The financing options for your Indian subsidiary: capital, ECBs or a bank loan

As the Indian operations of European companies grow, foreign shareholders often struggle with how best to finance the operations, given India's restrictive regulations. We therefore cover three strategic options for financing your subsidiary in India.

European companies in India have 3 options to finance their subsidiary

1. Share Capital

You can raise capital by issuing additional shares in your Indian company. Increasing share capital is a relatively sustainable and institutionalized way to grow the Indian subsidiary. Moreover, it signals to the outside world that the parent company is serious about developing the subsidiary's services or products in India.

There are two drawbacks to this route. Issuing new shares is a bureaucratic and time-consuming process and thus cannot be arranged at short notice. Thus, in the event of acute cash flow problems, it offers no solace. It can also affect ownership of the company, especially in joint ventures with Indian partners.

2. External Commercial Borrowing (ECB).

Your Indian subsidiary can borrow from the parent company in Europe, but this is only possible under the so-called External Commercial Borrowing construction (ECB). Applying for an ECB is a bureaucratic and time-consuming process, but it has a big advantage: the interest rate on an ECB loan to an Indian party is based on LIBOR + a premium of up to 300 basis points.

3. Bank loans

Indian Banks: Your subsidiary can apply for a loan from a local bank, but the enormously high interest rates rarely make this option attractive or feasible. Interest rates on credit from local Indian banks start at 10-12% and can easily exceed 15%. Only with a cash deposit as a guarantee can a lower rate be negotiated in some cases. In addition to sky-high interest rates, Indian banks routinely ask for collateral if you want to apply for a loan. To organize the paperwork with the bank, you need a local consultant. In addition, you pay the bank another administrative fee of 1% on average. With local banks, you can raise a maximum of 1-2 million euros this way.

If you need more capital, you can apply to several banks at the same time that can provide a loan as a consortium. Of course, this only makes obtaining the loan more complex and expensive.

International development banks: For projects supported by the Indian government, you can turn to development banks, such as IFC (World Bank) and the Asian Development Bank. In addition, Chinese banks may be an option, although these often impose the condition that the loan be spent on products or services from Chinese (state-owned) companies.

A comparison of the 3 financing options for your Indian subsidiary

CONSIDERATION	SHARE CAPITAL	EXTERNAL COMMERCIAL BORROWING (ECB)	LOAN AT LOCAL BANK
Interest expense	Not applicable.	Maximum: 500 basis point + acceptable reference rate. 3-4% interest rate would be ideal based on our experience and can be justified as arm's length.	Flexible structure with fixed and variable interest rates that can be negotiated with the lending bank. The average interest rate is about 10%.
Other costs	There are legal and filing fees associated with issuing new shares.	Exchange rate fluctuations for borrowers and monthly compliance costs for reporting data to the Central Bank of India.	Costs related to corporate guarantees or letters of credit issued by foreign banks of the parent company.
For- charges	Benefit from Income Tax Act -20% + surcharge & Cess.	Benefit from Income Tax Act -20% + surcharge & Cess.	Not applicable.
Corporate Income tax	Parent company must pay tax in the country of establishment. Tax deduction for taxes paid in India is applicable.	Parent company must pay tax in the country of establishment. Tax deduction for taxes paid in India is applicable.	Not applicable.
Payment terms	Repayment of capital occurs upon business termination. Dividend payment according to the rules of the Indian entity.	Average maturity requirements (ranging from 3 to 10 years) must be met, which provides flexibility in terms of repayment of interest and principal.	Strict payment terms and defaults affect credit scores and interest rates for future loans.
Regulatory considerations	Foreign lenders must meet tax liability through PAN registration, Form 10F and filing of Indian tax returns (only in case of dividend income).	Foreign lenders must meet tax liability through PAN registration, Form 10F and filing of Indian tax returns (only in case of dividend income).	Less hassle with regulations because established procedures are used.

Special guide for CFOs with operations in India

India can be a challenging country for European CFOs. Therefore, to give you a better understanding of the complex tax and financial system that every CFO in India faces, consulting firm IndiaConnected has created an insightful guide that addresses the most frequently asked tax questions.

We can, of course, support you at all times in such matters. From choosing the right financing option to helping you apply for ECB or bank loans, so you can always focus fully on your business in India. Contact us here.

Financing your business in India: these are your options

What is the smartest way to finance your subsidiary or branch in India? This is often a thorny issue for European companies, partly due to Indian regulations. We have listed the various strategic options for you.

Start-up capital

The financing options for your Indian business depend on the legal form of your business in India. The most common legal forms are the Private Limited (Pvt. Ltd) and the Joint Venture (JV), with an Indian company as co-owner. At the time of incorporation, the capital the company will start with is determined by the number of shares issued.

The minimum start-up capital of an enterprise in India is set by law at INR 100,000 (EUR 1,200). Many companies choose to contribute this minimum start-up capital, but bringing in more capital at the outset can solve financing issues in the future. This is because bringing in working capital at a later stage is subject to more rules.

