‘Flipping’ refers to the transfer of an Indian entity’s ownership and key assets, like intellectual property, to a foreign entity despite having most of their market, personnel, and founders in India. This move is often motivated by the desire to tap into larger pools of venture capital, specific investors’ terms and conditions, benefit from more favourable tax frameworks and enhance market penetration opportunities.

Reverse flipping is a counter-narrative to the flipping trend that involves relocating the company’s domicile and/or assets back to India after previously moving its headquarters overseas. Recently, there has been a notable rise in this trend, within the corporate landscape.

The prevailing techniques for reverse flipping typically include:

In an inbound merger, a foreign entity merges into an Indian entity, resulting in the Indian entity owning and controlling the assets and operations of the foreign entity. As consideration, the shareholders of the foreign entity receive shares of the Indian entity. In India, the process of obtaining approvals for such inbound mergers is lengthy and typically takes between 6 to 9 months for such transactions.

Transactions involving mergers and demergers are generally tax-neutral under Section 47 of the IT Act, exempting them from capital gains tax, including inbound mergers, provided certain conditions are met. Fintech start-up Groww has chosen to reverse flipping (from the USA to India) through this route.

In the case of a share swap, shareholders of the foreign entity exchange their shares in the foreign entity for shares in the Indian entity which takes very less time as compared to Inbound mergers. Foreign shareholders are taxed in India based on the difference between the value of the Indian entity’s shares during the reverse flip and the original cost of the foreign entity’s shares. Walmart backed PhonePe, and completed its reverse flipping (from Singapore to India) through a share swap, incurring approximately $1 billion in taxes in India, while no tax was paid in Singapore due to the absence of Capital Gains tax.

In our perspective, companies are opting for this strategic maneuver due to two primary motivations:

1. Initial public offerings and attractive valuations – Despite the significant tax outflow during the domicile shift, companies are still considering relocating their headquarters to India due to the attractive valuations in the Indian startup ecosystem. Late-stage Indian startups, too small to attract institutional investor interest abroad, are particularly drawn to this trend. Last year, PhonePe and its investors paid $1 billion in taxes to India on its $5.5 billion valuation. Subsequently, PhonePe raised funds in India, achieving a valuation of $12 billion. Given the substantial presence of 8 crore retail investors in the Indian market, initial public offerings (IPOs) emerge as the preferred exit route for investors. This trend presents favourable exit opportunities for investors.

2. Regulatory requirements – Reverse flipping is often pursued by companies based on the specific needs of the sector in which they operate. In the fintech sector, regulations set by financial authorities such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) play a significant role. These regulations favour fintech entities being domiciled in India due to stricter scrutiny and comprehensive disclosure requirements regarding fund sources and domiciles. This regulatory environment has led many fintech firms to reverse-flip their holding structures to ensure compliance. Notable examples include companies like PhonePe and Groww, which have adjusted their domiciles to align with these regulatory demands. It will be interesting to observe if there are any other sectors that will be required to relocate their domicile back to India due to regulatory requirements.

It is imperative to consider potential concerns from foreign investors regarding tax assessment risks and the nuances of the Indian taxation system, as they transition to being subject to Indian tax laws.

Additionally, the availability of tax treaty benefits for foreign shareholders in the new Indian entity may depend on whether a Double Taxation Avoidance Agreement (DTAA) exists between India and their home country. Furthermore, careful timing of the reverse flip is crucial to mitigate potential tax costs.

While it’s possible for the company to realize a valuation increase in the future, potentially offsetting the initial tax costs—as seen with PhonePe—it’s crucial to remember that the tax dynamics of reverse flipping add a layer of complexity to corporate decisions and transactions, underscoring the importance of tax planning, compliance, and risk management in navigating this strategic maneuver.

At the heart of this transformation are several pillars aimed at expediting dispute resolution within the corporate realm. The arbitration law, commercial courts, the Insolvency and Bankruptcy Code (IBC), and the National Company Law Tribunal (NCLT) constitute the core of India’s corporate litigation ecosystem. Their collective objective is ensuring swift adjudication of cases and fostering a conducive environment for business operations. All these judicial courts are mutually exclusive and have independent ruling powers within their ambit.

