With a potential market of over 1.2 billion people, India is among the fastest-growing economies globally. In 2009, the Government of India introduced a National Investment Promotion and Facilitation Agency, known as Invest India. The idea of this initiative was to help foreign organizations in setting up a subsidiary in India. In addition to this, different subsidies are offered to the foreign subsidiaries by the Government to generate more inflows of FDI revenue.
For setting up a subsidiary in India, registration as a private limited company or setting up as a branch/liaison office are two incorporation strategies. Incorporation as a private limited company of a fully-owned foreign subsidiary is the easiest way out of these two. It is because no Central Government permission is required.
Funding Options Available to Foreign Subsidiaries in India
Indian economy has emerged as a global competitor in foreign direct investment after its liberalization. There are management consultants who take care of the funding sources for these businesses, while companies can carry out their operations in a precise way. Here are the different sources of funding available to foreign subsidiaries:
External Commercial Borrowings
External Commercial Borrowings or ECBs are the loans offered by foreign entities to a company that has its existence in India. Any foreign firm setting up a subsidiary in India will be able to opt for ECB. The Ministry of Finance and the Reserve Bank of India govern the regulation of the ECB. It is denominated in both ways – foreign currency and INR. The requirement to be an eligible borrower, a direct foreign equity holder should have a minimum of 25% of direct holding. An indirect foreign equity holder should have a minimum of 51% indirect holding. For a company, it should be part of the common foreign parent company.
The corporate debt market is another pivotal funding option available to these foreign subsidiaries. Foreign shareholders must register as foreign portfolio investors (FPI) under the Securities and Exchange Board of India, to invest in listed and unlisted non-convertible debentures (NCDs). The process of registration under this applied law is completed within a few weeks. There are both secured, and unsecured NCDs and the minimal residual maturity is one year which is subject to certain conditions laid down by the law.
Investment through shares and different convertible instruments are the primary funding sources. The investment on equity shares, compulsorily convertible preference shares, compulsorily convertible debentures, and warrants are treated as capital investments by the applicable law. However, there apply certain investment compliances, which are:
- Restrictions on the margin of capital investment in different sectors,
- There are certain pricing compliances that ensure that any instrument is not issued at a lower price compared to its fair market value.
- Timely allotment of shares.
- Reporting of capital investments under the mentioned timeline.
Debt Based Funding
The first preference on raising debt funds for most subsidiaries is from different financial institutions like the World Bank, the International Monetary Funds, the US International Development Finance Corporation, and the Asian Development Bank, etc. To grow business in India, the World Bank and other financial institutions have come forward with beneficial plans for newly formed subsidiaries. Debt-based funding is more accessible to the Micro, Small, and Medium Enterprises sectors. The two types of debt funding options are Onshore debt funding options and Offshore debt funding options.
Onshore debt funding allows foreign investors to offer capital through a different channel like alternate investment funds, non-banking financial companies (NBFC), Asset Reconstruction Companies, Venture Debt, etc. The primary role of these Indian bodies is to act as a medium between the foreign investors and the ultimate borrower.
Offshore debt funding ensures direct investment to the ultimate borrower. This is the tax-effective option and empowers investors to have direct control over the enforcement. Offshore funds are regulated by SEBI and RBI. Some offshore debt funding options are Compulsory Convertible Debentures, Rupee Denominated Non-Convertible Debentures, and Rupee Denominated Bonds.
Funding Through Bank Loans
Different commercial banks in India are the first option for foreign funding. The bank’s loans plans and policies are always at par with the foreign client’s requirements. This is the most prevalent funding method opted by foreign subsidiaries who look for “how to expand business in India”. Though the interest rates on the loans are comparatively higher than what the financial institutions offer, the rates are lower than the domestic money lenders. The monetary risk factors are also low in the case of loans borrowed from commercial banks.
Why Do Foreign Ventures Invest In The Indian Economy?
India has grown into a large economic powerhouse with advanced business reforms and digital competitiveness. In the last 21 years (April 2000 – March 2021), the accumulated FDI inflows in the country are USD 763 billion. The equity inflows of the same increased by more than 160% in the first three months of FY 2021-22 compared to the corresponding last year due to the relaxation of the Government policy to promote FDI.
The economic growth over the last few years has been incredibly high. According to World Economic Forum’s Global Competitiveness Index, India ranked 41 out of 141 economies in the macro-economic sector. The Indian Government has removed significant FDI restrictions like uplifting foreign equity caps for insurance and defense, to elevate foreign direct investment in the country.
The growing technological innovations in telecommunications, IT, pharmaceuticals, textiles, etc., and the massive consumer market have insisted many foreign giant companies take steps in setting up a subsidiary in India.
Roles of Consulting Firms to Expand Business in India
Different consulting firms help by providing their customized and extensive services, therefore giving a clear vision on how to expand business in India. Global management firms like Tecnova help foreign companies to understand the market by real-time interacting with potential buyers, industry stakeholders, government bodies, etc. These international firms carry out certain functions like
- Market Exploration Phase
- Strategy Formulation and Business Plan Phase
- Implementation Phase which involves incorporation, undertaking activities, setting up Greenfield facilities, etc.
In addition to this, the key personnel attached with these firms have years of expertise to carry out thorough research on understanding the market and best possible funding strategies.
As a fast-evolving nation, India attracts a lot of overseas business and investors. Being the largest democratic country, there is a diversified consumer market with different needs and preferences. Moreover, this economy is booming, with many opportunities for foreign companies to invest. Therefore, it is needless to say that it is a great time to grow Foreign Subsidiaries In India with an attractive consumer market and expert resources.
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