Funding Options For Chinese-Backed Indian Companies

Ways that Chinese investors could fund Indian subsidiaries, investee or portfolio companies without needing prior approval.

U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes in Hong Kong, China. (Photographer: Brent Lewin/Bloomberg)
U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes in Hong Kong, China. (Photographer: Brent Lewin/Bloomberg)

To regulate any opportunistic takeover of Indian companies by its neighboring countries, foreign direct investment, inter alia, from China was recently brought under the government approval route.

Due to the government approval requirement, Indian companies and startups backed by Chinese residents or Chinese entities may struggle to raise funds. Since the FDI now needs government approval the transaction time might get extended (about 4-6 months) therefore proving to be deterrent for the parties involved.

Given the present economic situation, the Indian entities would need funds without any delay to survive, in the short- and medium-term.

This article explores options that Chinese investors could use to fund their Indian subsidiaries or investee or portfolio companies without having to seek the prior approval of the government.

Financing Another Foreign Investor Offshore For The Indian Investment

One option is for the Chinese investor to provide funds to another foreign investor—who is not prohibited from making an investment in India under the automatic route—who can invest in the Indian company. As a part of the financing arrangement, the Chinese investor can have a call option or other similar arrangement to acquire the shares held by such an FDI investor at a future date. The investment by the FDI investor would not be treated as an investment with a China beneficiary. Even a call option on the shares held by the FDI investor or other similar arrangement will not mean that the Chinese investor would be treated as a beneficiary, directly or indirectly.

Beneficial Ownership
It is not unusual for FDI investors to borrow funds offshore to make investments in India. In such cases, the lenders to the FDI investor are not treated or disclosed as beneficial owners.

In many cases, such lending arrangements would have an option to convert the loan into shares or any other security such as a pledge of shares, however, such an arrangement is not seen as the lender having beneficial ownership unless such option is exercised or pledge is enforced.

A call option or such other arrangement would entitle the Chinese investor ownership of certain shares and, therefore, it could be argued that it would make the Chinese investor a beneficial owner. To that extent, the transaction and contract will need to be carefully structured and drafted. The parties involved should understand the risk involved in such a structure as it can be challenged on the grounds that the same is against the spirit of Indian foreign exchange rules. It may also be noted that the authorised dealer bank may require the FDI Investor to disclose the source of funding.

The contract or arrangement of funding from Chinese investor to the FDI investor will need to comply with the laws of the country where the loan is provided.

Financing Structure
The funding arrangement between the Chinese investor and the FDI investor could be structured in many ways. For example, the FDI investor could avail of financing from a bank or institution which can be backed by collateral security provided by the Chinese investor. Further, such a structure could also involve multi-layered independent entities as a conduit for funding. Costs involved in making the investment through the FDI investor including the consideration, if any, payable to the FDI investor will also have to be factored into.

The timing for the exercise of the call option or conversion of the loan could be linked to the Indian government relaxing the government approval requirement.

Alternatively, the Chinese investor may apply to the Indian government for approval soon after the FDI investor has acquired the shares. As pricing guidelines would not apply to a transfer between the FDI investor and the Chinese investor, parties can agree to a price for the transfer of shares upfront. This will enable the Chinese investor to get the benefit of the pandemic-affected or deflated valuation. As well as allow the investee company access to funds quickly.

Chinese Investments In India Need Deft Handling

External Commercial Borrowings

External commercial borrowings can be provided to the Indian company by Chinese investors with

(a) direct foreign equity holding of minimum 25% in such Indian company or

(b) with indirect equity holding of minimum 51%;

or a Chinese Investor which is a group company with a common overseas parent, can provide a loan or ECB to the Indian company.

Alternatively, the Indian company could also resort to ECB from an offshore bank or other financial institution permitted subject to end-use restrictions.

For such ECB, the Chinese investor, being a promoter of the Indian company, could also pledge its shareholding.

Several conditions need to be fulfilled to avail of the ECB under the automatic route. Such conditions inter alia depend on whether the ECB is availed of in foreign currency or Indian rupees. Some of the important conditions are as follows:

1. Minimum average maturity period: The general MAMP is three years. However, in certain specific cases, the MAMP varies from one year to 10 years. For example, the MAMP is five years in the case of ECB raised from foreign equity holders (i.e., Chinese investor) for working capital purposes, general corporate purposes or repayment of rupee loans, etc.

2. All-in-cost ceiling per annum and other costs: The all-in-cost ceiling per annum is provided to be 450 basis point spread. A prepayment charge or penal interest, if any, for default or breach of covenants, should not be more than 2% over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.

3. Negative List: ECB proceeds cannot be utilised for real estate activities, investment in the capital market, equity investment, working capital purposes (except as specifically permitted), general corporate purposes (except as specifically permitted), repayment of rupee loans (except as specifically permitted), on-lending to entities for the above activities (except as specifically permitted).

Conversion Of ECB Into Equity

The ECB loan agreements could contain an option for the Chinese investor to convert the ECB into equity later, after the expiry of MAMP, probably, when the approval requirements are relaxed by the Indian government.

Such a conversion, without seeking prior government approval, would be subject to various conditions, some of which are:

  • The activity of the Indian company is under automatic route for foreign investments;
  • Such conversion will require the consent of Chinese investors and without any additional cost;
  • Pricing guidelines for foreign investments;
  • The consent of the other lenders, if any, of the Indian company is obtained or at least they are kept informed; and
  • The exchange rate prevailing on the ECB agreement date or any lesser rate can be applied.
Why Does India Get Nonplussed By China?

Domestic Borrowing With Parent Support

Chinese investors can facilitate the domestic borrowings for an Indian company by providing a pledge of their shareholding in the Indian company to the domestic lenders including banks and non-banking financial companies. The Indian foreign exchange regulations permit such a pledge by the non-resident shareholder subject to the satisfaction of an authorised dealer bank of compliance with all regulatory requirements.

In this option, as the Chinese investor would not be investing in the Indian company, it will not be prohibited by the recent changes in the foreign exchange laws.


While the Indian government’s concern is understandable, no time was given to the Indian companies backed by Chinese investors to arrange for funding, particularly, during such a difficult time. Most Indian startups which were heavily dependent on Chinese funds for their working capital purposes are now looking at a lengthy approval process for getting such investments. In this situation, Chinese investors may explore and evaluate the options set out above as an alternative to seeking government approvals, for meeting the funding needs of Indian entities backed by them.

Bhavik Narsana and Atul Pandey are Partners at Khaitan & Co.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.