1. FUNDING OPTIONS IN INDIA
BRIEF COMPARATIVE ANALYSIS
March 2013

2. Funding options in India
• Equity Share capital
• Compulsorily Convertible Preference Shares (‘CCPS’)
• Compulsorily Convertible Debentures (‘CCD’s)
• Shareholders loans / other debentures (redeemable / optionally convertible)
• Other preference shares (redeemable / optionally convertible)
• A mix of the above
• Key drivers to the choice of funding:
 Indian exchange control regulations and other regulatory requirements
 Indian company law regulations
 Tax efficiency
 Ease of repatriation
 Other commercial considerations, ie voting rights / control etc

3. Comparative analysis…
Parameter Equity shares CCPS CCD Shareholder loans / other Other preference shares
debentures
Treated as • FDI • FDI • FDI • ECB • ECB
Restriction • No restriction • No restriction • No restriction • Industrial or Infrastructure • Industrial Infrastructure
on amount Sector-USD 750 mn per Sector-USD 750 mn per
annum annum
• Specified Service Sector-USD • Specified Service Sector-USD
200 mn per annum 200 mn per annum
End use • NA • NA • NA • Cannot be used for: • Cannot be used for:
restrictions • On-lending, investment in • On-lending, investment in
capital market, acquiring a capital market, acquiring a
company in India or a part company in India or a part
thereof thereof
• Real estate • Real estate
• Working capital, general • Working capital, general
corporate purpose and corporate purpose and
repayment of existing repayment of existing
rupee loans rupee loans
Permitted • NA • NA • NA • Equity shareholder holding • Equity shareholder holding
lenders 25% equity shares directly 25% equity shares directly
All in cost* • Not specified • Maximum • Not specified • For maturity of 3-5 years: 6 • For maturity of 3-5 years: 6
dividend - SBI • (Arguable that month LIBOR +350 bps month LIBOR + 350 bps
PLR + 300 bps interest rate • For maturity above 5 years: 6 • For maturity above 5 years: 6
cannot exceed month LIBOR + 500 bps month LIBOR + 500 bps
prescribed
CCPS coupon
rate )
* Subject to Indian transfer pricing regulations

4. ...Comparative analysis
Parameter Equity shares CCPS CCD Shareholder loans/ other Other preference shares
debentures
Right of • Can be paid only • Right to receive • Interest can be • Interest can be paid • Right to receive dividend over
dividend/ from PAT and after dividend over paid irrespective of availability of equity shares and can be paid
interest payment of equity shares irrespective of profits out of PAT
preference and can be availability of
dividend paid out of PAT profits
Tax • Equity dividend not • Preference • Interest is tax • Interest is tax deductible • Preference dividend not
deductibility deductible for tax dividend not deductible subject to appropriate deductible for tax purposes
of dividends/ purposes deductible for subject to withholding of tax
interest tax purposes appropriate
withholding of
tax (certain
judicial
precedents
support this
claim)
Voting rights • Available • Available, if • Available post • Not available except in • Not available except in
dividend is not conversion into respect of part converted into respect of part converted into
paid for two equity shares equity shares equity shares
years or post
conversion into
equity shares
WHT • Not required • Not required • Withholding on • Withholding on interest at • Not required
• Indian company to • Indian company interest at 15%** • Indian company required to
pay Dividend required to pay 15%** pay DDT at 16.995%* on
Distribution Tax DDT at amount distributed
(‘DDT’) at 16.995%* on
16.995%* on amount
amount distributed distributed
*As per the Indian Finance Bill 2013
**Under the India-USA tax treaty

5. ...Comparative analysis
Parameter Equity shares CCPS CCD Shareholder loans/ other Other preference shares
debentures
Prepayment / • Repatriation • Possible post • Possible post • ECB upto USD 20 • ECB upto USD 20 mn:
Repatriation and through conversion into conversion into mn:Minimum average Minimum average maturity of
minimum time buyback*/ equity shares equity shares maturity of 3 years 3 years
period for capital • Maximum time • No time limit • ECB above USD 20 mn and • ECB above USD 20 mn and
redemption reduction period: 20 for CCD in a upto USD 750 mn: Minimum upto USD 750 mn: Minimum
years from private average maturity of 5 years average maturity of 5 years
date of issue company • Maximum time period for
preference shares: 20 years
from the date of its issue
Applicability of • Not applicable • May be • Applicable on • Applicable on interest • May be applicable on
Indian transfer on dividend applicable on interest payment dividend payment
pricing payments dividend payment
regulations payments
Taxation on • Not applicable • May not be • Exempt • Shareholder Loans – NA • May not be held as taxable
conversion held as taxable • Debentures – Exempt
Taxation on exit • Subject to • Subject to • Subject to • Shareholder Loans – NA • Subject to capital gains
capital gain tax capital gain tax capital gain tax • Other Debentures – Subject unless structured through a
unless unless to capital gains unless favourable tax treaty
structured structured structured through a
through a through a favourable tax treaty
jurisdiction with jurisdiction with
favourable tax favorable tax
treaty treaty
*The Indian Finance Bill 2013 proposes a distribution tax of 22.66%* (21.63% where income is more than INR 10 million and upto INR 100 million and 20.6% where the
income is equal to or less than INR 10 million) in the hands of a private company on the amount distributed to shareholders in a share buyback.