For many years, Indian startups adopted a familiar externalization structure. Founders incorporated a parent company outside India, often in Delaware, and operated through an Indian subsidiary.
This model gave early-stage companies access to international venture capital and a well-known corporate law framework.
Investors valued the predictability of Delaware corporate jurisprudence and the efficiency of its courts.
Holding companies in the United States also provided a convenient home for intellectual property and supported future fundraising through preferred stock and convertible notes.
A growing number of mature companies with India focused businesses are now moving in the opposite direction through a restructuring commonly described as a reverse flip or domiciliation.
A reverse flip reorganizes the group so that the Indian entity becomes the parent holding company. Several recent transactions across fintech, consumer and enterprise technology have adopted this model.
For transaction counsel supporting companies with substantial Indian operations, this development introduces a range of cross border considerations that require careful evaluation.
Commercial Drivers for Reverse Flips
Three commercial trends are most relevant.
First, India’s capital markets have deepened.
Late-stage private capital is available from domestic private equity funds, sovereign wealth investors with India mandates and large institutional pools that understand Indian regulatory and commercial dynamics.
These investors often prefer investing into an Indian incorporated parent because their investment charters and tax positions are aligned with domestic structures.
Second, India’s public markets have become a viable listing venue for technology and consumer companies with India centric business models.
Successful listings in recent years have demonstrated that companies operating in India can access liquidity and valuation outcomes that compare favorably to offshore alternatives.
Firms aiming for an Indian IPO often find it efficient to consolidate the holding company in India before commencing the listing process.
Third, as India focused companies scale their operational footprint, a consolidated parent under Indian law may streamline governance, reporting and regulatory compliance.
Management teams and boards often operate from India, and several statutory interactions, including tax assessments, licensing and regulatory filings, take place in India.
For these companies, an offshore holding company can introduce duplication and complexity that a reverse flip can eliminate.
Regulatory Developments Making Reverse Flips More Feasible
- Fast track route for inbound mergers
In 2024, India amended its company law framework to allow certain cross border mergers to use a simplified approval mechanism known as the fast-track route.
Under a fast-track route, a foreign parent company can merge into its Indian subsidiary if the Indian entity is a wholly owned subsidiary.
The (Indian) Companies Act ordinarily requires mergers, including inbound mergers, to be approved by the National Company Law Tribunal, which is a specialist judicial body that oversees corporate law matters.
That process typically involved multiple hearings, creditor notices and approval timelines that extended to nine to twelve months.
Under the fast-track route, the merger is reviewed instead by a Regional Director within India’s Ministry of Corporate Affairs.
A Regional Director is a senior administrative officer empowered to approve qualifying mergers based on statutory filings and shareholder and creditor consents.
Although still subject to procedural requirements, the fast-track path is administrative rather than judicial and therefore more predictable. More importantly, completion timelines can be significantly shorter.
Inbound mergers also require review by the Reserve Bank of India (RBI), which is the country’s central bank and the regulator for foreign exchange under the (Indian) Foreign Exchange Management Act or FEMA.
The RBI must confirm that the transaction complies with cross border merger regulations that govern valuation standards, treatment of foreign assets and liabilities and adherence to foreign exchange control norms.
This dual framework of company law and foreign exchange regulation is central to cross border restructurings involving Indian companies.
- Clarification of share swap rules under FEMA
A second pathway involves an out-of-court reorganization through a share swap.
In this structure, the Indian company issues shares to the shareholders of the foreign parent and those shareholders transfer their shares in the foreign entity to the Indian company.
This results in the Indian entity becoming the ultimate holding company without a statutory merger.
The share swap mechanism is governed by two separate FEMA regimes. Issuance of shares by an Indian company to non-resident persons is regulated by FEMA norms on incoming foreign investment into India (i.e., the Non Debt Instrument Rules, which mandate valuation by a qualified valuer and filings with the RBI).
The acquisition of shares in a foreign company by an Indian entity is governed by FEMA norms on outbound investment by Indian companies / persons (i.e., the Overseas Investment Rules, which provide a separate valuation and reporting framework).
Recent amendments have clarified these processes and introduced more predictable standards.
The result of these developments is that companies now have two workable routes for domiciliation. Each route has distinct regulatory and tax considerations which are discussed below.
Structuring Alternatives
- Inbound merger
An inbound merger under the fast-track route is a statutory merger. The foreign entity merges into the Indian subsidiary which survives as the parent.
All assets, liabilities, employees and contractual rights vest in the Indian company by operation of law. Shareholders of the foreign parent receive shares of the Indian company in accordance with the merger scheme.
The primary advantage is structural clarity. The transaction results in a single Indian parent at the top of the group.
