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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.