Indian investment and foreign exchange law become the focus of investors not only when establishing a subsidiary, a joint venture or when investing in an existing company in India, but also when financing further investments in the Indian location.

The legal basis for this is provided by Foreign Exchange Management Act (FEMA), the Indian foreign exchange law (see Reserve Bank of India – RBI: https://fema.rbi.org.in/) as well as the currently valid FDI (Foreign direct investment) Policy of the Ministry of Commerce and Industry, Government of India.

Due to Indian regulations, the issue of financing requires careful and timely planning.

Financing through equity

Since the Indian market opened in the early 90s, more and more industries have gradually been opened up to foreign investors. Meanwhile, only a few sectors - strategic for the Indian government - are “protected” from foreign investors by maximum participation rates and/or approval procedures, for example financial services, armaments, broadcasting or, to some extent, still in Retail.

In Indian investment law there is between “Automatic route” and “Government Route” differentiated. As the name suggests, the procedure is either Automatically or the investment Requires approval.

Investments and corporate actions (equity and debt) in sectors that do not require approval only need to be reported to the Reserve Bank of India (RBI) within 30 days.

The current and previous list of industries including Route and Participation limits can be found on the website of the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

When setting up a company, the following definitions must be distinguished (or defined in the memorandum):

  • Authorized Share Capital: Maximum amount that the company can issue in the form of shares. This should not be chosen too low, because a capital increase beyond this requires additional formal effort.
  • Subscribed Share Capital: Capital that the shareholders undertake to pay in.
  • From the Paid up share capital you speak when that Subscribed Share Capital (see above) has been paid.

Financing through debt capital

Debt capital can be in the form of a Loan from a local Indian bank –in Indian rupees - without regulatory restrictions - and also secured by a foreign company (or the Indian house bank).

External Commercial Borrowings

In order to save capital costs in India, foreign currency loans, so-called External Commercial Borrowings (ECB) is available as an alternative financing instrument. In addition to bank loans, these also include buyer and supplier loans, securitized instruments, fixed-interest bonds and loans from export credit agencies and multilateral financing institutions. This form of financing requires a term of at least three years.

External Commercial Borrowings (ECB) can be used to finance fixed assets or working capital, but not for investments on the stock market or speculation in real estate.

External Commercial Borrowings (ECB) are subject to a maximum interest rate and a minimum term (of at least three years).

Detailed information on the current ECB regime can be found in detail in the RBI publication (as of January 16, 2019) https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11456