domicile migration to India: Exclusive: Valuation cut at Groww in domicile flip back exercise; Razorpay may undergo similar reduction

Stockbroking platform Groww, which recently completed the flip back of its parent entity to India from the US, saw its fair market valuation being reduced to under $2 billion during the process, said people aware of the matter. The Bengaluru- based company paid Rs 1,340 crore ($160 million) in taxes to the US government calculated on this newly arrived fair market value (FMV), a cut of more than 30% on the $3 billion it was valued during its last funding in 2021, they said.

The exercise is directed at minimising the tax burden in the US, where there is a provision to lower FMV taking into consideration various parameters such as stocks issued at lower prices, legal experts said.

Another large fintech, Razorpay, which has sought board approval to move its domicile to India, may see a similar 30-40% cut in fair market value, said a person close to the matter. The final number may differ as the math on the tax outgo will depend on calculations involving the delta between common and preferred stock and total fundraising over the years. Preferred stock or preference shares come with a number of benefits not available to holders of common stock.

Razorpay, which was last valued at $7.5 billion, is working with consulting firm Deloitte on the matter. The company will send its domicile application directly to the Competition Commission of India (CCI) and the Reserve Bank of India, skipping the National Company Law Tribunal (NCLT) route.

This follows changes to the rules by the Ministry of Corporate Affairs in September. The founders have told ET they expect the time taken to reduce by at least a few months with the NCLT nod now not required. The company is also in the process of merging six of its Indian entities into one, said another person in the know.

Groww and Razorpay didn’t respond to queries.

In October, Groww said the tax payout led to a net loss of Rs 805 crore for FY24. At an operational level, the fintech reported a profit of Rs 535 crore, up from Rs 458 crore in FY23.

“When a US company merges into an Indian company, it pays taxes at 21% of the ‘fair value’ of the US entity. Based on US norms, this valuation tends to be similar to what is followed for ESOP ( employee stock ownership plan) pricing and is hence lower than the real market value,” said a legal expert who works with Indian startups. “Adopting this lower valuation should not by itself impact the tax outcomes if later on the Indian company raises capital, whether privately or publicly, at higher valuations.”

Another person in the know said, “The US tax experts worked on the flip-related restructuring for several months at Groww, covering multiple provisions, including Section 367. It is not a straightforward calculation, and any presumptive valuation figure will be too simplistic….Tax is calculated by the difference between cost and actual price and interspersed with specific other provisions. For instance, there is something called GILTI tax for non-US companies,” the person added.

Fixing FMV

“The delta between the fair market value and the preferred value (last round valuation) in such exercises is around 40-50%,” said an expert. “For US incorporated firms, this helps in lowering the total tax outgo. How much a firm has raised through issuing preferred stocks to investors also comes into the picture.”

Razorpay has currently budgeted $150-200 million for tax bills and is in the middle of filing for the move to India, which means the shareholding is locked. Investors can’t sell shares during the migration of the holding company. In Razorpay’s case, they are said to have around 40% of the shares in the common stock pool.

“How much of the digital assets, intellectual properties (IPs), are housed in particular Indian units may make the migration smoother in a merger process,” said a senior lawyer who specialises in the field. “How the US firm is being valued is critical, including if the entity has any business in the geography.”

Razorpay Software India will be the key local entity going forward, once the merger is complete.

Startups across sectors such as fintech, ecommerce, quick commerce and edtech, which had set up their parent firms overseas, are increasingly moving their domicile to India, primarily linked to their IPO plans and regulatory issues.

ET has been reporting on the likes of Kreditbee, Zepto, Eruditus and Meesho being in various stages of this process. Many companies like Groww, Razorpay and Meesho needed to incorporate in the US as they raised capital from Silicon Valley incubator Y Combinator in the early stages.