Intellectual property, commercial contracts and licenses can be integrated into one entity. If the transaction satisfies specific conditions under India’s Income-tax Act, it may qualify for tax neutral treatment in India.
The principal challenge arises from the treatment of foreign debt. Any liabilities of the foreign parent become liabilities of the Indian entity after the merger.
Under FEMA, these foreign liabilities are treated as external commercial borrowings (ECBs). ECBs are subject to detailed rules regarding permitted lenders, minimum maturity, interest caps, currency of borrowing, and end use restrictions.
This means that pursuant to the merger, the resulting Indian company must bring migrated liabilities in compliance with ECB norms within a two-year window. In some cases, this may require lender consent and possibly refinancing.
There may also be jurisdiction specific considerations. Where the foreign parent holds assets or licenses in other jurisdictions, local law may require filings, notices or regulatory approvals.
Further, intellectual property transfers may trigger re-registration or notification requirements, and contractual counterparties may have change-of-control or assignment provisions that require consent prior to the merger.
- Share swap
In a share swap, the Indian company becomes the holding company through an exchange of shares, resulting in the foreign parent continuing to exist as a subsidiary of the Indian parent. This foreign entity may eventually be wound up if not required.
This route does not cause foreign liabilities to migrate into India and therefore avoids the ECB implications associated with an inbound merger.
The swap can also be quicker to implement because it does not involve any statutory merger process or any statutory approval.
It does, however, require compliance with valuation norms and RBI reporting requirements which are necessary steps to achieve the restructuring. These are routine processes and can be completed fairly quickly.
The principal legal issue and disadvantage of this structure is Indian taxation.
A share swap is typically treated as a transfer for tax purposes. For US shareholders, the exchange of shares can create a taxable event under US tax law. Indian tax implications may also arise if the foreign parent derives substantial value from assets located in India.
Companies must model these outcomes early and, where appropriate, explore whether treaty relief or alternative sequencing of steps could mitigate tax exposure.
Core Legal Considerations for US Counsel
- Foreign exchange compliance
FEMA governs the issuance of Indian securities to non-residents, acquisition of foreign securities by Indian entities, and treatment of foreign liabilities and assets in cross border mergers.
The statute adopts a strict compliance approach. Transactions must satisfy pricing guidelines, sectoral conditions and reporting timelines.
RBI filings are mandatory and must be sequenced appropriately. US counsel should coordinate with Indian counsel early to ensure that the structure, timing and documentation align with FEMA requirements.
- Investor and lender approvals
A reverse flip is a fundamental reorganization that typically triggers approval thresholds under shareholder agreements and financing documents.
Transaction counsel should review voting arrangements, veto rights, and consent requirements.
Debt documents for the foreign parent may require lender approval for the merger or the share swap, particularly if it affects collateral, guarantees or other covenants.
Migration of all of these to the Indian parent would trigger various requirements and filings under Indian foreign exchange norms.
- Taxation
Tax consequences differ between the merger and share swap routes. Companies must assess potential tax liabilities for the parent and for shareholders in the US and India.
Typically, a Big 4 is brought in at the start of process to draw up financial and tax models. The availability of tax-neutral treatment under Indian law depends on compliance with statutory conditions.
For US shareholders, capital gains tax may be triggered in India without immediate liquidity, and therefore these issues can materially influence the choice of structure.
- Intellectual property and data
Migration of intellectual property to India or transfer of ownership within the group must comply with applicable registration and contractual requirements.
Where data localization or technology import regulations apply, additional steps may be required.
Counsel should review license agreements, customer contracts and vendor terms for change of control or assignment restrictions.
- Governance under Indian law
Following the reverse flip, the group’s governance is governed by the (Indian) Companies Act.
Director duties, related party transaction rules, shareholder approval thresholds, board composition and disclosure requirements differ from US law.
Rights commonly found in US investor agreements, such as drag rights or protective provisions, may require adaptation to fit within the Indian legal framework.
Companies planning an IPO in India should consider alignment with the governance and disclosure regime under the Securities and Exchange Board of India in terms of preparedness for listing.
Strategic Outlook
Reverse flips reflect the maturation of India’s legal and capital markets environment.
They offer a coherent structure for companies that derive most of their value from India and anticipate capital raising or listing activity within India.
For early-stage companies relying on globally distributed capital, the traditional outward flip to the US remains an efficient model because it aligns with investor expectations and financing instruments and as such may continue despite an opposing trend of reverse flips.
For US counsel the reverse flip introduces a multi-jurisdictional transaction that requires alignment of corporate law, foreign exchange regulation, tax planning and commercial strategy.
When structured carefully, it can rationalize the group structure and position the company effectively for long term value creation in India’s expanding market.
