Why India’s unicorns have bolted

Legal experts explain to Aditya Rangroo why our best startups have galloped to foreign soil, and whether it’s possible to shut the gate

India has the largest number of offshore unicorns – known as “flipped startups” – in the world. Indian entrepreneurs have founded substantially more unicorn companies outside India than from within its shores, translating into more offshore unicorns than any other nation.

The term “unicorn” was coined by venture investor Aileen Lee in 2013 to describe private enterprises or startups valued at more than USD1 billion. Nearly 11 years later, unicorns are no longer exceptional in India.

After Bengaluru-based fintech firm Open secured USD50 million to become India’s 100th unicorn in May 2022, the country was home to 100 unicorns.

However, in recent times, there has been a shift. Many Indian unicorns are being set up outside India, indicating concerns that are propelling entrepreneurs to consider moving to foreign soil.

According to a report by the Hurun Global Unicorn Index 2024, Indians have founded 109 unicorns outside of India and 67 within the country, with more offshore unicorns than any other nation. Interestingly, of the unicorns founded outside of India, almost all were in the US (95), led by the San Francisco Bay area, with four in the UK, three in Singapore and two in Germany.

This is reiterated by India’s International Financial Services Centres Authority (IFSCA) in its report titled Onshoring the Indian Innovation to GIFT IFSC, which points out that the trend of registering overseas is quite common in India’s startup ecosystem, the third-largest in the world. During the year 2023-24, the report pegs the overall number of companies valued at over USD1 billion at 340.

Notably, these startups and unicorns continue to have their primary market and operations, including their founders, based in India. Why? Lawyers quoted in this article attribute the phenomenon to several factors including complex taxation, the excessive regulation and rigid conformity known as “red-tapism”, unattractive corporate laws, policy concerns and a perceived lack of government support.

Complex tax

According to a report by the Bangalore Chamber of Industry & Commerce on direct tax administration, a complex and unfriendly capital gains tax system is a major reason for several Indian startups relocating their headquarters outside India. The multifaceted nature of India’s tax regime, which includes a mix of direct and indirect taxes, often leads to confusion and increased compliance costs for businesses.

For instance, there have been numerous revisions of the goods and services tax (GST) since its implementation, causing uncertainty and difficulties in planning for startups. A lack of clarity in tax laws, coupled with high corporate tax rates, often makes it more attractive for startups to register in countries where the tax regimes are simpler and more predictable.

Experts suggest that for India to become a true startup hub, comprehensive reforms are needed – structural tax reforms, regulatory frameworks and policy stability. One of the leading advocates is Teesta Hans, who specialises in intellectual property rights and corporate compliance and says many Indian unicorns were incorporated outside the country due to a less favourable business environment.

“For instance, Flipkart operates in India but was set up in the US,” she says. “The complex taxation system in India, marked by multifaceted and inconsistent regulations, imposes substantial compliance burdens, increasing costs and legal uncertainties. This was evident in the Vodafone tax case.”

On similar lines, Shoubhik Dasgupta, a Mumbai-based partner at Pioneer Legal who advises on private equity and corporate and commercial matters, says some unicorns have holding companies outside India to attract investments in favourable regulatory regimes. “Tax structuring is a common reason for … moving headquarters to countries like the Netherlands and Singapore, which have lower tax rates and double taxation avoidance agreements with India,” he says. “Additionally, sector-specific regulations and FDI [foreign direct investment] restrictions in India contribute to this trend.”

Sonal Verma, a partner and global leader (markets & strategy) at Dhir & Dhir Associates in Mumbai, adds that a major factor is the burden of high corporate tax rates in India, averaging 25.17%, compared to Singapore’s 17%, the US at 21% and the UK at 19%. Relocating to countries with lower tax rates helps startups reduce tax liabilities and retain more profits for reinvestment and growth.

“The UAE, with its minimal corporate tax rates up to AED375,000 (USD102,000), and no tax on salary income, is another lucrative destination for startups,” she says. “Although India has initiatives like the Startup India campaign and tax incentives, the appeal of overseas ecosystems persists. However, the International Financial Services Centre in GIFT City offers a promising solution with its business-friendly environment and tax advantages, potentially attracting startups back to India.”

Unattractive corporate law

Although improving, Indian corporate laws still present challenges for startups. The rigidity of labour laws, complex compliance requirements, and stringent regulations around mergers and acquisitions can hinder the growth and flexibility needed by startups.

Anisha Patnaik, the founder of startup-focused LexStart Partners in Mumbai, says Indian startups have redomiciled to jurisdictions like the US and Singapore in the past decade for strategic, financial, tax and regulatory reasons.

According to Patnaik, some of the key factors driving this trend include:

• Access to capital. International investors prefer companies in jurisdictions with clearer tax policies and repatriation regulations.
• Incentives and benefits. For example, Singapore offers a simplified regulatory framework, easier incorporation, supportive government policies and attractive tax incentives.
• Access to global markets. Proximity to international investors and access to global customers drive redomiciling. An international billing address increased confidence among international customers, even while back-end support remains in India.
• Clarity in taxation. Complicated Indian tax laws, especially around valuations and angel tax, deter investors.