Financing options for your Indian subsidiary: share capital, ECBs or a bank loan

As European companies grow their Indian operations, foreign shareholders often struggle with how best to finance the operations given India’s restrictive regulatory environment. In this article, we discuss three strategic options for financing your subsidiary in India.

1. Share capital

You can raise capital by issuing additional shares in your Indian company. Increasing the 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 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 therefore cannot be arranged in the short term. In case of acute cash flow problems, this does not offer a solution. It can also affect the ownership of the company, especially in joint ventures with Indian partners.

2. External Commercial Borrowing (ECB)

Your Indian subsidiary can take out a loan 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 has a major advantage: the interest on an ECB loan to an Indian party is based on LIBOR + a surcharge of up to 300 basis points.

3. Bank loans

Indian banks: Your subsidiary can apply for a loan from a local bank, 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 to over 15%. Only with a cash deposit as a guarantee can a lower rate be negotiated in some cases. In addition to the sky-high interest costs, Indian banks always 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 an administration fee of 1% on average. With local banks, you can attract a maximum of 1 to 2 million euros in this way.

If you need more capital, you can approach 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. International development banks: For projects supported by the Indian government, you can go to development banks, such as IFC (World Bank) and the Asian Development Bank. Chinese banks can also be an option, although they often stipulate that the loan is spent on products or services of Chinese (state) companies.