HOW INDIAN STARTUPS USE OFFSHORE ENTITIES BEFORE RETURNING HOME FOR AN IPO

INTRODUCTION

The past decade has marked a significant evolution in the Indian startup ecosystem, which now stands as the third largest in the world. With over 100,000 startups and more than 100 unicorns, Indian startups are increasingly competing on the global stage. In their early stages, many founders chose to incorporate offshoremainly in jurisdictions like Delaware or DIFCto attract international investors, simplify compliance, and access global capital.

However, this trend is gradually shifting. As SEBI IPO guidelines become more startup-friendly and Indian stock markets experience record retail participation, a growing number of companies are now choosing to reverse-flip and establish a more straightforward onshore company structure in India. This is especially relevant for those preparing for an IPO in India, where regulatory clarity and investor interest are stronger than ever.

This article explores why startups incorporate offshore, the emerging trend of onshoring, how regulatory reforms are enabling this shift, and ultimately, how to take a company public in Indiacovering the advantages, trade-offs, and latest developments shaping the future of Indian entrepreneurship.

INDIAN STARTUP ECOSYSTEM

India is the third-largest startup ecosystem globally, with over 100,000 startups and more than 100 unicorns. Early-stage startups often incorporated offshore (in Delaware or DIFC) to attract global investors and simplify compliance.

However, with SEBI IPO guidelines becoming more startup-friendly and Indian stock markets seeing record participation, many startups are now reverse-flipping back to India.

In 2024, Ernst and Young reported a preference from their clients for a simply structured Indian entity, reflecting the ecosystem’s maturity and growing global investor confidence in onshore models.

TMWala supports startups through this transition, offering tailored legal, structuring, and compliance services that make reverse-flipping and domestic expansion smoother and more efficient.

WHY INCORPORATE OFFSHORE?

Many Indian entrepreneurs in their early stages choose to incorporate as holding companies offshore, leaving the Indian entity as a wholly owned subsidiary. This tactic is motivated by multiple factors:

1. Investor-Friendly Jurisdictions: International venture capitalists and institutional investors are drawn to companies established in Delaware or the DIFC because they adhere to well-known corporate governance standards. Additionally, these areas provide advantageous departure tax treatment; for instance, eligible U.S. investors may get up to 100% tax-free exit gains.
2. Low Compliance Burden: These jurisdictions provide fewer filings, easier and quicker incorporation procedures, and more lenient foreign direct investment (FDI) regulations than India.
3. Flexible Licensing Options: Low-cost registration permits and startup-specific company kinds are available in jurisdictions like Delaware and the DIFC. Startups seeking to access Middle Eastern funding and international investors now find the DIFC in particular to be an alluring entry point.
4. Investor Onboarding: Usually, the offshore parent company receives investments from all equity investors. In addition to providing investors with predictable legal rights in offshore countries, this streamlines the cap table.

HOW TO TAKE A COMPANY PUBLIC IN INDIA

The increasingly startup-friendly SEBI IPO standards must be followed by startups wishing to go public in India. The usual path consists of:

1. Changing to an Indian holding structure, frequently by flipping in reverse.
2. Adhering to the transparency and corporate governance guidelines set forth by SEBI.
3. Including legal counsel, merchant bankers, and underwriters in the IPO preparation process.
4. Submitting to SEBI a Draft Red Herring Prospectus (DRHP).
5. Finishing investor education and roadshows prior to price and allocation.

THE ROLE OF FINANCIAL CENTRES LIKE DIFC

For businesses looking to raise capital from Middle Eastern and international investors, DIFC offers a strategic substitute for Delaware. It is becoming more popular because:

• English common law-based legal frameworks
• Affordable choices for startup licensing.
• In most situations, there are no corporate tax or capital gains tax advantages.
• A strategic location that connects the financial markets of Asia and the West.

IPO IN INDIA: GROWING MOMENTUM FOR REVERSE FLIPS

In order to get ready for their Indian IPOs, a number of well-known businesses have already flipped their offshore structures. While some companies, like Pine Labs and Razorpay, are still going through the process, others, like PhonePe, Groww, and Pepperfry, have finished their migrations. Similar actions are apparently being considered by companies such as Clevertap, Meesho, Kreditbee, Eruditus, Zepto, Flipkart, and Khatabook.

