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Authors: Pragati Patidar and Ishika Vats are 5th year students at the Institute of Law, Nirma University, Ahmedabad.
Introduction
In the past few years, reverse-flipping mergers have become a prevalent tool for corporate restructuring, whereby Indian companies that initially moved their business operations offshore have reversed the decision. This is primarily due to fewer regulatory burdens and compliance requirements, tax neutrality, and greater market access,which are driving companies to return to India. This wave of “Homecoming” is characterised by changes in India’s regulatory regime. After the recent amendment in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, Reverse Flipping Mergers can now be completed through the route of Fast Track Mergers. Additionally, one of the incentives of merging a foreign holding company into an Indian Subsidiary company is listing in the Indian market, leading to greater market access. Though reverse flipping mergers seem to be a lucrative option to access Indian markets, they are not free from roadblocks. The regulatory ambiguities surrounding reverse-flipping mergers are double taxation, different methods of valuation under the Foreign Exchange Management Act, 1999 (hereinafter “FEMA”) and the Income Tax Act, 1961 (hereinafter “IT Act”) and regulations governing the Employee Stock Option Plan (hereinafter “ESOPs”), all of which in turn critically impact India’s commitment towards ease of doing business.
Key taxation issues faced by companies in Reverse Flipping Mergers
Reverse flipping is a process in which foreign-based Indian companies strategically shift their headquarters back to their home country, India. There are two major ways in which companies adopt reverse flipping: first, a share swap structure, and second, inbound Cross-Border Mergers.
Reverse flipping by way of a share swap structure, where shareholders exchangeshares of the foreign holding company for shares in an Indian entity. Such transactions attract capital gains tax because they fall within the ambit of “transfer” under Section 2(47) of the IT Act. Here, tax on capital gain is calculated based on the difference between the Fair Market Value (hereinafter “FMV”) of Indian shares received by the shareholders and the cost of acquisition of the foreign shares as per Section 48 of the IT Act. Companies often face issues in determining the FMV, as it is subjective and heavily scrutinised by tax authorities, which can potentially lead to tax litigation. Along with this, if foreign shares derive substantial value from Indian assets, indirect transfer provisions apply, and this may result in taxation even for non-resident shareholders, depending on Double Taxation Avoidance Agreements (hereinafter “DTAAs”).
A prime example of this is PhonePe’s reverse flip, where it executed a reverse flip to India primarily through a share swap mechanism. Since the Singapore entity’s value was derived substantially from Indian assets, making the gains taxable in India even for non-resident shareholders, it resulted in a huge capital gains tax bill of around INR 8000 crore.
Even PhonePe benefited from easier access to Indian IPO markets and simplified governance, but the upfront tax cost was a significant hit. This case underscores why many companies, such as Groww in 2024 and Pine Labs in 2025, opted for reverse flips through cross-border mergers to aim for tax neutrality, avoiding the sharp swap’s tax pitfalls. Economic Survey 2022-2023 also suggested “Simplifying multiple layers of tax and uncertainty due to tax litigation” for such transactions to accelerate reverse flipping and attract companies to India’s booming capital Market.
Reverse flipping through the inbounds Cross-Border Mergers, in which a foreign company merges with an Indian company, and the foreign company’s shareholders are issued shares of the Indian company. This structure of reverse flipping may qualify for tax neutrality under Section 47 of the IT Act, if the conditions of amalgamation are satisfied, resulting in no capital gain tax on the transfer of assets from a foreign entity to an Indian entity. However, this process of reverse flipping is time-consuming.
For example, Pine Labs’ 2025 reverse flip through cross-border merger aimed for neutrality; however, the process took over a year after the prior approval from the Singapore court in May 2024. Therefore, companies often want to avoid this long, compliance-heavy process.
The concept of Cross-Border Merger through Fast-track Merger by incorporating Section 233 of the Companies Act, 2013, along with recent insertion of Rule 25A under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which is a ray of hope for fast mergers, because in a fast-track merger, the legislature removed the mandatory National Company Law Tribunal (hereinafter “NCLT”) approval which will result in time and cost friendly mergers. However, in this regard, only amendments were brought to the Companies Act; still amendment related to taxation laws are required to achieve the aim of ease of doing business. Based on the above discussion current tax regime related to reverse flipping creates a clear trade-off between efficiency and tax neutrality, compelling companies to choose between speed and tax optimisation. In the absence of corresponding tax reforms, the benefits of procedural efficiency under the company law remain significantly diluted by tax uncertainties and potential liabilities, thereby undermining the objective of achieving true ease of doing business.
Comparative analysis of the tax regimes governing Reverse Flipping Mergers
While India has made progressive steps with reforms like Rule 25A, with the recent growing surge in reverse flipping, legislators need to make the process of homecoming clearer and tax-friendly. Countries such as Singapore, Australia, and Delaware (USA) offer a highly attractive inbound homecoming framework that enables companies to relocate while reserving corporate identity, contracts, and other rights with minimal disruption and favourable tax treatment. In 2017, Singapore introduced a court-free inward re-domiciliation regime, allowing full continuity of the entity without creating a new company, with a structured and clear taxation framework, resolving the issues of double taxation, and fast 3-6 months approvals through the registrar only.
