Business / Industry Sectors
Doing Business in India: Types of securities
28/04/2013

Types of securities

 

The primary types of securities used in foreign investments into India are:

 

  • Equity Shares - Normal shares in the share capital of a company that typically come with voting rights and dividend rights. A private company may issue shares that have weighted voting rights or no voting rights at all.

 

  • Preference Shares - Shares which carry a preferential right to receive dividends at a fixed rate as well as preferential rights during liquidation as compared to equity shares. Convertible preference shares are a popular investment option. Preference shares may be redeemable.

 

  • Debentures - Debt securities issued by a company, and typically represent a loan taken by the issuer company with an agreed rate of interest. Debentures may either be secured or unsecured. Like preference shares, debentures may also be convertible.

 

Extracting earnings out of India can be done in numerous ways. However it is essential to consider the tax and regulatory issues around each exit:

 

  • Dividend

Companies in India, as in other jurisdictions, pay their shareholders dividends on their shares, usually a percentage of the nominal or face value of the share. For a foreign investor holding an equity interest, payment of dividend is as straight forward way of extracting earnings. However, the dividend distribution tax borne by the company distributing such dividend may not necessarily receive credit against any direct tax payable by the foreign investor who receives such dividend in its home jurisdiction.

 

  • Buyback

Buyback of securities provides an investor the ability to extract earnings as capital gains and consequently take advantage of tax treaty benefits. However, buybacks in India have certain restrictions and thus need to be strategically planned.

 

  • Redemption

Preference shares and debentures can both be redeemed for cash. While redemption is perhaps the most convenient exit option for investors, optionally convertible securities, which are effectively redeemable, have been classified as ‘external commercial borrowing’ (ECB).

 

  • IPO

An IPO is the first offer for sale of the shares of a company to the public at large via listing the company’s stock on a stock exchange.

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