Working capital

Do you need working capital in India? A quick and easy way to raise working capital is to pre-invoice planned exports of products or services to the parent company. The subsidiary may invoice services it supplies or plans to supply in the near future (pre-invoicing) to the European parent company. An advantage of pre-invoicing is that it can quickly generate the necessary cash flow for the Indian company. In case of a joint venture with an Indian partner, financing through (pre)invoicing depends on the agreements between the two JV partners. 

Loan for your Indian entity

Does your Indian subsidiary need capital to make investments in India? There are several options for this, but none of them are easy, quick or cheap. The subsidiary can take out a loan from the parent company in Europe, but this is only possible under a so-called External Commercial Borrowing (ECB) construction. Applying for an ECB is a bureaucratic and time-consuming process, but it has a big advantage: the interest rate on an ECB loan to an Indian party is based on LIBOR + a premium of up to 300 basis points.

Financing through an Indian bank

Indian banks can also provide loans, but the extremely high interest rates rarely make this option attractive or feasible. Interest rates on credit from local Indian banks start at 10-12% and can easily rise above 15%. Only with a cash deposit as guarantee can a lower rate be negotiated in some cases. Apart from the sky-high interest rates, Indian banks routinely ask for collateral if you want to apply for a loan. To organise the paperwork with the bank, you need a local consultant. In addition, you pay the bank an administrative fee of 1% on average. At local banks, you can raise a maximum of EUR 1 to 2 million in this way.

If you need more capital, you can apply to several banks at the same time, which can provide a loan as a consortium. Of course, this only makes obtaining the loan more complex and expensive. In short, borrowing from an Indian bank is really only an option if the Indian branch's cash requirements are extremely high and there will be an almost certain and substantial return on investment by taking out the loan.

International development banks

What other options are there? For projects supported by the Indian government, you can turn to development banks such as IFC (World Bank) and the Asian Development Bank. Chinese banks may also be an option, although these often stipulate that the loan must be spent on products or services of Chinese (state-owned) companies.

Issue additional shares

Finally, it is also possible to raise finance by issuing additional shares in the Indian company. Increasing the share capital is a relatively sustainable, formal and institutionalised way to grow the Indian subsidiary. Moreover, it signals to the outside world that the parent company is serious about developing the services or products of the subsidiary in India.

There are two disadvantages to this route. Issuing new shares is a bureaucratic and time-consuming process and cannot therefore be arranged at short notice. In the event of acute cash flow problems, this does not offer any solace. Another possible disadvantage of increasing the share capital is that it may affect the ownership of the company, especially in JVs with Indian partners.

Want to know more about the best financing options for your business?

This is how to open a bank account in India

1. I am based in Europe. How do I open a bank account in India?

If you are a resident of Europe, you cannot open a bank account in India. This is possible only for people of Indian origin, such as Non-Resident Indians (NRIs), Person of Indian Origin (PIOs) and Overseas Citizens of India (OCIs). If you do not fall under any of these categories, you must be resident in India to open an account. You are resident in India if you have lived in India for more than 182 days during the previous fiscal year. 

2. I am an expatriate living in India. How do I open a bank account in India?

Europeans who are long-term residents in India can open a so-called FA Resident Savings or Current Account with a bank in India, provided they provide the necessary documents (see under question 4). 

3. How long does it take to open a bank account in India?

On average, it takes 3-5 working days if all documents are enclosed.  

4. What documents do I need to open a bank account in India?

Indicative list of documents that may be requested by the bank: 

• Valid business or work visa

• Pan card

• Valid passport with photograph and signature as proof of identity and age

• Proof of address in the form of an electricity bill not older than two months. Some banks also accept a PAN card, an Aadahaar card or a letter from the embassy of the country of residence as proof of address. 

5. How do I choose the right bank in India?

Consultancy firm IndiaConnected can help you choose the right bank. While choosing the bank, we pay attention to the following points for our customers:

• How big is the bank? Does the bank have branches all over India? Is the bank internationally active?

• Can you bank online with this bank?

• Does the bank offer a wide range of products to suit your needs?

• Does the bank have a dedicated relationship manager?

6. What is the cost of opening the bank account in India?

Fees vary from bank to bank and depend on the services chosen. Most bank accounts in India charge a monthly account fee. In addition, you are required to maintain a minimum balance in your account.

7. Can I open a Dollar/Euro bank account?

Yes, individuals or companies receiving foreign currency income and residing in India can open a so-called Exchange Earners Foreign Currency Account (EEFC) bank account. 

 8. What is the interest rate in India?

This varies depending on the policy of the bank concerned, compare the current interest rates here.

9. What can I do to minimise currency risk in India?

You can hold your capital in an EEFC account. You can also choose to enter into Forward Contract Booking (FCB) with your bank to avoid daily rate fluctuations. FCB is a contract between you and the bank whereby you agree to exchange a specified amount of currency at a pre-agreed exchange rate on a specific date in the future.

10. How do I repatriate money from India to the head office account in Europe?

To repatriate, you must complete the required repatriation forms and provide supporting documents. How to do this smartly can be found in our guide for CFOs in India.