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Financing Manufacturing for Foreign Companies in India - Maier Vidorno Altios

India’s vast and growing market presents a tempting opportunity for foreign companies looking to expand their global footprint. However, establishing a manufacturing presence in India requires careful planning and financial considerations. One of the key decisions involves choosing the right financing option for your venture.

Foreign companies in India have three primary options for funding their manufacturing operations:

1. Equity Capital:
Pros: Offers control over the business.
Cons: Expensive, potential dilution of ownership.

2. External Commercial Borrowings (ECBs):
Pros: Potentially lower interest rates, flexibility in repayment schedules.
Cons: Subject to RBI regulations, currency exchange risks.

3. Bank Loans:
Pros: Readily available funds, familiarity with local regulations.
Cons: Higher interest rates, stringent collateral requirements.

Here’s a comparison of these three financing options to help you make an informed decision:

Considerations

External Commercial Borrowings-ECB (Foreign Currency Denominated)

Domestic Bank Loan

Capital Infusion

Interest Cost

Maximum: 500 basis point + acceptable reference rate.
Ideal : 3-4% interest rate would be ideal basis our experiences and can be justified as armlength.

Flexible structure offering Fixed and Floating Rates which can be negotiated with lending bank. The tentative Term loan interest rate would be around 10%

Not Applicable

Other Cost

Foreign exchange fluctuations for borrower.
Monthly compliance fees in reporting the details to Central Bank of India

Cost associated with Corporate guarantees or Stand by letter of credit issued by foreign bank of group company

Costs associated with legal fees and regulatory filing charges exist when raising capital. Additionally, fees for increasing authorised share capital may also arise.

Withholding Taxes

Beneficial of :
Income Tax Act –20% + surcharge & Cess *
India Swiss DTAA –10%

Not Applicable

Beneficial of the following applicable on Dividend:
• Income Tax Act –20% + surcharge & Cess
• India French DTAA –10%

Corporate Income tax

Tax Compliance is to be done by the interest-earning foreign company in the residence country. Credits for taxes paid in India will be available subject to applicable regulations/tax treaties.

Not Applicable (lookout of lending bank)

Tax Compliance is to be done by the interest-earning foreign company in the residence country. Credits for taxes paid in India will be available subject to applicable regulations/tax treaties.

Payment Terms

Average maturity period (ranging 3-10 years) regulation are to be complied which offer the flexibility on Interest and principal repayments leading to better cash flow management

Strict payment timelines and any defaults impact credit scores and interest rates for future lending.

Repayment of capital happens on the closure of business. Dividend payout as per purview of Indian entity.

Regulatory Considerations

Tax compliance by way of PAN registration, Form 10F and Indian tax return submission shall arise to foreign lenders if lower tax benefit as per DTAA is availed.

Less regulatory hassles as established procedures are present

Tax compliance by way of PAN registration, Form 10F and Indian tax return submission shall arise to foreign lenders (in case of Dividend Income only) if lower tax benefit as per DTAA is availed.

How to choose the correct financing option for your company

1. ECB:
Pros: Access to funds at reduced costs, well-defined regulatory framework.
Cons: Currency exchange risks, foreign lender’s Indian tax compliances.

2. Domestic Bank Loan:
Pros: Operational familiarity.
Cons: Elevated interest expenses, stringent payment schedules.

3. Local Intercompany Loan:
Pros: Flexible financing.
Cons: High-cost implications, limited capital availability, complex conversion into equity.

4. Additional Financing Options Considered:

Cross-Border Leasing: Specialized assets but faces transfer pricing complexities.

Domestic Leasing: Easier but potentially costly and litigative.

Maier Vidorno Altios: Your Partner for a Smooth Market Entry or Expansion in India

Maier Vidorno Altios is a leading financial consulting firm with extensive experience in helping foreign companies establish and expand their operations in India. We offer a comprehensive range of services to support your manufacturing venture, including:

• Financial modeling and feasibility studies
• Guidance on choosing the right financing option
• Assistance with ECB or bank loan applications
• Compliance support with Indian regulations
• Tax advisory and planning services
• Project management and implementation support

With Maier Vidorno Altios as your partner, you can:
• Minimize your financial risks
• Ensure compliance with all Indian regulations
• Navigate the complex Indian business environment
• Focus on your core business operations

Setting up a manufacturing plant in India is a rewarding venture, but choosing the right financing option is crucial. With comprehensive knowledge and the support of experienced consultants like Maier Vidorno Altios, you can ensure a smooth entry or expansion into the Indian market.

For additional tips and assistance, reach out to Maier Vidorno Altios and embark on your journey to success in the Indian market.

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