Funding of Indian businesses

Transcription

1 E Funding of Indian businesses

2 Doing business in India 105 Did you know! India is the largest producer in the world in terms of ticket sales and second-largest in terms of revenue, with 3.3 billion tickets sold every year and in a transition of becoming a US$5 billion industry in the next two years. E.1 Equity share capital E.2 Preference share capital E.3 Debentures and borrowings E.3.1 External commercial borrowings E.4 ADRs/GDRs/FCCBs

3 106 Doing business in India A foreign corporation can fund its Indian subsidiary through the following options: E.1 Equity share capital Issuing equity shares is the conventional means of funding a local Indian subsidiary. The amount of equity capital a company can issue is limited by the company can increase its authorized capital (including bonus/rights issue to existing holders) only if permitted by its Articles of Association. Equity capital can be repatriated on liquidation or on transfer of shares. A non-resident entity can infuse funds in an Indian LLP as contribution to capital subject to the conditions prescribed in the FDI. Capital in a LLP can be repatriated by way of withdrawal of capital or transfer/ assignment of partnership interest or through winding up of LLP. Equity shares need to be issued by the Indian company within 180 days of receipt of funds from the foreign investor. E.2 Preference share capital Another option for investors to invest in a company in India is through the issue of preference share capital. Foreign investments through convertible preference shares, which are compulsorily convertible into equity shares, are treated as FDI. Preference shares that are not compulsorily convertible into equity shares are construed as ECBs and hence, need to conform to the ECB guidelines. The following regulatory laws are relevant: According to Indian Company Law, preference shares have to be redeemed within a period of 20 years, and issue of preference shares is permissible only as a rupee-denominated instrument. The rate of dividends paid to non residents should not exceed the above State Bank of India s prime lending rate). 180 days of receipt of funds from the foreign investor.

4 Doing business in India 107 E.3 Debentures and borrowings Companies can raise funds by issuing debentures, bonds and other debt securities. They can also raise funds by accepting deposits from the public. Debentures can be redeemable; perpetual, bearer or registered; and convertible or non-convertible. Foreign investments through convertible debentures, which are convertible into equity shares, are treated as FDI. Debentures that are not compulsorily convertible into equity shares are construed as ECBs and hence, need to conform to ECB guidelines. Compulsorily convertible debentures need to be issued by the Indian company within 180 days of receipt of funds from the foreign investor. E.3.1 External commercial borrowings Debts raised in foreign currency by an Indian company (from internationally recognized sources) fall within the purview of the accessed under two routes the automatic route and the approval route. ECBs up to US$750m for rupee and foreign currency expenditure fall under the ambit of the automatic route, subject to compliance with the ECB policy. ECBs can be availed by corporate organizations registered under the Companies Act and Infrastructure Finance availed from internationally recognized sources such as international credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders (subject to certain minimum equity holding requirements in the borrower s company). ECB proceeds are subject to end-use restriction and can, under no circumstances, be used for on-lending, investment in a capital market, acquiring a company, working capital, general corporate purposes, repayment of existing rupee loan and real estate. In this context, redeemable preference shares/optionally convertible shares, partially convertible preference shares and debentures are considered as ECBs, and hence also need to conform with the ECB guidelines.

5 108 Doing business in India The minimum average maturity period of the loan will be three years for a loan amount of up to US$20m. For ECBs above US$20m but up The following are the all-in-cost ceilings for ECBs: Average maturity period All-in-cost ceiling over six months London Interbank Offered Rate (LIBOR) applicable up to 30 September basis points 500 basis points Proceeds from ECBs are allowed to be retained outside India (in prescribed liquid assets) or brought into rupee accounts in India pending their utilization. An empowered committee of RBI decides all the cases outside the purview of the automatic route. Corporate organizations registered under the Companies Act have been granted general permission for conversion of ECBs in convertible foreign currency into equity shares/fully compulsorily and mandatorily convertible preference shares, subject to certain conditions and reporting requirements contained in the FDI policy. LLPs are currently not permitted to avail ECBs. Prepayment of an ECB of up to US$500m is likely to be allowed by AD bankers without prior approval of RBI subject to compliance with the stipulated minimum average maturity period applicable to the loan.

6 Doing business in India 109 E.4 ADRs/GDRs/FCCBs Qualifying Indian companies are allowed to raise equity capital overseas through the issue of American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs)/Foreign Currency Convertible Bonds (FCCBs). Where the issue of ADRs, GDRs or FCCBs by a company is likely to increase the permissible investment limits of FDI under the automatic route, or where such an investment is made in the form of a project that requires government approval, the company must seek the approval of the FIPB. Investments through the instruments mentioned above may be made through the automatic route or the approval route according to the relevant sectoral policy/guidelines.