology in India and improvements in digital infrastructure and initiatives have created a lot of room for creativity and business opportunities. It has made it easy for tech companies to operate in India while also increasing market access and growth potential. This makes India an appealing destination for companies to tap into the expanding middle class with increasing disposable income.
A few decades ago, the atmosphere for raising capital in India for startups, i.e., through private equity and venture capital funding, was at a nascent stage. Startups that required heavy funding were advised to set up their base in off-shore jurisdictions like the United States, Singapore, Ireland, etc. so that they could easily have access to capital. However, this has changed in the last few years in India. The high number of PE and VC deals show that India Inc. is ready to bet on startups more than ever.
The major reason for Pine Labs to reverse flip is to get access to the Indian capital market. This is evident from the Pine Labs’ actions in the last 1-2 years. It raised $150 million in 2022, setting its valuation at $5 billion. It had actually planned for an IPO in the US later that year, which got deferred due to the poor market conditions. It would not be incorrect to assume that Pine Labs will eye another round of funding after the merger and go for an IPO in India, where it will get more returns than it could possibly have from the US markets.
Conclusion
Reverse flipping is expected to only increase in the next few decades. Pine Labs’ Singapore court approval is a landmark moment. It sets a precedent for companies that had flipped to Singapore from India and now wish to shift their base back to India. The rationale and structuring of the Pine Labs merger set a precedent and will be heavily studied further in the months to come once more documents are available in the public domain. Companies in Singapore that wish to shift their base to India now have the much more feasible option of an outbound merger at their disposal.
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