FUNDING OPTIONS IN INDIABRIEF COMPARATIVE ANALYSIS

March 2013

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

Comparative analysis…Parameter Equity shares CCPS CCD Shareholder loans / other

debenturesOther preference shares

Treated as • FDI • FDI • FDI • ECB • ECB

Restriction on amount

• No restriction • No restriction • No restriction • Industrial or Infrastructure Sector-USD 750 mn per annum

• Specified Service Sector-USD 200 mn per annum

• Industrial Infrastructure Sector-USD 750 mn per annum

• Specified Service Sector-USD 200 mn per annum

End use restrictions

• NA • NA • NA • Cannot be used for:• On-lending, investment in

capital market, acquiring a company in India or a part thereof

• Real estate• Working capital, general

corporate purpose and repayment of existing rupee loans

• Cannot be used for:• On-lending, investment in

capital market, acquiring a company in India or a part thereof

• Real estate• Working capital, general

corporate purpose and repayment of existing rupee loans

Permitted lenders

• NA • NA • NA • Equity shareholder holding 25% equity shares directly

• Equity shareholder holding 25% equity shares directly

All in cost* • Not specified • Maximum dividend - SBI PLR + 300 bps

• Not specified• (Arguable that

interest rate cannot exceed prescribed CCPS coupon rate )

• For maturity of 3-5 years: 6 month LIBOR +350 bps

• For maturity above 5 years: 6 month LIBOR + 500 bps

• For maturity of 3-5 years: 6 month LIBOR + 350 bps

• For maturity above 5 years: 6 month LIBOR + 500 bps

* Subject to Indian transfer pricing regulations

...Comparative analysisParameter Equity shares CCPS CCD Shareholder loans/ other

debenturesOther preference shares

Right of dividend/ interest

• Can be paid only from PAT and after payment of preference dividend

• Right to receive dividend over equity shares and can be paid out of PAT

• Interest can be paid irrespective of availability of profits

• Interest can be paid irrespective of availability of profits

• Right to receive dividend over equity shares and can be paid out of PAT

Tax deductibility of dividends/ interest

• Equity dividend not deductible for tax purposes

• Preference dividend not deductible for tax purposes

• Interest is tax deductible subject to appropriate withholding of tax (certain judicial precedents support this claim)

• Interest is tax deductible subject to appropriate withholding of tax

• Preference dividend not deductible for tax purposes

Voting rights • Available • Available, if dividend is not paid for two years or post conversion into equity shares

• Available post conversion into equity shares

• Not available except in respect of part converted into equity shares

• Not available except in respect of part converted into equity shares

WHT • Not required• Indian company to

pay Dividend Distribution Tax (‘DDT’) at 16.995%* on amount distributed

• Not required• Indian company

required to pay DDT at 16.995%* on amount distributed

• Withholding on interest at 15%**

• Withholding on interest at 15%**

• Not required• Indian company required to

pay DDT at 16.995%* on amount distributed

*As per the Indian Finance Bill 2013**Under the India-USA tax treaty

...Comparative analysis Parameter Equity shares CCPS CCD Shareholder loans/ other

debenturesOther preference shares

Prepayment / Repatriation and minimum time period for redemption

• Repatriation through buyback*/ capital reduction

• Possible post conversion into equity shares

• Maximum time period: 20 years from date of issue

• Possible post conversion into equity shares

• No time limit for CCD in a private company

• ECB upto USD 20 mn:Minimum average maturity of 3 years

• ECB above USD 20 mn and upto USD 750 mn: Minimum average maturity of 5 years

• ECB upto USD 20 mn: Minimum average maturity of 3 years

• ECB above USD 20 mn and upto USD 750 mn: Minimum average maturity of 5 years

• Maximum time period for preference shares: 20 years from the date of its issue

Applicability of Indian transfer pricing regulations

• Not applicable on dividend payments

• May be applicable on dividend payments

• Applicable on interest payment

• Applicable on interest payment

• May be applicable on dividend payment

Taxation on conversion

• Not applicable • May not be held as taxable

• Exempt • Shareholder Loans – NA• Debentures – Exempt

• May not be held as taxable

Taxation on exit • Subject to capital gain tax unless structured through a jurisdiction with favourable tax treaty

• Subject to capital gain tax unless structured through a jurisdiction with favorable tax treaty

• Subject to capital gain tax

• Shareholder Loans – NA• Other Debentures – Subject

to capital gains unless structured through a favourable tax treaty

• Subject to capital gains unless structured through a favourable tax 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.