Common Funding Options

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Common Funding Options

Indian entities have various funding alternatives available, the most common being issuance of equity & preference shares, debentures, domestic borrowings, external commercial borrowings and rupee denominated bonds.

  • Equity Shares
    • The amount of equity capital a company can issue is limited by the authorized capital specified in its Memorandum of Association
    • A company can increase its authorized capital only if permitted by its Articles of Association
    • Equity capital can be repatriated on liquidation or on transfer of shares
    • Akin to equity, funds may be infused into a LLP by way of contribution to capital
  • Preference Shares
    • Foreign investment through convertible preference shares, that are compulsorily convertible into equity shares, is treated as FDI and non-convertible preference shares as external commercial borrowings (ECB)
    • Preference shares must be redeemed within a period of 20 years
    • The rate of dividends paid to non- residents should not exceed the limit prescribed in the extant FEMA Regulations
  • Debentures & Borrowings
    • Overseas funding through compulsorily convertible debentures, convertible into equity shares, would be treated as FDI and non-convertible debentures as external commercial borrowings
    • Further, Indian entities may also avail funding by way of domestic borrowings (without restrictions)
  • External Commercial Borrowings
    • ECBs can be issued in INR or foreign currency, and are regulated by the Ministry of Finance and Reserve Bank of India (RBI)
    • They can be accessed under two routes: the automatic route and the approval route
    • ECBs up to US$750 million for rupee and foreign currency expenditure fall under the ambit of the automatic route
  • Rupee Denominated Bonds
    • RDBs are bonds issued in INR, and can be subscribed to by residents of any country that is either a member of the Financial Action Task Force (FATF), or a member of a FATF style regional body
    • Related parties (as defined in Indian accounting standards) are not permitted to subscribe, invest or purchase rupee denominated bonds

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