Australia provides a streamlined redomiciliation framework, with structured Australian Securities and Investments Commission (hereinafter “ASIC”) proceedings, tax regime and R&D incentives. Delaware (USA) excels through simple state-law conversions or mergers, often qualifying as tax- free “Type F” reorganisation under Internal Revenue Code (“IRS”) rules, with low costs, 1-3 months’ timeline, and strong governance appeal for tech and startups.
In contrast, India’s reverse flipping depends on inbound mergers (via Rule 25A fast – track) or share swaps, where mergers can achieve partial tax neutrality, but swaps usually trigger significant capital gains and indirect transfer taxes with a longer timeline of 5-14 months and value scrutiny. While India’s GIFT City incentives and Initial public offering (hereinafter “IPO”) access are growing strengths, adopting elements like Singapore’s seamless continuity, Australia’s quick approvals, or Delaware’s tax-free flexibility could reduce costs and friction, making India an even more compelling “homecoming” destination for its unicorns.
Tax Treatment of ESOP in Reverse Flipping Mergers
An inherent concern with Reverse Flipping Mergers is the treatment of ESOPs under the Indian law post-merger. ESOPs is commonly used by start-ups, wherein the employers provide the right to purchase the company’s shares to the employees in order to incentivise the company’s growth and retain talent. Generally, Start-ups and companies with limited cash use ESOPs as a reward mechanism. However, post-merger, when the assets of the foreign holding company get transferred to the Indian subsidiary company, a critical issue arises because the legal framework governing ESOPs in India may not complement the legal framework of the foreign jurisdiction.
Listed companies are governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, whereas unlisted companies are governed by Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Prior to the reverse flipping merger, the foreign holding company may agree to continue the incentives that are of equivalent value in the Indian company post-merger.
However, the practical ambiguities arise; firstly, in the scope of ‘employees’ under the Indian regulation governing ESOP. Non-eligible employees for the grant of ESOPs include independent directors, employees belonging to the promoter or promoter group, and directors holding more than 10% of the equity shares either themselves or through their relatives. However, these conditions do not apply in the case of startup companies till 5 years of its incorporation. In contrast, the foreign jurisdictions such as Singapore, Delaware, and the UK provide a broader category of eligible employees, such as advisors, consultants, independent contractors and members of the promoter group. Thus, as a result of the corporate restructuring, certain employees who do not fall within the definition of employees may not be eligible for the same incentives as they received at the foreign company. In order to curb this issue, the company must undergo a thorough review of tax compliance and implications to ensure that employees who do not fall within the purview of ESOPs in India post-merger are not subjected to an unjust tax burden.
Secondly, under Section 17(2)(vi) of the IT Act, the ESOPs incentives are taxed as perquisites on the basis of the difference between the FMV of the shares and the exercise price. The pertinent question that arises is, during the reverse flipping merger, if foreign ESOPs are replaced with Indian ones, then whether this replacement will be considered a taxable event as a fresh benefit. This regulatory loophole raises critical questions regarding the treatment of ESOPs incentives that need to be addressed, since Indian tax regulations do not provide any clarification on this aspect.
Recommendations and concluding remarks
Reverse-flipping mergers have become a pathway for companies to access the Indian Stock exchanges. To ensure a smooth transition for the companies involved, aligning the regulatory framework governing the reverse flipping merger is crucial. Bringing reverse-flipping mergers within the ambit of Fast Track Mergers through the recent amendment is a progressive step towards simplifying the corporate restructuring process. However, the alignment of corporate and taxation laws governing share swaps and inbound mergers is necessary to ensure coordination between the laws.
Firstly, under the IT Act, share swap transactions are currently treated as “transfers”, attracting capital gains tax without there being a real income. To address this anomaly, a particular provision should be introduced in taxation laws and related corporate laws to grant tax neutrality for share swap transactions that are undertaken in accordance with a sanctioned scheme of reverse flipping merger. Such a provision introduced would not only lead to tax efficiency in India but also model the Indian taxation regime around the International Rollover Regimes, those in the USA, UK and Singapore.
Secondly, there is no clear standard framework for the determination of Fair Market Value. To curb this, the alignment of the regulations governing such transactions, including the Companies Act, FEMA Regulations, and Income Tax Rules, is required by providing a standardised uniform valuation method for determining FMV.
Thirdly, in reference to the issues arising out of ESOPs in reverse flipping mergers, the definition of eligible employees should be expanded to be in line with the foreign jurisdictions such as the USA, UK, and Singapore, to ensure a smooth transition, and the employees are not subject to an unjust tax burden. Moreover, issuance of detailed guidelines for the treatment of ESOPs post-merger in line with international practices is imperative. It is undeniable that India has taken steps to reform the corporate laws governing reverse flipping mergers, but that alone would not be sufficient for the smooth operation of reverse flipping mergers. Incorporating such holistic legal reforms is likely to make India an even more attractive homecoming destination for startups and global investors.
