Razorpay: Razorpay’s ‘reverse flip’ to India may entail $300 million tax payment in US

Digital payments platform Razorpay plans to move its parent firm to India through a cross-country merger that may entail a tax payment of $250-300 million in the US, where it is currently domiciled, according to multiple people aware of discussions.

The planned merger will be between the US-registered firm and its Indian arm, they said.

ET first reported on May 9 about Razorpay being in the process of moving back its parent entity to India amid tighter fintech regulations.

Razorpay and its investors have recently considered a merger at a lower valuation from the peak of $7.5 billion ascribed to it in 2021. However, advisors to the deal — both in the US, as well as KPMG and Deloitte in India — are not in favour of this because of the payments processor’s paced growth trajectory over the last two years, the people cited said.

Discussion on valuation

A lower valuation would essentially make the tax liability relatively smaller, but those in the know said a steep cut may not receive regulatory clearance.

“Yes, there have been discussions to value the company at $3-4 billion, but external advisors are of the view that it may not be cleared by US authorities because of the company’s steady growth over the last year or so, even as peers in the US have seen correction in their valuations,” said one person aware of the developments.Razorpay will seek clearance from the National Company Law Tribunal (NCLT) in the next two months to merge its American holding company with its India unit. It would then also officially appoint an auditor for the valuation discussions.

At a $7-7.5 billion valuation, the tax outgo is estimated to be in the range of $250-300 million. The bulk of this is expected to go to the Internal Revenue Service in the US.

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Razorpay may tap investors to raise a new round of funding in 2024 in order to account for the tax payout, people in the know said, as it is not clear how long the NCLT approval will take.

The company last raised $375 million in December 2021. Since inception in 2014, it has raised over $741 million from investors such as Tiger Global, Peak XV Partners (earlier Sequoia Capital India), GIC and others.

“These proposals have been formally discussed with auditors, and nothing (in terms of valuation) has been ascribed yet on paper. The company is estimating it would have to shell out the tax amount once the process nears closure,” people aware of the matter said.

Emails sent to Razorpay and Deloitte did not elicit any response till press time on Monday. A spokesperson for KPMG India said it cannot comment on any company- or client-specific information.

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Home advantage

Razorpay’s move to shift is driven in large part by its ambition to list on Indian bourses over the next two to three years, as well as to help it navigate the regulatory landscape better.

“Nobody wants to pay huge taxes, but one has to keep in mind business growth and long-term plans of the company. In that context, they (Razorpay) are keen to close the merger sooner (rather) than later and are actively moving forward on it,” said one of the people mentioned above.

The company is said to have held discussions with government officials too, on necessary approvals required for the process.

Aparajita Srivastava, partner, Ikigai Law, said the two most common ways for companies to flip back are share swaps and inbound mergers. “In a share swap, shareholders of the foreign entity swap their shares (in the foreign holding entity) with the shares of the Indian entity. Thereby, both foreign and Indian shareholders hold shares in the India entity. But in case of an inbound (cross-)border merger, the foreign company… will cease to exist,” she said.

Typically, for companies with a large number of shareholders, the cross-border merger can prove to be beneficial. “In such cases, with proper approval from each shareholder, the process can get done through a court-appointed mandate, where the entity applies to NCLT,” Srivastava said.

In May, ET reported that Razorpay processes around $100 billion of gross transaction value across both online and offline digital transactions. It launched its offline business in 2022 through the acquisition of Ezetap for around $200 million. In May last year, Razorpay also closed a secondary share sale of $75 million, which was first reported by ET in April 2022.

Growwing in India

Razorpay’s efforts to domicile itself in India coincide with a similar move by wealth management platform Groww, which applied to NCLT earlier this year, filings reviewed by ET showed. The firm is seeking a cross-country merger between Indian arm Billionbrains Garage Ventures and US holding firm Groww Inc.

According to an order issued on August 4 by the Bengaluru bench of NCLT, the company has secured the first set of clearances.

Groww has now been directed to seek clearance from the Karnataka tax department, the Reserve Bank of India and other sectoral regulators, as required under the process.

The wealth management firm in a filing said it has also submitted a valuation of its shares certified by Incwert Advisory. The details are not public yet.

Queries emailed to Groww did not elicit any response till press time on Monday. A person involved in the process said the approvals are “procedural” but expected to take time.

Valued at $3 billion, Groww recently pipped rival Zerodha to become the largest Indian stockbroker in terms of active clients.

A senior legal advisor told ET on the condition of anonymity that he has been advising fintech startups operating in India to set up clear corporate structures headquartered in India, which will help them apply for regulatory clearances and plan for an eventual listing in India.

“After companies like PhonePe and Pepperfry redomiciled in India recently, many other startups are evaluating the strategy. For companies which have a large shareholder base, doing a cross-border merger with their foreign entity is a comparatively less cumbersome process than a share swap, which requires higher administration to consummate with each shareholder,” said Rishabh Mastaram, founder RGM Legal.