After deciding the form it will take, the next vital consideration for any business is raising funds for their operations. Your business in India can be financed in a number of ways and the choice will, in part, be driven by the type of entity established. These range from the most straightforward funding via the head office to equity instruments and external commercial borrowings.
You can also base your financing on considerations such as redemption, earning repatriation, and capital gains. Here’s everything you should know about financing your business operations in India.
Let us understand some of the funding options that are mentioned in the chart above. Tax implications, debt-equity ratio, repatriation option, return on investment, funding needed, and permitted funding options are some more factors to be examined before market entry.
In addition to the ones mentioned above, listed debentures, American Depository Receipts, and Foreign Currency Convertible Bonds are also available for eligible companies.
|Equity||Compulsorily Convertible Preference Shares (CCPS)||Compulsorily Convertible Debentures (CCD)||ECB|
|Definition||Permanent capital in the company. Determines the ownership of the Company||Compulsory convertible into equity. Vis-à-vis equity shares, preference shares have preferential rights in respect to dividend and surplus distributions in case of liquidation||Compulsory convertible into equity (quasi debt).||Foreign currency or INR denominated loans from foreign source. Foreign group entities are allowed to extend loan to company in India.|
|Non-convertible preference shares or debentures are treated as ECB.|
|Voting Rights||Carry voting rights in proportion to shareholding||CCPS may be issued with or without voting rights||No voting rights||No voting rights|
|Redemption||Permanent capital. Difficult to redeem||Need to be compulsory converted into equity. Conversion into equity is not a taxable event||Need to be compulsory converted into equity. Conversion into equity is not a taxable event||Need to be repaid back on completion of term. Option available to convert into equity.|
|Earning repatriation||Dividend without any cap if issued from current year’s profits||Dividend at a fixed rate||Interest at a fixed rate.||Interest subject to cap as per ECB policy|
|Transfer Pricing||Not applicable on dividend||Not applicable on dividend||Applicable on interest||Applicable on interest/td>|
|Transfer||Transferable subject to conditions in charter documents and company law provisions||Transferable subject to conditions of issue and Company law provisions||Transferable subject to conditions of issue||Cannot be transferred|
|Capital gain on transfer||Taxable||Taxable||Taxable||Not applicable|
|End Use||No End use restrictions||No End use restrictions||No End use restrictions||End use restrictions applicable. However, permitted for working capital or general corporate purposes when taken from foreign equity holder|