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Unravelling India's Corporate Finance Labyrinth
Vasu Gupta • December 25, 2023
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 info@srgaglobal.com. 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
COP28 marks the conclusion of the first-ever global stocktake, sounding a reminder that we are falling short of the Paris Agreement's 1.5°C target. As governments convened, decisions taken here fuelled ambitious climate plans to secure a sustainable future. SRGA Global consistently and actively participated in COP events. This engagement reflects our unwavering commitment to addressing climate change and sustainable development issues that affect India and UAE, and their ongoing journey towards balancing economic growth with climate commitments under the Paris Agreement. Road from B20 India to COP28, UAE Under the theme R.A.I.S.E - Responsible, Accelerated, Innovative, Sustainable, and Equitable businesses, B20 India offered empowering recommendations for business leaders to adopt responsible, expedited, innovative, sustainable, and equitable practices. There is an agreement across forums on tripling renewable energy capacity globally by 2030, driving accelerated energy transitions, strengthening bilateral and multilateral partnerships between stakeholders towards enhancing business-led climate action and unlocking increased climate finance through leveraging of private capital through various means. Effective cooperation among governments, businesses, and international stakeholders is necessary to tackle the pressing challenges of our time. Additionally, the B20 India 2023 Action Council on ESG in Business Policies highlighted the necessity of a standardised ESG framework and advocated for a resilience and disaster management framework to mitigate climate impacts, especially in the Global South. Key Highlights from India Perspective: COP28 should prioritize workforce capacity building, focusing on knowledge development and gender inclusivity. Ensure MSMEs have a dedicated voice at COP28 to address their unique challenges in transitioning to a low-carbon economy. The inclusion of MSMEs can strengthen COP28's goal to triple Renewable Energy (RE) usage and double energy efficiency (EE) by 2030. Leveraging COP28 as a platform to foster interactions with the corporate sector and to present their unique perspectives on various initiatives such as the Global GDA, the Industrial Transition Accelerator (ITA) and the Charter for Oil and Gas Decarbonization (COGD). Discussions on Articles 6.2 and 6.4 should provide clarity to all stakeholders, fostering increased climate finance flows and technology access in developing countries. There is an immediate need for well-defined standards and protocols that take into consideration inclusion, equity and parity. This is needed to bring about a well-oiled voluntary carbon market mechanism that will collectively work towards sustainable goals. Considering the evolving landscape we are operating in, it is imperative that we define and improvise on the go. At COP28 UAE, SRGA Global stands at the forefront of environmental stewardship and corporate responsibility. Our growing domain knowledge in ESG standards and frameworks positions us uniquely to guide companies through comprehensive ESG Audits and Advisory. Partner with us for insights and strategies that align with the latest in sustainable development and responsible business practices.
As we illuminate our office with the vibrant lights of Diwali 2023, we're not just sparking diyas, but igniting the spirit of camaraderie and joy. This year is particularly momentous as we mark three decades of unwavering service, trust, and collaboration. As our teams come together in celebration, dancing to the rhythm of success and unity, we're reminded that SRGA Global is more than just a consulting firm; it's a family that thrives on mutual respect and shared goals. Here's to 30 years of SRGA Global - where tradition meets ambition, and celebrations are just as important as innovations. 🫱🏻🫲🏽
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