In our previous article, we asked where in India to set up. This one asks how to fund what has been established. The default answer, given in almost every India entry conversation, is straightforward: the parent injects equity — typically USD 1 million, sometimes more — the shares are issued, and the funding conversation closes.
That default is often right, but it hides the real decision. Capital structure is the mix of equity, debt, and intercompany credit — and the timing of each. It shapes tax outcomes, working capital flexibility, and how the entity is perceived by tax and regulatory authorities for years.
Four routes exist. Well-structured entities usually use two or three in combination. We come to each below.
Equity Injection
The parent subscribes to shares of the Indian entity in exchange for capital. Under India's automatic FDI route, no prior government approval is needed for most sectors, subject to sectoral caps and the specific rules for investments originating from land-border countries. Reporting is straightforward — Form FC-GPR filed with the Reserve Bank of India within thirty days of share allotment. Equity is the simplest structure to set up and the most defensible from a tax perspective. It gives the subsidiary the strongest capitalisation profile for banking credit, vendor payment terms, and government tenders. The trade-off: capital repatriation is possible but slower. Dividends attract tax at the parent level, and buybacks are subject to timing and holding-period rules.
External Commercial Borrowings
The parent lends to the subsidiary at arm's-length interest rates. The subsidiary pays interest and repays principal over the agreed tenor. Under the revised ECB framework introduced in early 2026, borrowings from a foreign parent are expressly permitted on an arm's-length basis, automatic-route limits have been substantially increased, and the earlier all-in-cost and prepayment ceilings have been removed. This has made ECB a materially more usable route for foreign-owned subsidiaries than it was even eighteen months ago. The key advantage is repatriation flexibility — interest and principal payments are routine cross-border remittances, unlike dividends. The trade-off: interest must be defensible on transfer pricing grounds, minimum maturity and end-use rules apply, and RBI reporting is ongoing.
Intercompany Trade Credit
Where the Indian subsidiary imports goods or services from the parent, deferred payment terms function as a working capital line. Trade credit under FEMA is permitted up to defined tenor limits without prior approval, and requires no formal loan documents — just extended payment cycles built into intercompany invoicing. This is the lightest-touch route for short-term funding needs. The trade-off: it only works where genuine trade exists between parent and subsidiary. Tax authorities examine intercompany trade credit closely for transfer pricing, so both the pricing of the underlying goods or services and the credit period itself must be defensible against independent-party comparisons.
Convertible Instruments
Compulsorily Convertible Preference Shares and Compulsorily Convertible Debentures sit between equity and debt. They are debt-like on issue but convert into equity within a fixed period on pre-agreed terms. FDI rules treat them as equity for foreign investment purposes while allowing features like preferred dividends, downside protection, and predetermined conversion ratios. This makes them useful when board control, valuation timing, or exit rights need calibration — most often in joint ventures with Indian partners, or where the parent wants an equity-like exposure with structural safeguards. The trade-off: greater documentation complexity, higher legal costs, and ongoing FEMA reporting. For a straightforward wholly-owned subsidiary, they are usually unnecessary.
Three questions that resolve most cases
- How long is the runway?Equity fits capital the parent expects to leave in India for years — base working capital, capex, or patient growth. ECB fits medium-term needs where structured repayment matters. Trade credit fits short-term operating requirements. The right mix follows the shape of the actual funding need.
- What is the repatriation priority?If profits will eventually flow back as dividends, equity works. If regular cross-border cash flow to the parent matters — to service parent-level obligations or return capital predictably — ECB's structured interest and principal payments are more responsive.
- How much documentation complexity is workable?Equity is simplest to establish and maintain. Trade credit is next. ECB and convertible instruments require legal documentation, board resolutions, and ongoing reporting. First-year bandwidth is often the binding constraint.
The two expensive mistakes
Two errors drive most of the avoidable cost. The first is under-capitalisation. There is no statutory minimum capital requirement in India for private limited companies, and some foreign parents inject only the minimum needed to start operations, planning to top up later. Under-capitalised subsidiaries attract tax department scrutiny, struggle to secure vendor credit terms, and fall short on capital adequacy thresholds required for government tenders. The correction is expensive and resets transfer pricing conversations. The second error is over-reliance on a single instrument. All-equity structures repatriate slowly. All-debt structures create constant interest servicing pressure. A blended structure — equity for base capitalisation, ECB or trade credit for working capital elasticity — matches how well-run subsidiaries actually operate.
Why this decision follows the others
Decision One asked whether an entity is needed. Decision Two asked which structure fits. Decision Three asked where to sit. Decision Four asks how to fund what has been built. All four are strategic decisions in operational clothing. Capital structure is not the sign-off on a wire transfer amount. It is the design of how money enters, sits in, and eventually leaves the Indian entity — across tax, treasury, and regulatory dimensions that compound over years. What remains is the question of who runs day-to-day compliance once the entity is live. That is where the final article takes the series.
The decision in one paragraph
Foreign companies funding an Indian subsidiary face four routes that matter more than the single-number default: equity injection (simplest, most defensible, slowest to repatriate), External Commercial Borrowings (now materially more usable after RBI's 2026 liberalization, structured for regular cross-border cash flow), intercompany trade credit (lightest-touch, only works where genuine trade exists), and convertible instruments (useful when board control or exit rights need calibration, usually unnecessary for wholly-owned subsidiaries). Most well-run subsidiaries blend two or three. The two expensive mistakes are under-capitalisation and over-reliance on a single instrument.