CORPORATE JUDICIAL ECOSYSTEM

Corporate disputes often revolve around the exercise of board powers, actions, or their failure to act. They can manifest in conflicts between boards and shareholders, directors, and executive management, or even among directors themselves. When these disputes spill into the public domain or escalate into litigation, they signal governance lapses within the company—a critical aspect in maintaining investor confidence and market stability.

Recognizing the pressing need to streamline India’s litigation framework, policymakers embarked on a journey to alleviate the burden on high courts and the Supreme Court. Specialized tribunals like the NCLT and the National Company Law Appellate Tribunal (NCLAT) were established under the Companies Act to handle core company litigation, replacing erstwhile bodies like the Company Law Board (CLB) and the Board for Industrial and Financial Reconstruction. The NCLT or “Council” is a quasi-legal position made under the Companies Act, 2013 to deal with corporate common questions emerging under the Act. Furthermore, the Companies Act endeavours to strike a balance between the rights of majority and minority shareholders. While acknowledging the rule of the majority, it also safeguards minority interests through well-defined minority rights, thus ensuring equitable treatment and protecting minority shareholders from potential exploitation. Judicial courts play a pivotal role in maintaining this equilibrium and addressing the concerns of stakeholders.

The Insolvency and Bankruptcy Code stands as another testament to India’s commitment to expedited dispute resolution. By enforcing a time-bound insolvency process, the code aims to facilitate a faster turnaround and smoother bankruptcy proceedings. This, in turn, enhances investor confidence and provides a conducive environment for business growth and investment. The fastest resolution so far in an IBC case, the insolvency resolution of Bhushan Steel was completed in just 10 months flat. The case was admitted for resolution in July 2017 and got the approval in May 2018. The bidding war between Tata Steel and JSW Steel fetched lenders a 63 percent recovery, where Tata Steel bid INR 35,200 crore against Bhushan Steel’s debt of INR 56,051 crore.

Despite these commendable efforts, challenges in implementation persist. The success of these reforms hinges on effective execution and institutional capacity building. As per the latest information available, 21,205 cases were pending with NCLT benches as of 31.01.2023, including 12,963 cases under the Insolvency and Bankruptcy Code (IBC), 1,181 cases of Merger and Amalgamation (M&A), and 7,061 other cases.

The NCLT benches are burdened with large number of cases, leading to delays in the disposal of matters. The infrastructure and manpower at various benches need further improvement to handle the increasing workload effectively. Nevertheless, the courts have played a crucial role in promoting a more streamlined and efficient resolution process for corporate disputes and insolvency cases. The decisions of these courts have a significant impact on the corporate sector, shaping jurisprudence and providing clarity on various legal provisions.

Alternative Dispute Resolution (ADR) methods like conciliation, mediation, and Lok Adalats have shown promise in addressing issues in India’s traditional court system but have not scaled widely. COVID-19 restrictions have further limited their effectiveness and that paved way for Online Dispute Resolution (ODR) or e-ADR as a key alternative. However, it is crucial for ODR platforms and courts to collaborate, share data, and build a cohesive dispute management system.

In conclusion, India’s corporate disputes ecosystem has undergone a remarkable evolution, driven by the imperative of efficiency and governance. While significant strides have been made, continued vigilance and concerted efforts are necessary to realize the full potential of these reforms. By fostering a robust dispute resolution framework, India can bolster investor confidence, attract foreign investment, and propel its economy towards sustained growth and prosperity.

Despite challenges such as high-interest rates, macroeconomic uncertainty, regulatory scrutiny, and geopolitical risks plaguing the global market, India’s M&A activity demonstrated remarkable resilience throughout 2023. Optimistic projections for 2024 indicate that the country is poised to maintain its momentum in deal-making, further underscoring its attractiveness in the M&A sector. This buoyancy solidifies India’s status as a premier destination for strategic acquisitions and corporate consolidations, reaffirming its enduring appeal in the foreseeable India.

