In today’s Finshots, we explain why fintech startup PhonePe has moved its base from Singapore to India.

The Story

Indian startups like Singapore. It’s easier to raise funding when you’re headquartered there. Simply because there are a lot of VCs who’ve set up base in the island nation. Singapore has a lower corporate tax of 17% compared to over 25% in India. So that’s always appealing. And most importantly, investors in companies don’t have to pay a tax on capital gains when they sell shares. That’s an added bonus.

Also, it’s just easier to do business in Singapore. In 2020, the World Bank ranked India 63rd in terms of ease of doing business. But Singapore snagged the 2nd spot. So it’s no wonder that in the past two decades, over 8,000 Indian companies have made Singapore their official home.

But, things could be changing…

PhonePe, the Bengaluru-incubated fintech startup (now owned by Walmart), is saying goodbye to Singapore. It has come back home. In fact, it’s the first big startup to return to its home base.

And guess who’s loving the move?

The Indian government! They sent PhonePe’s investors a tax bill of a whopping $1 billion!

Wait…what?

Okay, let’s explain. See, when PhonePe shifted its HQ, it had to move investors from one entity to another — from PhonePe Singapore to PhonePe India. So they had to swap shares. For instance, if they bought a share at $10 in the Singapore entity that is now worth $100, the investors were expected to pay a tax on the valuation gains. Even if the investors weren’t cashing out and were just swapping shares.

This is what gave way to the massive tax bill. And while you would expect investors to baulk at this figure, it seems they aren’t. The biggest investor Walmart is cool with paying the Indian government the nearly $1 billion it owes. And PhonePe’s spokesperson called it the ‘right long-term strategy.’

Now you have to wonder — what are these long-term benefits that would offset the $1 billion tax bill?

Well, one theory is this — PhonePe is preparing for a stock exchange listing in India.

But how does that matter? Can’t PhonePe simply list in Singapore or the US?

It could. But PhonePe is still primarily a UPI business with its customers hailing from India. UPI isn’t a global model. At least, not yet. So if it plans to do an IPO in the US, it might have a hard time convincing public market investors of its potential. Or even its business. Which inevitably means that it’ll command a lower valuation.

But in India, everyone knows PhonePe. It’s a well-known brand that is at the top of the UPI ladder with over a 45% market share. So it could easily value itself higher.

Also, investors in India just seem more willing to pay up when compared to their global peers. As The CapTable pointed out, while Zomato commands a valuation of 12–13 times its FY22 revenues, the US-listed DoorDash trades at a measly 4–5 times its revenue.

So you argue that existing shareholders or investors will reap the benefits if PhonePe debuts on the Indian stock exchanges. And that a higher IPO valuation will make up for the tax bill today.

Secondly, it could be to do with PhonePe’s ambitions. Or shall we say Walmart’s ambitions of becoming a fintech superpower.

Okay, we’ve already established that PhonePe is a UPI giant. That’s its core business. But PhonePe doesn’t really make money from this since UPI is largely free in India.

Instead, they make their money through commissions when their customers make bill payments like electricity or water bills. Or through advertisements. So PhonePe needs more revenue sources. And that’s where its plans to distribute mutual funds and even launch its own mutual fund company come into the picture. Then there’s the insurance broking business that could become a solid revenue stream too.

But the real game changer? Lending money!

Because everyone wants a loan these days. Digital lending in India is currently a $270 billion market and could quadruple by 2030. There’s a lot of money you could make from interest payments alone. And if you look at PhonePe’s rival Paytm, you’ll notice that 11% of its revenues in FY22 came from the loan business. So lending is quite lucrative.

But PhonePe hit a roadblock. Apparently, India’s banking regulator RBI didn’t want to hand out a lending licence to the fintech startup. Oops.

But PhonePe quickly figured out that there was a backdoor entry to lending. It decided to acquire a company that already had the coveted lending licence. And in November, there were rumours that PhonePe was all set to snap up ZestMoney — a BNPL (Buy Now Pay Later) platform that’s disbursed over a billion dollars in loans to 17 million Indians in the past few years. So that’s quite a massive customer base for PhonePe to easily tap into, lend, and make money.

And while the deal hasn’t been fructified yet, it seems like the RBI is okay with such a move.

But the point is that if PhonePe decided to list outside the country. Or maybe even kept its headquarters in Singapore, the RBI may not have allowed PhonePe’s fintech ambitions to take root. Especially in lending. The central bank wants complete oversight over digital lenders and every few months, there’s a new rule or regulation coming in. Maybe that explains why PhonePe needed to come back to India.

Now we’ll just have to wait and see if other Indian fintech startups with similar ambitions head back home too.

Until then…

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