Flipping by startups poses security threat: SJM

New Delhi: Raising red flag over flipping by some of India's best known startups, Swadeshi Jagran Manch (SJM) has cautioned that Indian companies opting foreign jurisdiction for incorporation potentially poses security threat due to practically no scrutiny of source of funds and transfer of critical data on Indian consumers abroad.

Ashwani Mahajan, National Co-Convener of SJM, a wing of the Rashtriya Swayamsevak Sangh (RSS), says unicorns with one billion valuation flipping means avoiding Indian regulatory oversight and loss of revenue to the country.

"India has been proud of its startups creating immense value and adding to the GDP of the country. But our happiness remains short-lived when we find that they have not remained Indian any more. Most of these high ticket startups have flipped away and are no longer Indian companies in essence," he said.

Flipping means a transaction where an Indian company incorporates a firm in a foreign jurisdiction, which is then made the holding company of the subsidiary in India. The most favourable foreign jurisdictions for Indian companies are Singapore, the United States and the United Kingdom. He demanded an overhaul of the system from policy and regulations, to access to capital to push entities to register in India.

"The differential policies discriminating indigenous and attracting foreign entities need to stop. However, to ultimately discourage Indian startups to flip, we need to take some tough measures as well, including declaring those who flip, a foreign company," he said.

One of the best examples of a flipped company is domestic e-commerce giant Flipkart. The promoters of the firm, which ultimately attained market valuation of $20 billion, flipped away from India and registered their company and other associated companies in Singapore. And the set of companies were sold to Walmart, leading to transfer of Indian retail market share to a foreign company.

"It is interesting to note that several hundreds of Indian unicorns have either flipped or were incorporated abroad, which have Indian founders who started off in India. Amongst them majority have operations and primary market in India. Nearly all have developed their intellectual property (IP) using Indian resources (human, capital assets, government support, etc.)," he said.

Flipping, he said, essentially leads to unicorns avoiding the Indian regulatory landscape and the India's tax laws and scrutiny by authorities.

"Various international investors force their investee companies to flip abroad and sometimes even keep this as a condition precedent to their investment in these startups as they want the data and IP to be headquartered overseas where they will put their money," he said.

Mahajan said flipping leads to immense economic and national loss as an Indian company becomes a wholly-owned subsidiary of the foreign corporation despite 90 per cent-plus value creation from India, resulting in loss of all future tax on capital gains, public listing and operational profits."

Stating that ownership of critical data as well as IP is transferred abroad, he said most of these companies are growing 100-200 per cent annually and are increasingly capturing more and more critical consumer data.