Funding Options for Indian Subsidiaries: Exploring Different Approaches

Introduction:

India's business environment has attracted a substantial inflow of foreign capital. However, foreign shareholders often encounter challenges when seeking optimal financing options for their Indian ventures and profit repayment. These challenges stem partly from India's regulatory system, which rigorously oversees capital account transactions. In this article, we will explore various funding options available for subsidiary companies in India.

Investments through Shares and Convertible Instruments:

Foreign companies can finance their subsidiaries in India by investing in stocks and convertible instruments. Indian laws permit investments in equities, mandatory convertible preferred shares, compulsory convertible bonds, and warrants.

Options for funding of Indian Subsidiary

External Commercial Borrowings (ECBs):

Indian subsidiaries have the option to obtain debt from their foreign shareholders through external commercial borrowings (ECBs). The relevant regulations require that the foreign shareholder directly hold a minimum equity stake of 25% in the Indian subsidiary, or indirectly hold at least a 51% equity stake, or be a group company with a foreign parent. Borrowings can fall into different categories, and approval from the Reserve Bank of India (RBI) may be necessary.

Masala Bonds:

Introduced in September 2015, Masala bonds are rupee-denominated bonds that Indian corporates can issue under the ECB regime. Masala bonds offer more flexibility compared to ECBs, attracting a wider range of lenders, and the minimum equity percentage requirement for external equity holders is not applicable.

Non-Convertible Debentures:

Foreign shareholders can register as foreign portfolio investors (FPIs) and invest in listed or unlisted non-convertible debentures (NCDs) in India. Registering as an FPI is a straightforward process, usually taking a few weeks. The issuer of the NCDs has flexibility in determining maturity, security, and interest rates.

Business Arrangements:

Indian subsidiaries can enter into business arrangements with their foreign shareholders, wherein funds can be provided as part of the corporate earnings. There is no specific cap on the amount received through such arrangements. However, it is important to carefully consider implications such as transfer pricing when opting for this funding option.

Conclusion:

Foreign shareholders of Indian subsidiaries have several funding options to consider, including investments through shares and convertible instruments, external commercial borrowings, Masala bonds, non-convertible debentures, and business arrangements. Each option has its own requirements and benefits, which should be evaluated based on the specific circumstances of the Indian subsidiary. It is crucial for foreign holding companies to engage with service providers in India, navigate the registration process diligently, and establish appropriate agreements to ensure successful execution of their funding strategies.

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