Most companies (foreign or Indian) provide funding to their
subsidiary through equity. This is first as initial capital and
then rounds of subsequent capital until the subsidiary becomes
self-sustaining. However the problems of equity funding become
apparent at a later stage, when for all practical purposes, the
money is locked in. Problems of equity funding include:
1. Restrictions and taxes on dividend
The Companies Act 2013 restricts the payment of dividend and the
Income Tax Act 1961 applies taxes on dividend paid. The company
issuing dividend also pays Dividend Distribution Tax (DDT).
The Companies Act places a limit on the amount that can be paid
as dividend in a year (as a % of net worth). This is to ensure
value is not eroded. The Income Tax Act applies a stated tax rate
of 15% which translates to an effective tax rate of over 20% on the
dividend amount (on applying the grossing-up provisions). So, when
considering cash reserves available for dividend,