In India, the Competition Act, 2002 (as amended) (“the Act”) serves as an important legislation that regulates M&A activities. This Act prohibits anti-competitive agreements that may significantly adversely affect competition within India. The Competition Commission of India (CCI) is empowered under this act to investigate anti-competitive agreements and instances of dominant positions, such as predatory pricing, and declare them void. Moreover, the Act prohibits any person or enterprise from engaging in a combination that would result in or likely result in a significant adverse impact on competition within the relevant Indian market. Such combinations shall be deemed void. A combination, in this context, encompasses mergers, amalgamations among enterprises, or the acquisition of control, shares, voting rights, or assets of an enterprise by another entity.

Not all M&A activities necessitate notification to the Competition Commission; only combinations surpassing specified thresholds require prior notification and approval. The act delineates thresholds for enterprises and groups based on assets and turnover. If these thresholds are surpassed, it necessitates notifying the CCI. Presently, the thresholds stand as follows:

On March 7, 2024, the Central Government extended the de minimis clause, exempting acquisitions, mergers, or amalgamations involving target enterprises with assets not exceeding Rs. 450 crores or turnover not exceeding Rs. 1,250 crores in India from the purview of the Act. This exemption is applicable for 2 years from the date of notification in the official gazette.

Reliance & Disney Merger:

On February 28, 2024, Reliance Industries Limited and Walt Disney finalized a merger agreement, creating a media giant valued at US$ 8.5 billion (Rs. 70,352 crore). Nita M Ambani is slated to chair the combined entity’s board, with Reliance and its affiliates holding a majority 63.16% stake (16.34% by RIL, 46.82% by Viacom18), while Disney retains 36.84%. Given this merger exceeds the threshold, notifying the CCI and obtaining approval is imperative. Post-merger, the entity secures exclusive rights to distribute Disney films in India and access over 30,000 Disney content assets, enhancing its entertainment offerings. With a collective total of 120 TV channels and two digital streaming platforms, Disney and Reliance aim to reach 750 million users in India. Reliance and Disney’s TV viewership share in the top 10 channels is estimated to be 40% as per the Broadcast Audience Research Council (BARC). Disney+ Hotstar maintained its dominance in the Indian OTT market with a 24% market share in Q4 2023, while Jio Cinema held a 6% share. Together, the joint venture is poised to capture a significant 30% market share in the OTT sector, surpassing Prime Video’s 22% and Netflix’s 13%. The proposed merger is subject to obtaining regulatory, shareholder, and customary approvals, with an expected completion timeline in either the fourth quarter of the calendar year 2024 or the first quarter of the calendar year 2025.

The CCI may scrutinize the proposed merger entity’s ability to increase prices for advertisers, Distribution Platform Owners (DPOs), and viewers, particularly in channels with substantial market share. Additionally, the CCI might express apprehensions regarding potential discriminatory pricing practices with DPOs.

Over the past two to three years, the CCI has shown a readiness to consider alternative forms of remedies, if they adequately tackle competition concerns. The CCI has indicated its departure from a one-size-fits-all approach, instead opting to tailor remedies meticulously to address the specific harm identified in each case.

Since its inception, the Competition Commission of India (CCI) has reviewed more than 1,000 transactions, successfully resolving 99% of them. Notably, only eight cases, accounting for less than 1% of the total, have advanced to a comprehensive Phase II investigation, while the majority have been cleared during Phase I. Importantly, there hasn’t been a single instance of a transaction being blocked thus far. Instead, approvals have been granted in certain cases following the implementation of structural or behavioural remedies, determined in consultation with the involved parties to address potential anti-competitive impacts on markets. This underscores the CCI’s predominantly pro-business stance.

In October 2022, the CCI approved the consolidation of specific entities within the Sony Corporation group and Zee Entertainment Enterprises Limited. However, this approval was subject to certain conditions, including voluntary structural modifications such as divesting three Hindi general entertainment and film television channels. The CCI expressed concerns about the potential emergence of the resultant entity as the largest broadcasting house in India. Alongside divestment, the CCI imposed additional conditions to ensure fair market practices.

