Various Funding Sources for Foreign Subsidiaries in India | Acclime (2024)

India is one of the world’s fastest-growing economies, with a potential market of over 1.2 billion people, a GDP of over USD 3 trillion, and FDI inflow of USD 847.40 billion (April 2000-March 2022).

And as Indian operations of foreign businesses grow in number with each passing year, foreign shareholders are trying to figure out the best ways to finance these operations and repatriate the profits – mostly due to the Indian regulatory system that strictly controls capital account transactions.

This article overviews a few methods of financing the Indian subsidiaries of foreign shareholders.

Funding options available to foreign investors

Equity-based investing

The main funding sources are investments in shares and various convertible instruments. The applicable law considers investments made in equity shares, compulsorily convertible debentures, compulsorily convertible preference shares, and warrants to be capital investments.

However, there are a few investment compliances that must be followed:

• Restrictionson the capital investment margin in various sectors
• Any instrument cannot be issued at a price lower than its fair market value due to specific pricing compliances
• Timely share allocation
• Reporting of capital expenditures within the specified time frame

External commercial borrowings

External Commercial Borrowings, or ECBs, are loans provided to an Indian company by foreign organisations. Any foreign company establishing a subsidiary in India will be ableto chooseECB.

ECB is dominated in both foreign currency and INR, and it is governed bythe Reserve Bank of India and the Ministry of Finance.

The requirements for an eligible borrower are the following:

• A direct foreign equity investor must own at least 25% ofdirect holding
• Anindirect foreign equity investor must own at least51% of indirect holding
• In case of a company – it must be a part of the common foreign parent company

Debt-based funding

For most subsidiaries, the World Bank, the International Monetary Funds, the US International Development Finance Corporation, the Asian Development Bank, etc. are the preferred sources of debt financing.

That is why in an effortto promote business development in India the World Bank and other financial organizations have proposed advantageous plans for recently formed subsidiaries where the Micro, Small, and Medium Enterprises sectors have easier access to debt-based financing.

There are two types of debt funding options: Onshore and offshore debt funding.

With onshore debt funding foreign investors can offer capital through a different channel like alternate investment funds, Asset Reconstruction Companies, non-banking financial companies (NBFC), Venture Debt, etc. The main function of these Indian organisations is to act as a medium between the foreign investors and the actual borrower.

With offshore debt funding direct investment is ensured to go straight to the ultimate borrower. This option is tax-effective and allows investors to have direct control over the enforcement. Offshore funds are regulated by RBI and SEBI. Some offshore debt funding options are Rupee Denominated Non-Convertible Debentures, Compulsory Convertible Debentures, and Rupee Denominated Bonds.

Funding through bank loans

Anotheroption that foreign subsidiaries frequently opt for when expanding to India is seekingfundingthrough variouscommercial banks. The bank’s loan plans and policies are always in line with the demands of its international customers while the monetary risk factors are comparatively low. And although the interest rates on the loans are lower than those offered by domestic money lenders, they are still higher than those offered by financial institutions.

Non-convertible debentures

Another key funding optionforforeign businesses is the corporate debt market. To purchase listed and unlisted non-convertible debentures, foreign owners must register with the Securities and Exchange Board of India as foreign portfolio investors (FPIs) in order to invest in listed and non-listed non-convertible debentures (NCDs). The process of registration under this applied law should typically be completed within a few weeks.

How we can help

To determine which option is best suited for a particular Indian subsidiary will depend on the specific circ*mstances of each case that is why it is highly recommended to seek the assistance of a premier corporate service provider like Acclime.

Acclime is a premier provider of professional formation, accounting, HR & advisory, tax services in India. We focus on offering high-quality consulting and outsourcing services to our international clients in India and throughout the region.