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Flipback Tax: Razorpay restructures to cut levy; Groww pegs tax outgo at $70 million

May 22, 2024

US-registered Razorpay is quickening plans to shift its domicile to India. For the same, it has initiated a restructuring exercise through which half a dozen India units are being brought under one holding company.

Local startups domiciled abroad are moving swiftly to execute their plan to shift their registered entities to India. Razorpay, the $7.5 billion digital payments firm with its registered office in the US, is the latest among them, and has initiated a restructuring exercise whereby its half-a-dozen India units are being brought under a single local holding company, sources aware of the matter said.

All the India units will roll into Razporpay Software India, the sources said. This will also lead to reduction in the overall tax outgo for the payments processing firm.

The Bengaluru-based company is working with consulting firm Deloitte on the restructuring process and estimates a tax outgo of up to $200 million once the process is complete, people briefed on the matter said. The auditor has reviewed the estimate, they said.

ET had reported in November that Razorpay’s tax outgo with the registered office in the US could be $300 million.

Another fintech startup, online stockbroker Groww, completed its domicile shift to India as of March, cofounder Lalit Keshre wrote in a May 9 post on microblogging platform X. It has, according to sources, accounted for around $60-70 million tax for the return of the holding company to India.

— lkeshre (@lkeshre)

Groww has completed the transfer of shareholding from a US unit to an India entity but other formalities including calculation of the exact tax payments are still being closed, people aware of the matter said. 

“The main part of moving domicile is the shareholder transfer — that’s complete but some of the other formalities are yet to close. While the company has accounted for a tax implication in the US, it’s yet to be wired,” a person tracking the migration of top-tier startups said.

Groww too was domiciled in the US, like Razorpay with common investors such as Y Combinator, Peak XV Partners and Tiger Global.

Among other startups, quick-commerce firm Zepto has secured the approval of its board to move the domicile here from Singapore. It will file an application for the transition after the close of an ongoing fundraise.

“All the six India units will come under Razorpay Software India Pvt Ltd. The restructuring is underway and has been approved based on the advisor (Deloitte) view. This will lead to tax gains also,” a person briefed on the matter said. “For now, the company has accounted for the tax outgo internally and may only go for a fundraise after moving the domicile here fully.”

Emails sent to Razorpay and Groww did not elicit any response on the matter. A spokesperson for Zepto declined to comment.

Razorypay’s structure after the recast will be similar to that of Groww. Groww owns its businesses and licences under different units, which are held by the group firm.

“That’s the process underway at Razorpay now. Obviously, every company’s plan is to minimise the tax burden and some of the restructuring at India level will aid to that,” one of the people said.

ET had first reported that Razorpay’s tax outgo might be of $300 million as it began consulting with advisors on moving domicile.

Valuation of a startup plays a key role on the tax implication, several founders in the middle of the process told ET. On Monday, ET reported, citing Pine Labs’ regulatory filing in Singapore, that it had secured court approval there to move its domicile to India.

Razorpay last raised $375 million in December 2021. Since inception in 2014, it has raised more than $741 million from investors.

How and why?

Industry experts said the two most often used ways for companies to flip back are share swaps and inbound mergers. During a share swap, shareholders of the foreign entity swap their holding (in the foreign holding entity) with the shares of the Indian entity. In other options, the two entities merge and the overseas one ceases to exist. In the case of Groww, it went for the first option.

One of the key reasons for fintech firms to move domicile here is to be aligned with the regulatory framework where local financial sector regulators prefer companies and their subsidiaries are based in India. However, an initial public offering is the ultimate connection as these companies — across sectors — feel they can have a better life in public markets here than abroad.

“Eventually, all this is linked to the IPO. Companies are operating here, customers (consumers or businesses) know them and so do regulators. The ability to list here and perform well after that is much higher,” a venture investor–whose portfolio company is in the middle of moving domicile as well–said. “And, of course, the Indian public markets are a bright spot now globally. So, valuation multiples is an attraction as well.”

As mentioned earlier, quick-commerce firm Zepto is waiting for its fundraising to close. “They (Zepto) have the board approval and want to move domicile here. The funding round is in the final stages of closing and should be finalised in a few weeks,” this person said.

ET has reported that the company is raising at least $300 million from investors after its early talks for a majority stake investment from Flipkart fell through.

[The Economic Times]

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