In March 2023, the CCI granted conditional approval for the 100% acquisition of Hindustan National Glass & Industries Limited (HNG) by AGI Greenpack Limited. However, this approval was contingent upon the divestiture of a manufacturing plant owned by HNG.

In August 2022, in the case of Umang Birla/Aditya Marketing, the CCI conditionally approved the merger. This approval was subject to voluntary behavioural remedies, including refraining from interference with the board of directors and management of certain affiliates of Umang Birla, which exhibited significant horizontal and vertical overlaps with Aditya Marketing. Additionally, the remedies required Umang Birla to reduce its shareholding in one of its affiliates to below 25%.

Given the similarities between the Reliance Disney merger and the Sony-Zee Merger and drawing from past precedents, the CCI may impose conditions such as divestment of certain business segments or other restrictions to address potential anti-competitive concerns and uphold fair market practices. These conditions serve to protect competition and consumer interests in the broadcasting sector, in accordance with the regulatory framework established by the CCI.

Further, any person or enterprise intending to enter into a proposed merger must submit a notice in the prescribed form within 30 days of the approval of such proposal by the directors or the execution of any agreement or other documents for such combination. Failure to provide notice to the commission may result in the imposition of a penalty by the commission, amounting to up to 1% of the total turnover or assets, whichever is higher, of such combination.

In the past, the CCI has imposed penalties in several cases including Bharti Airtel Limited with a penalty of Rs. 1 Crore, Hindustan Colas with Rs. 5 Lakh, Adani Transmission with Rs. 10 Lakh, Adani Green Energy with Rs. 5 Lakh, Chhatwal Group Trust with Rs. 10 Lakh and Zuari Fertilisers and Chemicals Limited and Zuari Agro Chemicals with Rs. 3 crores.

Looking ahead, as India’s M&A activity continues to evolve, adherence to regulatory requirements and cooperation with regulatory authorities will remain paramount. The CCI has demonstrated its effectiveness as a competition regulator in India, particularly as the country’s competitiveness has surged in recent years.

Through its open-door approach, in contrast to other regulatory bodies, the CCI maintains accessibility to address inquiries and apprehensions from stakeholders engaged in mergers. This approach fosters a more transparent and foreseeable regulatory framework for businesses navigating India’s emerging M&A landscape.

The structure of acquisition finance varies depending on the geographical regions and borders. Acquisitions can be broadly classified into domestic and cross-border categories. Cross-border acquisitions are typically segmented into two: Inbound and Outbound acquisitions.

In recent times, notable acquisition transactions have occurred in India. In June 2023, Tata Communications announced its intention to acquire the US-based enterprise messaging firm Kaleyra for US$ 100 million in an all-cash deal (Outbound acquisition). Following this, in July 2023, the Indian arm of the French advertising and public relations company Havas revealed its acquisition of PivotRoots (Inbound acquisition). Additionally, in August 2023, the jewellery retailer Titan expanded its stake in CaratLane by acquiring an additional 27.18% for Rs. 4,621 crore (US$ 556.01 million) (Domestic acquisition). These instances highlight the dynamic landscape of acquisition activities, showcasing diverse sectors and moves within the Indian market.

Inbound acquisitions refer to instances where a foreign entity directly purchases a company incorporated in India or does so through foreign owned and controlled operating company (FOCC) incorporated in India as a subsidiary of an offshore entity

Outbound acquisitions refer to instances where an Indian acquirer directly purchases a company incorporated outside India or does so through a special purpose vehicle incorporated outside India.

Commonly, the financial options available for such types of acquisitions are summarised in below table:

Disclaimer: The above table only outlines commonly used acquisition finance options based on our secondary research.

Some important factors that must be taken into account when domestic entities engage in different types of acquisitions are:

1. For domestic acquisitions, the guidelines set forth by the Reserve Bank of India (RBI) limit the capacity of Indian banks to provide financing for the acquisition of equity shares in an Indian company, except in exceptional circumstances.
2. For outbound acquisition, acquiring entity has the option to secure loans from banks, financial institutions, and other lenders, provided it adheres to specific qualitative and quantitative regulatory constraints.
3. Considering the limited availability of global funds for small to medium scale domestic companies, acquisition financing through GIFT City is facilitated by leveraging its status as an IFSC, which opens avenues for accessing global financial markets, engaging with international banks and investors, and utilizing a regulatory framework tailored for cross-border financial activities.

