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Liberalisation in India has resulted in significant inbound foreign investment. As Indian operations of foreign businesses grow, foreign shareholders grapple with the best ways to finance these operations and repatriate some of the profits – partly due to the Indian regulatory system, which strictly regulates capital account transactions. This article examines some key ways of financing Indian operations of foreign shareholders. But it will depend on the specific circumstances in each case to determine which option is best suited for a particular Indian subsidiary.
Investment through shares and convertible instruments. Foreign companies can finance their subsidiary’s operations through investment in shares and convertible instruments. The law allows investment through equity shares, compulsory convertible preference shares, compulsory convertible debentures and warrants.
The investment in the aforesaid instruments is treated as capital investment by the foreign investment law of India, but such capital investment is subject to certain conditions including: (1) Restrictions on the level of capital investment in specified sectors, e.g. permissible capital investment in multi-brand retail is up to 50%; (2) the need to specify the manner of pricing the instrument to ensure that the instrument is not issued/transferred at a lower price than its fair market value (pricing compliance); (3) a specified time for the allotment of such instruments; (4) reporting such capital investment within a specified timeline.
For example, when a foreign shareholder wants to fund its subsidiary for working capital needs, the foreign shareholder may want to evaluate, prior to the capital investment, the pricing compliance. Considering the pricing compliance mandates that the instrument be not issued at a price lower than its fair market value, the foreign shareholder will need to evaluate whether such pricing compliance will result in the capital investment being much more than what is needed.
However, there are some exceptions to the pricing compliance for a private company or a public unlisted company, e.g. issuing the instrument through a rights issue. Instruments issued through a rights issue can be issued at a price similar to the price offered to an Indian shareholder. For wholly owned subsidiary of a foreign shareholder, however, this exception may need to be examined given that the subsidiary may not have an Indian shareholder.
Considering the above, capital investments may not always be the optimum method for funding as foreign shareholders may not want to lock in huge capital for inordinately long periods. Further, repatriation of profits from such subsidiaries has certain restrictions under applicable law and is coupled with attendant tax leakages.
External commercial borrowings. A foreign shareholder can also fund through debt. However, third party loans are costly in India compared to borrowing overseas and are not easily available. But there are some viable debt alternatives which foreign parents can explore to finance their Indian subsidiaries, earn some interest and recover the money in due course.
Under the applicable law, an Indian subsidiary can raise debt from its foreign shareholder by way of external commercial borrowings (ECBs). In this context, a direct foreign equity holder with minimum 25% direct equity holding in the Indian subsidiary, an indirect equity holder with minimum indirect equity holding of 51% in the Indian subsidiary, or a group company with a common overseas parent, is permitted to provide an ECB to its Indian affiliate. The borrowings may fall under any of the three categories – either with or without approval of the central bank (RBI) – depending on the business of the Indian subsidiary, the end use of the ECB proceeds, the currency of borrowing and the average tenure of the ECB. Further, the applicable law stipulates that the Indian subsidiary is to maintain a debt equity ratio of 7:1. However, this ratio is not applicable if the total of all ECBs raised by an Indian entity is up to US$5 million or equivalent.
While the applicable law requires RBI approval for ECBs not satisfying certain conditions set out under the relevant regulation, such approval may be time consuming and may not meet the immediate needs of the Indian subsidiary.
Masala bonds. In September 2015, RBI permitted Indian corporates to issue rupee-denominated bonds (nicknamed as Masala bonds) under the ECB regime. The Masala bonds regime is more liberal than the ECB one. The pool of lenders is increased and any person from a Financial Action Task Force compliant jurisdiction can subscribe to such bonds. The requirement of holding a minimum equity percentage as per the ECB guidelines for foreign equity holders is not applicable, and an equity holder with less than 25% equity in the Indian company would also be eligible to subscribe to such bonds.
Non-convertible debentures. Another avenue available is the corporate debt market. A group company of a foreign shareholder can register as a foreign portfolio investor (FPI) under the Securities and Exchange Board of India’s prescribed regulations. The registration process is straightforward and typically an FPI registration can be completed within a few weeks. An FPI is permitted to invest in listed or unlisted non-convertible debentures (NCDs). The minimum residual maturity of such NCD’s should be 1-year subject to certain conditions set out under the applicable law. The NCDs can be secured or unsecured. The issuer has considerable flexibility on how to use the proceeds and the amount of interest or redemption premium to be paid on such instruments.
This route has been used amply, especially by foreign funds, to finance Indian portfolio companies. This option provides more flexibility than the ECB option in raising funds from foreign shareholders. However, there would be certain disclosure requirements that need to be considered.
