Legal experts explain to Aditya Rangroo why our best startups have galloped to foreign soil, and whether it’s possible to shut the gate
India has the largest number of offshore unicorns – known as “flipped startups” – in the world. Indian entrepreneurs have founded substantially more unicorn companies outside India than from within its shores, translating into more offshore unicorns than any other nation.
The term “unicorn” was coined by venture investor Aileen Lee in 2013 to describe private enterprises or startups valued at more than USD1 billion. Nearly 11 years later, unicorns are no longer exceptional in India.
After Bengaluru-based fintech firm Open secured USD50 million to become India’s 100th unicorn in May 2022, the country was home to 100 unicorns.
However, in recent times, there has been a shift. Many Indian unicorns are being set up outside India, indicating concerns that are propelling entrepreneurs to consider moving to foreign soil.
According to a report by the Hurun Global Unicorn Index 2024, Indians have founded 109 unicorns outside of India and 67 within the country, with more offshore unicorns than any other nation. Interestingly, of the unicorns founded outside of India, almost all were in the US (95), led by the San Francisco Bay area, with four in the UK, three in Singapore and two in Germany.
This is reiterated by India’s International Financial Services Centres Authority (IFSCA) in its report titled Onshoring the Indian Innovation to GIFT IFSC, which points out that the trend of registering overseas is quite common in India’s startup ecosystem, the third-largest in the world. During the year 2023-24, the report pegs the overall number of companies valued at over USD1 billion at 340.
Notably, these startups and unicorns continue to have their primary market and operations, including their founders, based in India. Why? Lawyers quoted in this article attribute the phenomenon to several factors including complex taxation, the excessive regulation and rigid conformity known as “red-tapism”, unattractive corporate laws, policy concerns and a perceived lack of government support.
Complex tax
According to a report by the Bangalore Chamber of Industry & Commerce on direct tax administration, a complex and unfriendly capital gains tax system is a major reason for several Indian startups relocating their headquarters outside India. The multifaceted nature of India’s tax regime, which includes a mix of direct and indirect taxes, often leads to confusion and increased compliance costs for businesses.
For instance, there have been numerous revisions of the goods and services tax (GST) since its implementation, causing uncertainty and difficulties in planning for startups. A lack of clarity in tax laws, coupled with high corporate tax rates, often makes it more attractive for startups to register in countries where the tax regimes are simpler and more predictable.
Experts suggest that for India to become a true startup hub, comprehensive reforms are needed – structural tax reforms, regulatory frameworks and policy stability. One of the leading advocates is Teesta Hans, who specialises in intellectual property rights and corporate compliance and says many Indian unicorns were incorporated outside the country due to a less favourable business environment.
“For instance, Flipkart operates in India but was set up in the US,” she says. “The complex taxation system in India, marked by multifaceted and inconsistent regulations, imposes substantial compliance burdens, increasing costs and legal uncertainties. This was evident in the Vodafone tax case.”
On similar lines, Shoubhik Dasgupta, a Mumbai-based partner at Pioneer Legal who advises on private equity and corporate and commercial matters, says some unicorns have holding companies outside India to attract investments in favourable regulatory regimes. “Tax structuring is a common reason for … moving headquarters to countries like the Netherlands and Singapore, which have lower tax rates and double taxation avoidance agreements with India,” he says. “Additionally, sector-specific regulations and FDI [foreign direct investment] restrictions in India contribute to this trend.”
Sonal Verma, a partner and global leader (markets & strategy) at Dhir & Dhir Associates in Mumbai, adds that a major factor is the burden of high corporate tax rates in India, averaging 25.17%, compared to Singapore’s 17%, the US at 21% and the UK at 19%. Relocating to countries with lower tax rates helps startups reduce tax liabilities and retain more profits for reinvestment and growth.
“The UAE, with its minimal corporate tax rates up to AED375,000 (USD102,000), and no tax on salary income, is another lucrative destination for startups,” she says. “Although India has initiatives like the Startup India campaign and tax incentives, the appeal of overseas ecosystems persists. However, the International Financial Services Centre in GIFT City offers a promising solution with its business-friendly environment and tax advantages, potentially attracting startups back to India.”