Despite high costs, the reverse flip is gaining momentum:

• To finalize the transfer, PhonePe paid the Indian government almost $1 billion in capital gains tax.
• Groww paid over $160 million in taxes and experienced large restructuring expenses.
• After its transfer from the US to India is complete, Razorpay is anticipated to pay more than $200 million.

SEBI IPO Guidelines

1. Eligibility:
   • The company must have had net tangible assets worth at least ₹3 crore in any 3 out of the last 5 financial years.
   • The company must have made an average pre-tax profit of ₹15 crore or more, calculated over any 3 out of the last 5 financial years.
   • Option to list on the Innovators Growth Platform (IGP) for startups without profits.
2. Minimum Public Shareholding (MPS):
   • 25% public shareholding post-IPO (10% allowed for large issues, with a 3-year plan to reach 25%).
3. Lock-in Period:
   • Promoters: 18 months for 20% shareholding.
   • Pre-IPO investors: 6 months lock-in.
4. Disclosure:
   • File a Draft Red Herring Prospectus (DRHP) with SEBI.
   • Must disclose financials, risks, business model, and promoter details.
5. Book-Building:
   • Common pricing mechanism.
   • 75% of shares to Qualified Institutional Buyers (QIBs) for book-built IPOs.
6. Innovators Growth Platform (IGP):
   • For tech startups backed by institutional/angel investors.
   • Relaxed norms on profitability and disclosures.
7. Intermediaries:
   • Must appoint merchant bankers, legal advisors, registrars, and auditors.

OFFSHORE VS. ONSHORE COMPANY

The majority of Ernst & Young’s startup clients, according to a 2020 report, favoured holding companies with headquarters in Singapore or the US, with an Indian subsidiary managing operations that were predominantly conducted in India. However, that desire has changed by 2024:

Ernst and Young stated in 2024 that their clients preferred an Indian entity with a straightforward structure, which also appears to be preferred by authorities. Additionally, according to industry reports, when it comes to important operating permits, like those required in the fintech sector, the RBI and other regulators favour domestic companies over their international counterparts.

ROLE OF REGULATORY REFORMS AND ONSHORING

The Merger Rules amendment is a component of a larger wave of legislative changes intended to entice companies to relocate back to India. Key shifts include:

• There are now more Indian companies with market values over $1 billion than ever before.
• In 2024, there were over 10 crore unique investors in the Indian stock market, up from just 3 crores in 2020, indicating a sharp increase in retail involvement.

Regulators are seeking to further streamline the procedure in order to facilitate onshoring. In a paper titled “Onshoring Indian innovation to GIFT IFSC,” the International Financial Services Centres Authority outlined the necessary policy adjustments to facilitate relocation. These consist of:

• A time-bound, tax-free redomicile procedure
• Greater latitude in the tools a start-up can employ.

• Easier exit norms for M&A.
• Forums are specifically designed to resolve disputes within the business law ecosystem.

CONCLUSION

The landscape for Indian startups is rapidly maturing, with global investor confidence now extending beyond offshore holding structures to favour more straightforward, locally incorporated entities. The evolving Indian startup ecosystem, supported by policy reforms and record market participation, is creating strong incentives for companies to return home through reverse flips.

Thanks to increasingly favourable SEBI IPO guidelines, startups are finding it easier to prepare for an IPO in India, where domestic capital markets offer not just liquidity but also higher valuations. Regulatory bodies like SEBI, RBI, and the Ministry of Corporate Affairs are also encouraging this transition by simplifying compliance, improving M&A frameworks, and facilitating re-domiciliation.

While offshore incorporation once provided a strategic edge in attracting capital, the balance is now shifting. The offshore vs onshore company debate is no longer about compliance alone’s about strategic alignment with future growth, public market access, and long-term value creation.

For ambitious founders and their investors, understanding how to take a company public in India has become more crucial than ever. With the right structure, timing, and regulatory alignment, Indian startups can now dream of going global while staying rooted at home.

With expertise in cross-border structuring, compliance, and IPO readiness, TMWala empowers startups to navigate these complex transitions smoothly.