Declare Indian startups under foreign control as foreign firms, says RSS-affiliate Swadeshi Jagaran Manch

Drawing attention to the practice in which foreign companies gain control of startups in India, SJM national co-convenor Ashwini Mahajan said it leads to immense economic and national loss

As the government pushes Atmanirbhar Bharat and ‘vocal for local’ campaigns, RSS-affiliate Swadeshi Jagaran Manch (SJM) has drawn attention to foreign control of Indian startups through “flipping” and demanded that such Indian companies be declared “foreign”.

The organisation has cited the example of Flipkart as one such company that has engaged in “flipping”, giving its effective control to Walmart.

“We may take pride in saying that two Indian boys made a unicorn (Flipkart) which ultimately attained market valuation of US$ 20 billion, but the fact of the matter is that the promoters of Flipkart flipped away from India and registered their company and other associated companies in Singapore. And the set of companies were sold to Walmart (with 77 per cent of the shares being transferred to it) and not just a unicorn which was already flipped away went into the hands of a foreign company, Indian retail market share was also transferred to a foreign company silently,” Dr Ashwini Mahajan, national co-convenor of SJM said.

Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling it for profit. According to SJM, flipping of an Indian company involves a transaction in which an Indian firm incorporates a company in a foreign jurisdiction, which is then made the holding company of the subsidiary in India.

“It is interesting to note that several hundreds of Indian unicorns which have Indian founders who started off in India have either flipped or were incorporated abroad. Among 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),” Mahajan said.

According to SJM, this is done to avoid the Indian regulatory landscape, Indian tax laws and scrutiny by Indian 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,” Mahajan said.

He said this was also being done due to favourable foreign policies that nations like the US and Singapore have adopted which allows for lower corporate tax, fixed GST, zero capital gains tax rate, double taxation avoidance treaties, simple majority vote on critical issues, evolved IP protection laws and so on.

The Manch pointed out the need to overhaul the system from policy to regulations and 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,” Mahajan said.

SJM said ‘flipping’ leads to loss of revenue for India. “Flipping leads to immense economic and national loss as an Indian company becomes a wholly owned subsidiary of the foreign corporation despite 90%+ value creation from India, resulting in loss of all future tax on capital gains, public listing, operational profits etc,” Mahajan said.

According to SJM, it also leads to ownership of critical consumer data and IP being transferred abroad. “Flipping imposes a security threat on all critical data and also results in substantial loss of possible future value creation from all associated IPs of that company. Due to foreign HQ structures, the Indian government can’t determine the source of money backing these companies which can result in security issues for the nation in case war-like activities arise in future,” Mahajan said.

SJM said it also gives an unfair advantage to foreign investors over domestic players. “Flipping is the perfect example that India rolls red carpet to foreigners and shows red tape to indigenous players. Foreign entities get exemptions during land allocations in various states, but indigenous players are left to fend for themselves,” he said.

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