Amid calls for immediate listing of Indian unicorns in the overseas market without listing on domestic exchanges, Swadeshi Jagran Manch (SJM) has said the cure is worse than the ailment as Indian authorities not only lose oversight but also the right to tax profits arising from companies built in the country.
Ashwani Mahajan, National Co-Convener of SJM – a wing of the Rashtriya Swayamsevak Sangh, said the argument that India’s capital markets lack depth has been shattered by highly successful IPOs of companies from Zomato to Paytm and Nykaa.
“Swadeshi Jagran Manch is deeply concerned that a huge number of unicorns, which have grown in the past ten years, have either been turned over or taken up abroad,” he said.
Flipping an Indian company means a transaction where an Indian company sets up a company in a foreign jurisdiction, which then becomes the holding company of the subsidiary in India.
The most favorable foreign jurisdictions for Indian companies are Singapore, the United States and the United Kingdom. Most of these flipped entities have operations and primary markets in India.
Almost all have developed their intellectual property (IP) using Indian resources (human, capital goods and government aid).
These unicorns usually run at the urging of foreign investors, aiming to avoid the Indian regulatory landscape; and this process has been accentuated by the favorable policies of the host countries, where these startups are turning, such as US, Singapore, UK, etc., said Mr Mahajan.
These unicorns have also listed their shares abroad, assuming that the valuation is higher because of the deeper pool of investors in those countries, he added.
“The real question is whether this argument of lack of maturity of the Indian capital market or lack of funds is a valid one? Lack of liquidity has been cited as the limiting factor in financing startups. This argument seems misplaced. Recently, an Indian unicorn has Zomato launched an initial public offering (IPO), which was several times oversubscribed. More than 33 percent of Zomato’s anchor investors were domestic investors. Even global capital can participate in the IPO through the FPI route without a foreign listing,” he says. said.
Motivated by Zomato, more than 10 tech companies have filed for an IPO in India with a target market cap of $50 billion or Rs 3 lakh crore.
“The current law of the country does not allow direct foreign listing of shares of Indian companies without prior domestic listing. However, if the startups are allowed to list their shares abroad, it could be detrimental to the economic interests of the country. India in general and it will have a negative impact on the treasury and will have an even greater impact than even turning it around,” he said.
In the case of a foreign listing, only foreign investors will participate in secondary purchases, as the place of business of trading is abroad. Under current tax laws, all foreign exchange gains in India are tax-free, Mahajan said, adding that Indian authorities will lose oversight of such companies.
The Indian Tax Rules for Indirect Transfer of Capital Goods in India and Taxability of Transactions under the Income Tax Act, Section 9(1) of the Income Tax Act, 1961 shall not apply to the sale of shares in foreign markets, if these shares are not simultaneously listed in India.
Mr Mahajan said that if the loss to the treasury is to be avoided, a mechanism should be created whereby foreign exchanges must manage STT and investors need PAN registration.