Unattractive corporate law
Although improving, Indian corporate laws still present challenges for startups. The rigidity of labour laws, complex compliance requirements, and stringent regulations around mergers and acquisitions can hinder the growth and flexibility needed by startups.
Anisha Patnaik, the founder of startup-focused LexStart Partners in Mumbai, says Indian startups have redomiciled to jurisdictions like the US and Singapore in the past decade for strategic, financial, tax and regulatory reasons.
According to Patnaik, some of the key factors driving this trend include:
- Access to capital. International investors prefer companies in jurisdictions with clearer tax policies and repatriation regulations.
- Incentives and benefits. For example, Singapore offers a simplified regulatory framework, easier incorporation, supportive government policies and attractive tax incentives.
- Access to global markets. Proximity to international investors and access to global customers drive redomiciling. An international billing address increased confidence among international customers, even while back-end support remains in India.
- Clarity in taxation. Complicated Indian tax laws, especially around valuations and angel tax, deter investors.
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Red-tapism
Bureaucratic red tape is another significant deterrent for Indian startups. The World Bank’s Ease of Doing Business report 2020 ranked India 63rd overall but, in terms of starting a business, it was ranked 136th. This highlights the bureaucratic challenges that entrepreneurs face when establishing a new venture in India.
Teesta Hans points to an ineffectiveness in Indian efforts. “Although initiatives like Startup India exist, their limited implementation and effectiveness are insufficient,” she says. “In contrast, Singapore, the UAE and the US offer simplified tax structures, minimal bureaucratic hurdles, attractive corporate laws and robust support, prompting many Indian startups to incorporate outside India.”
It is true that entrepreneurs in India frequently encounter delays and hurdles in obtaining necessary licences and permits. The process of regulatory approvals can be time-consuming and opaque, discouraging innovation and agility, which are crucial for startups.
Policy instability remains another significant issue in India. The frequent changes in policies related to FDI, data localisation and e-commerce can create an unpredictable environment for startups. This uncertainty can be detrimental to startups that rely on a stable policy environment to plan their long-term strategies. Countries with more stable and startup-friendly policies are often preferred as a result.
Verma, at Dhir & Dhir, says regulatory frameworks that promote the ease of doing business and government support also attract startups. “The US offers flexible regulations, the JOBS Act [Jumpstart Our Business Startups Act] for emerging growth companies and Small Business Administration [SBA] loans,” he says. “Singapore has tech incubators, accelerators and tax holidays/exemptions for startups. Favourable stamp duty regimes in the US and Singapore further enhance their attractiveness.”
Tanya Prasad, head of legal and CIO at litigation funding company Legalpay in New Delhi, says that aside from an intricate tax structure and frequent legislative changes, bureaucratic red tape is a significant barrier for startups.
“Procedural delays and onerous requirements for licences and approvals can be prohibitive,” she says. “India’s legal framework is often seen as restrictive, with stringent compliance requirements and limited operational flexibility. This deters investors and complicates scaling efforts. Countries like Singapore and the US, with more accommodating corporate laws, present a more favourable landscape for business operations and growth. Frequent policy changes and the lack of a coherent, long-term strategic vision create an unpredictable business environment.”
Lack of government support
While the Indian government has launched initiatives fostering entrepreneurship, the on-ground impact has been limited due to bureaucratic hurdles and lack of awareness. In contrast, other countries provide more direct support to startups through grants, tax incentives and easier access to capital. Prasad says the perceived lack of substantial government support for startups also impacts decisions to establish unicorns abroad. In response, India has introduced initiatives like the Credit Guarantee Scheme for Startups and tax incentives, improving the startup climate.
The government has also amended listing rules to allow more startups to go public in India. Prasad says this has led to a trend of startups considering returning to India. However, to fully realise this potential, experts say these policies need efficient implementation and continual refinement to meet the evolving needs of the startup ecosystem.
Praveen Raju, partner and head of the corporate practice at Spice Route Legal in Mumbai, traces the “flipping” trend to more than a decade ago, when consumer tech companies like Flipkart and Snapdeal were making waves.
“This was largely driven by investor insistence: tax, larger investor base for secondary exits, and quicker and efficient contractual enforcement; regulatory reasons – structures to enable businesses where FDI was restricted or prohibited; lower corporate tax and capital gains; and expansion of businesses into other jurisdictions and the need for free exchange convertibility and capital flow,” says Raju. “The reasons continue to largely remain the same.”
