4 ways to finance your Indian subsidiary
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1. ECB (External Commercial Borrowing)
An ECB is almost the only option to provide a loan to an Indian subsidiary from the Netherlands. An ECB is a loan agreement approved by the Indian government that can be used by the Indian company for, for example, the purchase of goods or capital goods, but also for working capital or the refinancing of existing loans. Interest is based on Libor + a surcharge. This is many times cheaper than a purely local Indian loan. That is why many companies use an ECB. The local bank of the Indian company plays an important role in processing and applying for an ECB loan.
2. Local loan from an Indian bank
A local loan from an Indian bank is almost always an option, but also very expensive due to the high interest rates in India. A regular business loan has interest rates of 12%, sometimes rising to 20%. This can be reduced by a few percentage points (to a minimum of around 9%) by providing a guarantee to a bank in the EU.
3. Working capital from turnover
Another option is to invoice the services provided by the Indian subsidiary to the parent company. If all transfer pricing requirements and guidelines are met, this is a practical way to provide the Indian subsidiary with the necessary working capital. This construction is often used for 100% subsidiaries that provide IT or engineering services for the parent company.
4. Share capital (upon incorporation and additional share issuance)
When setting up a subsidiary in India, you should carefully consider your short-term capital needs. The minimum share capital of INR 100k (Euro 1400) for an Indian Pvt Ltd is often chosen too quickly. The shareholders are free to increase the share capital in order to be able to provide the new subsidiary with the necessary start-up capital immediately. This is also the easiest and virtually cheapest option for new companies. Alternatively, the shareholders of an Indian subsidiary can decide to issue additional shares to raise capital. Please note that this is easier with a 100% subsidiary than in a joint venture construction.
