Choosing the correct source of funding

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Capital flows in India are generally in the form of foreign equity investment or foreign currency debt. The inclination towards foreign currency debt is generally more as debt is overall cheaper than equity and it gives downside protection to investors by providing guaranteed returns and security against the sums advanced. Virtually there is no restriction on foreign equity investment in India except for entry into specific sectors. However, until the recent past the External Commercial Borrowing (ECB) framework was very constraining.

In the last decade a paradigm shift has been noticed for investment in Indian companies- the use of hybrid instruments, which merges the benefits of debt instruments as well as equity instruments. These instruments are suitable for attracting foreign investments in several niche areas, especially for the startups and venture capital firms.

The Reserve Bank of India (RBI) has recently revised the overseas borrowing framework substantially relaxing the regime for ECBs. The changes have removed almost all restrictions on eligible lenders and eligible borrowers and have substantially expanded the scope of end-use restrictions. The new policy has increased the overall limit of borrowing without an approval requirement. Also, a separate policy for hybrid instruments is on the way.

On one hand RBI has opened up the avenues for overseas borrowing and is moving towards self regulated environment, on the other hand, it has introduced strict compliance requirements with stringent consequences. It is of vital importance for everyone to understand the various funding routes for Indian companies and considering the recurrent changes in different regulations, the importance to understand the evolving exchange control regulations under Foreign Exchange Management Act, 1999.

Objective:

This document will help to:

  1. Understand the basics of the revised overseas borrowing framework 
  2. Enlighten the companies about the new avenues of capital flow
  3. Evolution of various reporting mechanisms and the consequences of violation
  4. Understand the implication of revised framework on various sectors.

Choosing the correct source of funding

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