Changes to India's withholding tax regime will raise borrowing costs for Indian companies seeking funds from foreign investors by 30 to 40 basis points, according to J.P. Morgan analysts.

According to Corporate Research analyst Aman Aggarwal, the change may have a negative impact on the supply of funds because issuers may seek liquidity in the onshore market at competitive rates.

"The majority of the companies that will be affected are Indian renewable names." According to Aggarwal, "the majority of Indian renewable bond structures involve an offshore Special Purpose Vehicle (SPV) that issues USD bonds and on-lends the proceeds to onshore subsidiaries."

He also stated that costs for Mauritius-based SPVs would rise by 10 to 20 basis points. Indian companies can currently raise funds from foreign investors through External Commercial Borrowing (ECB) and Foreign Portfolio Investments (FPI). The tax change impacts the latter.

Since 2013, foreign portfolio investors have benefited from a lower 5% tax on bond interest, making investments in the country more appealing. This exemption expired on July 1, forcing them to pay a 20% tax on interest income.

Despite the change, foreign portfolio investors (FPIs) purchased Indian shares worth 466.18 billion rupees ($5.63 billion) on a net basis in July, according to data from the National Securities Depository Ltd (NSDL).