However, ever since it completely shifted domicile from Singapore to India in October, about 20 unicorns and their investors have enquired about the process and are actively looking to move here, Nigam added.
He was interacting with fellow cofounder and chief technology officer Rahul Chari in a YouTube Live session.
Nigam listed 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 as some of the key challenges it faced.
“If there’s willingness, it will get easier from here. There are certain obstacles. For example, if you want to move from any other market to India as a domicile, it’s treated like a capital gains event for existing investors. So, one has to do a fresh mark-to-market valuation and pay tax on the delta (difference). Our investors paid almost Rs 8,000 crore in taxes just to allow us to come back to India,” Nigam said.
He added that this is a “stiff shock”, especially if a business is not yet mature.
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ET reported on January 4 that the government was likely to net as much as $1 billion in taxes from US-based retailing giant Walmart and other shareholders of PhonePe as part of the fintech firm’s shift to India.“There’s engagement happening with the highest levels in government to make it easier for businesses to come back,” Nigam added.
Esop vesting
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.
“The law in India says if you migrate the Esop plan you still have to start with a new one-year cliff. It is very hard for startups, particularly early-stage ones, to convince employees that their vesting status just reverts back to zero. I think that law needs to change because it’s not progressive, and disincentivises India-focused startups from changing domicile,” he said.
He also highlighted the challenges around accumulating losses that can be offset once the company becomes profitable.
“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,” Nigam said.
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”. Further, it is treated as “another acquisition event”, Nigam said.
“Personally, it’s one of the biggest milestones we’ve achieved. But it’s been challenging. And just to make this move hasn’t been easy,” Chari said.
Why the move
Nigam said, “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.”
The Indian market is becoming attractive, and many entrepreneurs are realising that the markets, where their brand has relationships with customers, is expected to reward them better.
“We’ve collected the names of over 20 existing unicorns in a list of 100 who’ve reached out and are actively looking (to move back). Some of the investors have said if this becomes smoother, we would like to move domicile here (India),” he added.
On the company’s IPO plans, he said that the event is a few years away, once it can show “profitability at scale” and “diversification in business”.
PhonePe has focussed on entering the lending segment through the acquisition of ZestMoney and ramping up its insurance distribution play. It has a broking licence. It is also planning a new ecommerce play by integrating with the Open Network for Digital Commerce (ONDC), ET was the first to report in August last year.
PhonePe received its account aggregator licence earlier this week, after receiving in-principle approval in 2021.
Split from Flipkart
Last month, PhonePe announced a separation of ownership from homegrown e-tailer Flipkart, which had acquired it in 2016.
Speaking about the separation, Nigam said, “Everyone had to be aligned. It’s a big investment in time, money, effort… It became clearer that these two companies are on very different tracks strategically, market wise. And it just made a lot of sense for shareholders in the long term – to separate the two entities out.”
Nigam added that the separation gives PhonePe the opportunity to get investors who are aligned to fintech and payments, while Flipkart can attract investors interested in ecommerce and related businesses.
“I think it gives us an independent path towards our own listing, our own ability to actually do things without having to worry about Flipkart,” he added.
Last week, PhonePe announced a $350 million funding round from global private equity firm General Atlantic at a pre-money valuation of $12 billion. The investment marks the first tranche of an up to $1 billion primary fundraise.
Nigam also confirmed that Qatar Investment Authority (QIA), Microsoft, Tencent, Tiger Global and smaller hedge funds had participated in the round.