Unravelling India's Corporate Finance Labyrinth

The rapid expansion of companies in India has fueled a growing demand for equity capital, with multiple instruments emerging in the nation's capital market. These instruments range from Initial Public Offerings (IPOs) and Further Public Offerings (FPOs) to private placements and rights issues. Consequently, it has become essential to implement a robust regulatory framework governing the issue of capital, particularly concerning equity shares.

Corporate finance involves activities and transactions centred around raising capital to create, develop, and acquire businesses. It connects an organization with the capital market and is directly linked to financial decisions affecting the company. Corporate finance spans a broad spectrum of financing and investment decisions, which can be grouped into the following categories:

1. Indian Equity - Public Funding:

Coordinating a public issue requires collaboration among stakeholders, including issue managers, underwriters, brokers, registrars, legal advisors, auditors, and government or statutory agencies. The issuance of shares typically involves pre- and post-issue activities, with the former focusing on capital issue planning and the latter on subscription list management. Presently, stock exchanges only admit dematerialized shares for trading.

2. Indian Equity - Private Funding:

To fuel their growth, Indian entrepreneurs require private equity and debt products offered by private equity and venture capital funds, typically channelled through Alternative Investment Funds (AIFs). This type of capital is scarce in India, so fostering a supportive policy and regulatory environment is crucial. AIFs are overseen by the Securities and Exchange Board of India (SEBI), the Ministry of Finance, and sector regulators.

3. Indian Equity - Non-Fund Based:

Companies aim to attract and retain investors and top talent through incentives such as dividends, bonus shares, and employee stock ownership plans (ESOPs). Sweat equity shares, which reward employees with a stake in the company, also serve this purpose.

4. Debt Funding - Indian Fund-Based (Corporate Debt):

Corporate bonds and debentures, which offer interest or coupons to lenders, provide an appealing source of financing for companies and governments. These instruments play an increasingly vital role in the country's economic growth, especially given the challenges faced by the banking sector.

5. Debt Funding - Indian Fund-Based (Government Debt & Banking Finance):

Commercial banks significantly contribute to business financing in India by offering various credit facilities, typically secured by properties or assets. Banks also provide tailored lending solutions based on borrowers' specific needs.

6. Debt Funding - Indian Non-Fund Based:

Organizations may require external funding for various reasons, including the acquisition of machinery or entry into new markets. The cost and availability of funding differ depending on the organization and its objectives.

7. Foreign Funding - Instruments & Institutions:

Globalization has ushered in new opportunities for international financing, with sources including commercial banks, international agencies, development banks, and international capital markets. Capital raised in foreign currencies, such as euro equity or debt, can be obtained from global capital markets.

8. Inter-Corporate Loans & Investment/Deposit:

Inter-corporate loans and investments, regulated by the Companies Act of 2013, play a crucial role in the growth of industries by facilitating the flow of funds among group companies or other entities in need of financing.

9. Listing:

India's regulatory framework aligns with international best practices, such as the OECD Principles, and has been further enhanced by introducing the 'Listing Obligations and Disclosure Requirements Regulations, 2015.

Understanding the intricacies of corporate financing is essential for multinational businesses operating in India. India has experienced remarkable economic growth, with its GDP expanding at an average annual rate of 7.5% between 2014 and 2019 [1]. As a result, the country has become an increasingly attractive destination for foreign investors.

However, companies must remain vigilant of the evolving regulatory environment. In recent years, the government has introduced several reforms to boost foreign investment, such as raising FDI limits in key sectors [2] and implementing the Insolvency and Bankruptcy Code (IBC) in 2016 to streamline the insolvency resolution process [3].

Organizations can mitigate corporate risks and optimize their global financing strategies by addressing key considerations and ensuring compliance. SRGA Global , a leading business and finance consulting firm, offers expert guidance and support in international taxation to help clients achieve their financial and business objectives. To learn more about how SRGA Global can assist your organization, please visit our website at?www.srgaglobal.com?or contact us directly at?[email protected]. By leveraging our expertise, you can confidently navigate the complex landscape of corporate finance in India and position your business for sustained success.

Resources:

[1] World Bank. (n.d.). GDP growth (annual %) - India. Retrieved from?https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN

[2] Government of India. (n.d.). Make in India - FDI Policy. Retrieved from?https://www.makeinindia.com/policy/fdi-policy

[3] Insolvency and Bankruptcy Board of India. (n.d.). Insolvency and Bankruptcy Code, 2016. Retrieved from?https://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Oct/C-180223_2016_Insolvency_and_Bankruptcy_Code,_2016_2018-10-25%2011:34:12.pdf