Adherence to regulatory frameworks established by the RBI and FEMA under FDI and ODI regulations is imperative for both Inbound and Outbound acquisitions. The RBI regulations play a crucial role in acquisition financing, and the introduction/ modification of any regulations hold the potential to usher in transformative changes in the acquisition financing landscape. This, in turn, may lead to heightened dynamism and structural shifts in the overall scenario.

In the face of elevated global inflation and economic uncertainties, Indian corporations with a solid foundation haves potential to sustain continued growth in domestic acquisitions. We believe that the need of the hour is to facilitate equity finance from Indian banks within the established regulations.

A staggering 2.68 crore disputed tax demands, including Income Tax, wealth tax, and gift tax, totalling Rs. 35 lakh crores, are pending across various legal forums as confirmed by Shri. Sanjay Malhotra, Revenue Secretary at the Department of Revenue, Ministry of Finance. Among these, 2.1 crores have demands up to Rs. 25,000/-, with cases dating back to 1962. Furthermore, approximately 58 lakh demands qualify for relief up to FY 2009-10, and 53 lakh demands are eligible for the period spanning FY 2010-11 to 2014-15. The image below depicts the rising trend of the direct tax collection under dispute.

*Amounts in INR lakh crores Data available only till 2020-21

The budget announcement lacked clarity regarding the withdrawal of demands, leading to significant uncertainty. Questions arose regarding whether the relief amounts of Rs. 25,000/- and Rs. 10,000/- would also encompass the interest component or only the principal. Furthermore, it remained unclear if taxpayers with demands exceeding Rs. 25,000/- or Rs. 10,000/- would receive partial relief, and if there would be an upper monetary limit for demand withdrawal.

Addressing these concerns, the Central Board of Direct Taxes (CBDT) issued a detailed explanation on February 13, 2024. According to it, outstanding demands under the Income-tax Act, 1961, Wealth-tax Act, 1957, and Gift-tax Act, 1958 as of January 31, 2024, will be withdrawn from the date such demands were raised or modified for the respective Assessment Year. However, there is a cap of Rs. 1,00,000/- per taxpayer on the principal component of tax demand under these Acts. The order excludes any outstanding demands related to Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) under the Income-tax Act, 1961.

Regarding the computation of the monetary limit of Rs. 1,00,000/-, it is specified that the limit will apply from earlier assessment years to subsequent assessments, provided the demand does not exceed the ceiling of Rs. 1,00,000/-. Additionally, demands exceeding Rs. 10,000/- or Rs. 25,000/- will be disregarded for the purpose of this calculation.

It is emphasized that the withdrawal of the claim does not grant taxpayers the right to claim credit or refunds for taxes prior to withdrawal. Moreover, it does not impact any ongoing criminal proceedings under any law and does not confer any benefit or immunity to the taxpayer or assessee in such proceedings.

Following the CBDT’s order, the Income-tax E-filing portal of taxpayers displayed “Extinguished Demand” highlighted in red under the outstanding tax demand tab as under:

The Government’s decision is welcome move as:

1. Many outstanding demands date back to as early as 1962 and when taxpayers attempted to rectify or contest these demands with tax authorities, the income-tax officers, at various instances lacked sufficient information to verify their claims.
2. The government typically also incurs significant costs in pursuing small demands and this move will reduce such spends.
3. This has offered relief to taxpayers, as many tax refunds were previously withheld due to unresolved demands from previous years.

This move is likely to benefit 1 crore tax payers and, in our view, this action solidifies the Government’s assertion of recognizing and honouring taxpayers, as well as underscores the importance of fostering a favourable business environment in India. By addressing unresolved tax demands and facilitating the release of withheld tax refunds, the government has initiated a positive message to both domestic and international investors regarding its commitment to a fair and consistent regulatory framework.