By way of business arrangements. Today a good number of Indian subsidiaries, commonly in the IT sector, have been set up to provide services only to its foreign shareholder based in a jurisdiction outside India. These Indian subsidiaries enter into service arrangements with its foreign shareholder and receive funds as part of their business income for providing services to such shareholder. The applicable law does not stipulate a cap on funds received from a foreign shareholder as part of a service contract between the Indian subsidiary and the foreign shareholder. Therefore a foreign shareholder can raise funds for his subsidiary through such an option. However, certain tax implications, such as transfer pricing, may need to be examined.
In what ways funds be provided from a Foreign Parent Company to a Indian Wholly Owned Subsidiary Company or Subsidiary company. Also kindly provide the relevant provisions as per Indian laws.
Any remittance from a foreign entity to an entity resident in India is regulated by the provisions of FEMA. Some of the common options permissible under law are investment by way of equity, debts, service arrangements etc. The relevant law in this regard is the FEMA Act and regulations under it namely, Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2018.Best, Rohit
Whether stamp duty is applicable on ECB Agreement? if Yes what would be the rate and prevailing laws? thanks in advance for your reply
Dear Jeni NamECB means external commercial borrowing. The various possible forms of ECB are bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs or Financial Lease. Accordingly, if the ECB is in the nature of a term loan or a debenture subscription or a financial lease and consequently an agreement is proposed to be executed which creates rights and liabilities between the parties, such an agreement may qualify as an instrument under the Indian Stamp Act and resultantly is required to be stamped. Per the applicable law, the stamp duty is determinable based on the instrument under consideration and the jurisdiction where the instrument is executed or the jurisdiction where the subject matter of the instrument is situated. Accordingly, please provide the nature of the ECB and the applicable jurisdiction for ascertaining the payable stamp duty.
A wholly owned subsidiary of a foreign company received FDI and afterwards the subsidiary had issued optionally convertible debentures to its step down subsidiary, will it be covered under ECB?
HelloKindly clarify regarding the below mentioned suitation:An Indian holding company wants to raise funds from its wholly owned foreign subsdiarywhether the External Commercial borrowings are applicable?If so, kindly share the relevant notification issued by RBI for referenceThank You in Advance
No, the concept of External Commercial Borrowings will not be applicable as the foreign entity in this case is not the shareholder ( only foreign equity holders are treated as recognised lenders) of the Indian Company (eligible resident entity).
Sir..I would seek further clarification regarding this…Sorry for bothering you…Sir,As per the RBI notification “RBI/2018-19/109” , it states thata) The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECBs.However,b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad;In my case the Wholly owned Foreign Subsidiary is in SINGAPORE( FATF Compliant country), Isnt the First (a) Point would satisfy the applicability of ECB.Since the point (b) specifies about Individuals, which mentions about Foreign Equity holdersKindly enlighten me on this, it would be great help..Thank you so much Sir
Can Indian holding company receive funds (may be by way of ECB) from its foreign wholly owned subsidiary (WOS)? If yes, please provide relevant regulations and procedure for the same,
Dear Ankur,No, the Indian holding company cannot receive funds by way of ECB from its wholly owned subsidiary.
Dear Sir,Can a foreign company give interest free loan to its wholly owned indian subsidiary? If yes then which provision of FEMA governs this?
Can Indian subsidiary company take loan from Foreign Holding Company? What are the compliances to be done as per Companies Act 2013 and FEMA
applicable FEMA provisions for loan by foreign holding Company to its subsidiary company (India based)
I had a case study where in There is a foreign Company which has its Subsidiary in India The holding company has a Fixed deposit with a foreign bank. Now Indian subsidiary wanted to take loan from Indian branch of the same foreign bank for which foreign bank gives guarantee to Indian branch of bank.Are there any FEMA provisions applicable , loan from bank requires RBI approval or not.