To create and nurture an environment where entrepreneurs feel motivated to domicile in India, the government can explore strategies such as favourable tax regimes, ease of registration, regulatory sandboxes and strengthened IPR regimes to promote an entrepreneurial culture. Until then, Indian startups seem likely to continue setting up companies with offshore headquarters.
According to Safir Anand, senior partner and head of trademarks, contractual and commercial IP at Anand and Anand in New Delhi, and Ritu Bhargava, lead managing associate at Anand and Anand in Bengaluru, India’s regulatory landscape is improving but still has challenges in bureaucratic procedures, stringent compliance requirements and inconsistent policy implementation.
In contrast, countries like Singapore, the US and the UK offer more business-friendly environments with streamlined regulatory processes, better IP protections and favourable tax regimes, allowing startups to focus on innovation and growth.
Anand and Bhargava say ease of access to venture capital is another reason that countries like the US, particularly Silicon Valley, attract investors with a high-risk appetite for new technologies and innovative business models. They say an international domicile “enhances a startup’s credibility and attractiveness to global investors. For instance, Freshworks, originally founded in Chennai, moved its headquarters to San Mateo, California, to access VCs and an extensive customer base, eventually going public on the Nasdaq. It also gives access to a larger talent pool. Ola, for example, established an international headquarters in London to attract top global talent for its expansion.”
Reverse flipping
Interestingly, Raju points out reverse flipping has been witnessed recently. Companies like Razorpay are evaluating a return to local shores, thanks to a “growing economy, and a booming public market”. However, he is only cautiously optimistic, preferring to adopt a wait-and-watch approach.
This flipping reversal may gain momentum as the Indian government considers implementing reforms aimed at making the domestic business environment more conducive for startups, strengthening the local startup ecosystem, and ensuring that the benefits of innovation and entrepreneurship contribute directly to the domestic economy.
Anand and Bhargava add that changing regulatory environments, market dynamics and supportive government policies can influence such a shift.
Anisha Patnaik also offers examples of reverse flipping. “With India’s growing reputation as an innovation hub, startups are shifting back to India,” she says. “Companies like Groww, PhonePe, Razorpay, Meesho and Pine Labs initially moved abroad for better infrastructure and capital access but are now returning.” She gives these reasons:
- Robust Indian economy. Startups are leveraging India’s vast consumer base, rising middle class, increasing disposable incomes, and rapid digital adoption, creating substantial opportunities.
- Better listing opportunities. The strong performance of the Indian stock market and successful high-profile IPOs make it attractive for startups considering an IPO.
- Access to capital. The increase in AIF registrations in India and SEBI regulations limiting investments in foreign companies encourage startups to stay domestic.
Patnaik says that while Indian startups initially moved abroad for better capital access and regulatory frameworks, the trend is reversing due to India’s robust economy, proactive policy reforms, lucrative market opportunities and improved regulatory environment. This reverse flipping underscores India’s rise as a prime destination for startups and investors.
However, it would be premature to celebrate the trend. Verma says that although the Indian government has implemented initiatives like the Startup India campaign, and tax incentives like a decade-long exemption from capital gains tax for investments originating from angel investors and venture capitalists to a three-year tax respite extended to freshly established startups, “the allure of overseas ecosystems persists”.
“However, the International Financial Services Centre in GIFT City presents a compelling solution,” she says. “As an onshore offshore jurisdiction, it offers the benefits of foreign transactions, eased capital movement, a business-friendly environment and tax advantages, potentially enticing flipped startups back to India and curbing the exodus of innovation.”
India has an opportunity to be a breeding ground for innovation. There are nearly 20 “soonicorns” waiting to join the unicorn club, which is expected to expand by one-fifth in 2025, according to startup media company Inc42. Candidates include fintechs Turtlemint and Paymate, with probables such as Bookmyshow, Refyne, Ind Money, Jupiter, agritech firm Ninjacart and e-commerce platform Biz on Go waiting in the wings.
Better valuation, easy access to capital, and simplified regulatory compliances can go a long way towards achieving this goal. When it comes to a reverse flip, the only way forward is to make policies attractive and seamless, ensuring a safe landing during homecoming.
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