Funding access is essential for organisations planning to enter the Indian market, particularly for Global Capability Centers (GCCs). Start-up and operational funding requirements are extensive, covering salaries for employees, office procurement, legal compliance, and technology requirements. Funding will typically be from the foreign parent organisation, and in many different forms, the chosen form will define operational flexibility, compliance, and tax efficiency.

Common forms of funding include the following:

• Role of equity capital contributions
• Cost-plus arrangements (reimbursement of expenses plus a mark-up; mark-ups are typically 10–18%)
• External commercial borrowings (ECBs) are directly from the foreign parent company, rather than third-party banks or institutions.

Of these, External Commercial Borrowings (ECBs) are an increasingly popular mechanism for funding Indian subsidiaries from the foreign parent companies, primarily associated with subsidiaries that may relate to global business affiliates (GCCs).

Why ECB is More Flexible Than Equity Infusion

Equity capital is the one of the most time-honoured ways to invest in a subsidiary, but it has several limitations:

• Equity Not Ideal for GCCs: GCCs usually operate as cost centers and not as independent value-generating entities, so valuation is not a major consideration during funding.
• Locked-in Capital: Once funds have been injected (in the main) as share capital, removing the cash requires a lot of forward planning. Share buy-back, capital reduction, or dividend declarations all require legal processes to be followed for repatriation – all with their own tax status/regulation attached.

ECB offers a flexible alternative – especially if the subsidiary is capex-heavy or in its early years of operation

Structured Repayment: Repayment can be timed to the intended cash flows of the subsidiary and its expected asset depreciation.

Lower Interest Rates: ECB interest rates (typically from either a recognised group company or a development finance institution) are typically lower than loans from a domestic institution.

Predictable Exit Mechanism: The parent company knows exactly when and how it will recover its cash, unlike equity returns.

ECB vs Equity: Ease of Withdrawal

The limitation of equity in practice is with the repatriation of capital:

• When equity is invested, it is then locked in unless the company undertakes a capital reduction, share buy-back (which requires approvals, compliance delays, and tax costs).
• Dividends are only allowed when the company has profits, which also withhold tax.

In contrast, ECB allows for different structure for capital repatriation, which includes:

• Regular interest payments
• Repayment of principal according to the originally agreed terms
• Early repayment or prepayment (subject to RBI rules)

This provides more comfort to the parent company in terms of capital liquidity and financial planning.

Regulatory Guidelines for ECB from Holding Companies

The Reserve Bank of India (RBI) established rules for ECBs through its Master Direction, and when an Indian subsidiary raises ECB from a foreign parent company, it must comply with the following:

• Eligible Borrowers: All Indian companies that are holders of FDI, including wholly owned and joint venture subsidiaries..
• Recognised lenders: Parent companies having a stake of 25% direct equity in the Indian entity can lend under the automatic route.

Minimum Average Maturity Period (MAMP):

• 3 years for general ECB purposes
• 5 years only for ECBs utilising working capital, corporate uses or to refinance rupee loans

End Use Restrictions:

• Permissible uses: Capital expenditure, working capital (only a 5-year MAMP), and refinancing of rupee loans (may be subject to conditions)
• Prohibited uses: Investment in real estate, capital markets, or on-lending to the permitted sector

Compliance requirements:

• Filing of Form ECB (with the Authorised Dealer (AD) Bank) to get a Loan Registration Number (LRN)
• Filing monthly ECB-2 returns notifying the lender of how much was used, repaid, and interest paid

Case Study: ECB for a UK-based Holding Company in India

A UK-based business process consultancy firm planned to set up a Global Capability Center (GCC) in India. The Indian arm would provide outsourcing and back-office support for global operations. During the setup phase, the subsidiary required funding for:

• Hiring and onboarding employees
• Purchasing laptops and IT infrastructure
• Paying professional service providers (accounting, legal, compliance)
• Office interior work and leasehold improvements

While the UK parent company was committed to funding, it was reluctant to infuse equity due to:

• Uncertainty over returns
• No clear exit mechanism or repatriation strategy
• Group treasury’s preference for recoverable, structured funding

The Hybrid Solution: ECB + Cost-Plus Model

A two-part funding approach was developed to address both operational and capital costs with efficiency and compliance.

1. Cost-Plus Method for Operational Costs

• The cost-plus markup model was based on transfer pricing.
• The costs covered included payroll, rent, shared services, compliance, and utilities.
• The Indian subsidiary would receive allocations for the actual costs incurred plus a cost-plus markup from the UK parent monthly.
• This ensured no working capital was blocked with the payment to the UK parent and all payments were fully transparent across the border.

2. ECB for Capital Expenditure

The subsidiary used ECB from the UK parent to fund capital assets, like information technology infrastructure and office interiors, on the following terms:

• Term: 5 years
• Use: Capital expenditure (including laptops, servers, office fit-outs)
• Interest: Based on 6-month SONIA.
• Repayment: matched to the depreciation lifecycle of the asset.

Depreciation charges were incorporated into the cost allocations meaning that the cost of the asset would fully recover over time.

This hybrid funding structure led to:

• Smooth launch of Indian operations
• No dilution of equity and no capital lock-in
• RBI and transfer pricing compliance
• Structured and predictable capital recovery for the parent company

The Indian subsidiary is now fully operational, with robust financial governance and complete flexibility for the parent entity.

For foreign companies entering India, ECB from the parent company provides unparalleled flexibility. Scheduled repayments, straightforward compliance from regulatory requirements, and no equity dilution make ECB the ideal funding structure from your parent company. When combined with operational models using cost-plus for everyday expenses, ECB utilizes the compliance aspect and optimal cash management functionality of your parent’s currency for your operations without having to pass through the operational fund to try to meet compliance.

However, not all business scenarios are the same. The funding structure presented in this case study is only aligned with a specific client’s situation, and it may not fit any other company. The optimal funding solution will always depend on your business requirements, tax profile, and length of funding requirements.

Need to speak to an adviser?

If you are the CFO or head of Finance of a company that plans to acquire funding opportunities for your Indian operation, contact us at Indusentry for the best solution for your circumstances with ECB, equity, and cost-plus models that are compliant and efficient.