India has been a capital-deficient country since independence and raising funds either by means of equity or debt has always been problematic for industry. The question that comes up when a business is planning a round of fundraising, is whether debt or equity is a better choice, and whether funds should be raised domestically or through foreign channels.
Local markets have been sluggish in terms of fundraising so the focus of this article is on international fundraising. When an Indian company considers raising funds there are traditional and nontraditional channels available. Some of the options are as follows.
Equity based. Foreign direct investment policy is very liberal and balanced, and international investors can invest in nearly all sectors. Save in a few sensitive sectors such as retail and insurance, 100% foreign equity participation is available. In this liberal environment, it is easy to find equity participation.
Investment funds, which may be pure financial funds, sovereign funds, social Impact funds or related institutions have at least two attractions. Their purpose is to invest in the industry or sector of the target business customers, and they have an appetite to invest in India. Partnering with foreign companies in joint ventures (JV) works best where partners are from countries that are technology and capital rich. To have a foreign shareholder and partner in a JV allows access to the capital markets of the foreign partner for additional equity and lower cost debt. In one particular European country, the government offers an incentive scheme to double the equity invested by the foreign partner in the Indian company bringing substantial benefits for both the Indian and the foreign partner company. European economies have the foresight to invest in developing markets to overcome the saturation in their own sectors.
A listing of an Indian company on stock markets and alternate investment exchanges is available in most developed countries. This can be done either by means of an organic listing like an IPO or by means of a reverse merger with an existing listed company followed by a stock offering. Stock markets in Canada, the US and Singapore are quite suitable for such transactions. Equity guaranteed debt also involves relying on the reputation of a JV partner or a significant partner shareholder, which can then float a loan for the Indian company and guarantee it locally, making fundraising easier and more economical.
Debt based. Major banks and financial institutions are the first choice when raising debt funds from outside the country. Many commercial banks in countries such as the US, Canada, the UK, Switzerland, Japan, China and Taiwan provide funds to Indian businesses to finance their business needs. Debts from banks and large financial institutions are mostly large tickets and suited for projects of significant economic importance. Institutions such as the World Bank, the International Monetary Fund, the US International Development Finance Corporation and the Asian Development Bank also fall into the category of lenders that fund Indian projects of importance.
Smaller banks and debt funds are more accessible to the MSME sector. These providers are also willing to fund smaller banks and large nonbanking financial companies. Interest rates on loans and funds are higher than those from larger institutions, but still lower than those from domestic funders. JV partners provide channels of funding through their own banking relationships. By leveraging a low-cost debt themselves, JV partners can in turn bring in a low-cost debt as a back-to-back lender to its own business under the current external commercial banking policy in India. With business development funding, certain European banks are willing to finance the international business of their clients by providing low-cost debt in developing economies like India so long as the foreign partner is part of the business.
Besides these financing choices, Indian businesses now have options open to them such as trade factoring in businesses conducted with reputable importers of their products. Export finance is a great advantage when buying capital goods from developed countries such as the USA, Canada, Japan and China. Extremely low-cost finance options are available for the right customers in India.
Setting up a subsidiary of an Indian company in a capital-rich country is another means of securing low cost finance. Many schemes and growth opportunities are available by this method for reputable companies in India, through their overseas subsidiaries. With the Indian government accepting that foreign-capital markets are a valuable source of funding, it is a good time for businesses to access such markets and partners to build up capital reserves over the coming decade.
India Law Offices
D-19 (GF) & D-31, South Extension – 1
New Delhi – 110 049
Mumbai | Bengaluru
Tel: +91 11 2462 2216 / +91 11 246 2218
Fax: +91 11 2465 4364