ETtech Explainer: why PhonePe investors paid Rs 8,000 crore to shift base to India?

The change in domicile was a part of a larger restructuring process that saw the existing shareholders in Flipkart Singapore and PhonePe Singapore, led by Walmart, purchased shares directly in PhonePe India bringing to a close a three-year-old process that began in 2019.

In December, ET reported that homegrown ecommerce firm Flipkart, which earlier owned 87% in PhonePe, would no longer own any stake in restructured entity PhonePe India.

ETtech tries to address some of the challenges faced by PhonePe and its investors in completing this move

Why did PhonePe move its domicile to India?

According to Nigam, the move was a natural one for the fintech firm as it is eyeing the next phase of its growth by investing in new businesses — like insurance, wealth management and lending, and also enabling the next wave of growth for UPI payments in India.

Discover the stories of your interest

Further, PhonePe plans to eventually list in the country and the relocation was partly motivated by this.

ETtech

“India is where we started and India is where we will be focused on for the next couple of decades. And to that end, for various reasons (we chose to move domicile to India), including being highly regulated, wanting to list here, and creating ecosystem value and shareholder value here. I think the domicile to India for PhonePe as a business and as a company was the right answer,” said Nigam.

Why was the amount paid & who paid it?

The amount, close to about $1 billion, was due to a long-term capital gains tax payout to be made to the government as PhonePe aimed at raising fresh capital from investors at a higher valuation, the people, who were briefed on PhonePe’s ongoing financing round, said.

ET reported on January 19 that PhonePe raised $350 million in funding from global private equity firm General Atlantic at a pre-money valuation of $12 billion, making it the most valuable privately held Indian fintech firm.

Also, Walmart paid most of the $943.01 million or Rs 8,000 crore that was incurred as a capital gains tax after PhonePe investors sold their stake in the Singapore entity and invested in the Indian entity following the domicile change.

ETtech

How is the tax amount calculated?

Sources told ET that there would be a capital gains tax-pay-out to the government of India based on the final size of the funding round. PhonePe conducted a fresh mark-to-market valuation and paid the tax amount on the delta (difference).

What is the impact of this tax payout on PhonePe?

Nigam said the capital gains tax paid by shareholders and investors, reset of the vesting period for employee stock ownership plans (Esops), and the inability to offset losses are some of the key challenges it faced.

The Walmart-backed company, Nigam said, also had to convince several thousand employees about being back to a “zero-vesting one-year cliff” or a reset of the vesting period for their stock options.

“One of the things that is very common in the pre-profit startup world is your accumulating losses. Later, as the company becomes profitable, you get to actually offset the losses, which saves you some tax. In this case, by domiciling into India, unless the law changes by the end of March, we stand to lose about $900 million of accumulated losses, because it’s considered a restructuring event,” he added.

Do domicile laws need to be reformed?

Indian startups prefer to domicile themselves in foreign countries as it allows for availing tax sops, and easier routes to close mergers and acquisitions.

In India, according to Nigam, the crux of the problem is that “there’s no distinction in Indian law between a restructuring where the pre-and post-beneficial owners are the same”.

However, there’s engagement happening with the highest levels of government to make it easier for businesses to come back.

(Graphics and illustrations by Rahul Awasthi)