A prominent Indian internet entrepreneur has expressed concern over a current trend that Indians call “flipping” – transferring ownership of successful home-grown startups overseas to skip Indian regulations and taxes.
Sanjeev Bikhchandani, who owns Info Edge (India), a Bombay Stock Exchange-listed firm, told Press Trust of India that an estimated one in five startups have moved overseas and 17 trillion rupees (US$ 230 billion) of market cap has been transferred abroad because of flipping. Indian start-ups were required to shift company domicile overseas by foreign investors promising the funds they need for growth, he added.
Info Edge owns job search portal naukri.com, matrimony site jeevasathi.com and real estate search engine 99acres.com. Bikhchandani has also invested in online food delivery outfit Zomato and insurance marketplace Policybazaar.com.
In his tweet he drew an analogy with the British East India company in the 17th century, which later reduced India into a colony of the British Empire. “Shades of the East India Company type of situation here – Indian market, Indian customers, Indian developers, Indian workforce,” he tweeted. “However, 100% foreign ownership, foreign investors. IP and data transferred overseas. Transfer pricing issues foggy. Basically institutionalized transfer of wealth away from India while living off the Indian market and Indian labor somewhat like the days of the Company rule.”
Bikhchandani observed that through this process the Indian company becomes a 100% subsidiary of the overseas entity. He also flagged concern regarding the transfer of all IP and data, hitherto owned by the Indian company, to the overseas firm. “This overseas company is substantially outside of Indian jurisdiction and the influence of Indian regulators,” he told the news agency.
Citing the example of software biggies HCL and Infosys, he said they were startups in the early eighties. “Imagine if they had flipped overseas when they were young. This is a matter that is of strategic significance for India,” he said.
The internet entrepreneur opined that flipping does not matter in the short run, as the startups receive foreign funds, but in the medium to long term there is significant potentially serious negative impact for the Indian economy. He said the government and its regulations must insist that data and the IP belong to the Indian subsidiary and cannot be owned by the overseas entity, particularly in sensitive sectors.
As for the East India Company analogy he said that, if flipping happens on massive scale, then you have an institutionalized mechanism that effectively transfers wealth out of India on a very large scale.
One of the hottest destinations of Indian startups happens to be Singapore. Companies such as Flipkart, Milaap, Mobikon, InMobi, and Medialink are currently based there. The city-state offers a more tax-friendly regime and a favorable business environment.