Startups’ turnaround poses a security threat, says SJM

Raising the red flag on the “turnaround” of some of the country’s best-known startups, Swadeshi Jagran Manch warned that Indian companies opting for foreign jurisdiction for incorporation potentially pose a security threat due to the lack of controlling the source of funds and the transfer of critical data on Indian consumers. abroad.

Ashwani Mahajan, national co-organizer of SJM – a wing of Rashtriya Swayamsevak Sangh, said unicorns with a valuation of over US $ 1 billion “to return” means avoiding Indian regulatory oversight and loss of revenue for the country.

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“India is proud of its startups creating immense value and adding to the country’s GDP. But our happiness is short-lived when we see that they have no longer remained Indian. Most of these high-cost startups have turned around. and are no longer essentially Indian companies, ”he told PTI.

Rollover refers to a transaction whereby an Indian company incorporates a business in a foreign jurisdiction, which then becomes the holding company of the subsidiary in India. The most favorable foreign jurisdictions for Indian businesses are Singapore, the United States and the United Kingdom.

He demanded an overhaul of the system – from policies and regulations to access to capital to push entities to register in India.

“Differential policies discriminating against natives and attracting foreign entities must end,” he said. “However, to ultimately discourage Indian startups from switching, we also need to take strict action, including declaring those that do switch a foreign company.”

One of the best examples of a reverse business is national e-commerce giant Flipkart. The promoters of the company, which eventually reached a market valuation of $ 20 billion, turned away from India and registered their company and other associated companies in Singapore. And all of the companies were sold to Walmart, causing the market share to shift from Indian retail to a foreign company.

“It is interesting to note that several hundred Indian unicorns have turned or been incorporated abroad, whose Indian founders started in India. Of these, the majority have operations and a primary market in India. Almost all of them have operations and a primary market in India. have developed their intellectual property (IP) using Indian resources (human, capital, government support, etc.), ”he said.

The turnaround, he said, essentially leads the unicorns to avoid India’s regulatory landscape, the country’s tax laws and control by authorities.

“Various international investors force their companies they invest in to look overseas and sometimes even keep this as a prerequisite for their investment in these startups, as they want the data and intellectual property to be based abroad or they will put their money, “he said.

Mahajan said that “the turnaround” results in “immense economic and national loss as an Indian company becomes a wholly-owned subsidiary of the foreign company despite more than 90% value creation from India resulting in the loss. from any future taxes on capital gains, trading and operating profits. “

Stating that the ownership of critical data as well as intellectual property is transferred overseas, he said most of these companies are growing at 100-200% per year and are capturing more and more critical consumer data. .

“The turnaround imposes a threat to the security of all critical data and also results in a substantial loss of possible future value creation of all associated IP addresses of this business,” he said.

Additionally, reverse startups bypass Indian tax law and other legal regulations and gain an unfair advantage over their domestic counterparts. “It effectively becomes a structure to transfer value creation from India to overseas territories since most of the business is still done in India with teams based here as well.”

More importantly, the turnaround poses security threats. “Due to the overseas headquarters structures, the Indian government cannot determine the source of the money that supports these companies, which can lead to security concerns for the nation in the event that war activities occur. in the future. For example, money from neighboring countries is only allowed in startups domiciled in India after the required approvals, but startups headquartered abroad do not need such approvals. “

It also gives unfair advantages to foreign investors. “Foreign investors are keen to take advantage of India’s economic growth and the turnaround allows them to avoid coming to the country (which they should have done). This sets off a vicious cycle as more and more people foreign investors are starting to see the turnaround as a legitimate demand without fear of loss for India, ”he said.

As these reverse startups will also be listed overseas, Indian stock markets will lose depth. “It becomes a way for foreign investors to profit from India’s wealth of resources and progress by circumventing our laws and regulations,” he said.

Mahajan said the turnaround is the perfect example of India rolling out the red carpet for foreigners and showing red tape to native players.

“Foreign entities enjoy exemptions when allocating land in various states, but indigenous actors are on their own. Reverse entities have easy and cheaper access to capital and it is also much easier to withdraw money (using DTAA), ”he said. “Even Indian funds pay a higher capital gains tax than their foreign counterparts investing in India.”

One of the methods of implementing a “flip” trade is to trade stocks. As part of this exercise, once the Indian promoters have established an international holding company, the shares held by the shareholders of the domestic company are exchanged with the shares of the foreign holding company. As a result, the shareholders of the domestic company become shareholders of the foreign holding company.

Instead of a share swap, a rollover structure can also be executed when the shareholders of the Indian company acquire shares of the foreign holding company and the holding company acquires all the shares of the Indian company from its shareholders. .

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