Dear Jay,Although borrowing and lending in Indian Rupees between two residents (i.e. the Indian branch of a foreign bank and Indian subsidiary of a foreign company) does not attract any provisions of the Foreign Exchange Management Act, 1999 (“FEMA”), the provisions of FEMA will be attracted only when guarantee provided by a company outside India (“Foreign Company”) to its Indian subsidiary (“Indian Subsidiary of Foreign Company”) is invoked.The permission of the Reserve Bank of India may be required in most cases for obtaining an overseas guarantee.  To ascertain if such permission is required, we would need further clarifications from you.An overseas guarantee provided by the Foreign Company for the Indian Subsidiary of Foreign Company through an Indian branch of a foreign bank should be invoked as per the following terms:1. If the guarantee is invoked, the Foreign Company should discharge its liability by:i) payment out of rupee balances held in India;ii) remitting funds to India; oriii) debit to its Foreign Currency Non-Resident (Bank) Account/ Non-Resident External Account maintained with an authorised dealer bank in India.2. The Foreign Company may enforce its claim against the Indian Subsidiary of Foreign Company to recover the amount (“Amount”) for which the guarantee has been invoked and on recovery of the Amount it may repatriate the same, if the liability is discharged, by:i) inward remittance; orii) debit to Foreign Currency Non-Resident (Bank) Account/ Non-Resident External Account.However, if the liability is discharged by payment out of Rupee balances, the Amount may be credited to the Non-Resident Ordinary account of the Foreign Company.3. If the liability is met by the Foreign Company out of funds remitted to India or by debit to its Foreign Currency Non-Resident (Bank) Account/ Non Resident External Account, the repayment should be made by credit to the Foreign Currency Non-Resident (Bank) Account/ Non Resident External Account/ Non Resident Ordinary Account of the Foreign Company, provided that the amount remitted/credited does not exceed the rupee equivalent of the amount paid by the Foreign Company against the invoked guarantee.Also, for repayment to a person resident outside India who has met the liability under a guarantee, a general permission is available to all residents who are principal debtors (in our case, the Indian Subsidiary of Foreign Company).
can a Indian subsidiary of a foriegn company, lend US$ to its affiliate which is in effect another Indian subsidiary of a foreign company in India
What will be a tax impact if the foreign parent wants to inject capital in the Indian subsidiary for working capital requirements (due to persistent losses)?
There is a case that, there is a Foreign Subsidiary company whose directors wish to start an Indian Company .In that case, Whether Indian Company can receive funds from that Foreign Company .If so, what are the rules and regulations?
What will be the RBI compliance requirement in case of Indian subsidiary extending loan to Foreign Holding Company.
WHAT WILL BE TAX IMPLICATION ON INTEREST PORTION (IN CASE FUND RAISED AS DEBT) AS THERE IS WITHHOLDING TAX @ 20 % IN CASE OF DIVIDEND. IS THERE SAME PROVISION IN CASE OF DEBTS ALSO OR NOT.
sir can director of indian co can give loan to wos of indian co abroad from his lrs funds trf
Can an Indian private limited company receive loan from its subsidiary situated in foreign country. Further, would it be subjected to ECB guidelines
Whether Foreign Company give guarantee against borrowing by its holly subsidiary company in India and what are the compliance and which acts to be referred to safeguard lender
sir, can indian subsidiries of foreign companies purchase commercial real estate to set up their office as well as to supplement their income by leasing vacant spaces?
An 100% foreign subsidiary Company in India received funds from Parent Company (in Foreign). and then 100% foreign subsidiary Company in India making Loan / Inter corporate Deposits in the Indian Companies.Does it attracts FEMA Provisions ?If yes, then what provisions we need to take care while doing such transactions?
what are the implications of Indian subsidiary taking funds from foreign holding companies for business expenditure in india and now not able to repay due to losses. How the same to be closed out in subsidiary
Sir,An Indian Pvt Ltd Company recently incorporated subsidiary in USA wanted to give initial fund for working capital . The same can be taken back once the business is stabilize their. What are the various method to give and take fund . Also what would be the FEMA regulations .Kindly advice.
Can a foreign company make payment (on behalf of its indian subsidiary) to a Third-party Indian entity?
Sir,Could you please advice the procedure for remittance from a foreign holding company to subsidiary in India through service arrangements
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On part payment of loan amount which is given by Indian Holding company to its foreign wholly on subsidiary, is there any compliance or communication needs to be made by Indian Holding Company to RBI under FEMA Provisions?
A) Can an Indian wholly owned subsidiary company can pay guarantee fee to its foreign holding company, for the corporate guarantee extended by the holding company, for the INR loan availed by the subsidiary from a scheduled commercial bank in India. B) If such fee can be paid, what should be the underlying documents in place. C) whether such fees has to be remitted from the same bank from which loan was availed or can it be remitted from any other AD bank.D) if it can be remitted from any other bank, is a noc from the bank extended loan has to be obtained. E) If such corporate guarantee fees can be paid, which purpose code should be selected for remittances.
Thanks for so many clarification … how ever being Indian company we have subsidiaries in UK and USA for working capital what route should we use to get funds at better cost . Thanks