Background

  • The Pricing Guidelines for the issue of shares by an Indian Company to a non resident is governed by the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2000.
  • As per the aforesaid regulations, pricing norms for issue of shares by an Indian Company to non-resident were as under:

– In case of listed shares – as per Securities and Exchange Board of India (SEBI) guidelines

– In case of unlisted shares – at fair valuation done by a Chartered Accountant as per the erstwhile Controller of Capital Issues (CCI) guidelines

  • The pricing norms for rights issue of shares by an Indian Company to non-resident shareholders were as under:

– At a price not lower than the price at which such shares are offered to resident shareholders.

Changes in pricing guidelines

Reserve Bank of India (RBI) has, by a notification dated 7 April 2010 amended the FDI Regulation with regard to pricing guidelines. The amendments are made effective from 21 April 2010. The highlights of the amendments are as under:

  • Pricing norms for issue of shares by an Indian Company to non-resident are as under:

– In case the shares of a company are listed on a recognized stock exchange in India, the price would need to be worked out in accordance with the SEBI guidelines as applicable.

– In case the shares of a company are not listed on a recognized stock exchange in India, the fair valuation of shares would be undertaken by a SEBI registered Merchant banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.

– Where the issue of shares is on a preferential allotment basis, the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by RBI from time to time.

  • Pricing norms for rights issue of shares by an Indian Company to non-resident shareholders are as under:

– In case of the shares of a company listed on a recognized stock exchange in India, at a price determined by the company

– In case of the shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which offer on right basis is made to resident shareholders.

Conclusion

  • The pricing in regard to issue and transfer of shares to non-residents were governed by the CCI guidelines. Theses have been replaced with the discounted cash flow method which is based on the future earnings. However, RBI has made a distinction in pricing with respect to issue of shares on preferential basis as compared to normal issue as the same would be covered by the RBI guidelines to be prescribed.
  • The interplay between issue of valuation rules guiding the determination of fair value of unlisted shares for the purposes of section 56 (i.e. gifts) based on book value/ historic method and the pricing guidelines under FEMA based on DCF are bound to create some confusion for investors.

Source: Notification No. GSR 341 (E) FEMA 205 /2010 – RB dated 7 April, 2010 issued by RBI.

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