Flexibility in pricing of Shares, issued to Non-residents- Clarity still missing!

Flexibility in pricing of Shares, issued to Non-residents under FDI Scheme by unlisted Indian Companies, granted, however, clarity still missing!!!!

In case of unlisted Indian Companies issuing Shares to Non-residents, issue price should not be less than the Fair Value of Shares determined by a Chartered Accountant as per Discounted Free Cash Flow (DCF) Method. This was the stance as per RBI Master Circular No. 15/2013-14 which says “Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be :

• on the basis of SEBI guidelines in case of listed companies.
• not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted companies.”

Discounted Free Cash Flow (DCF) method lacked accuracy due to data required for computation of Fair Value of Shares which, in most cases, was either not adequately applicable or not available. It’s primarily based on Projections which have uncertainty built-in so the Fair Value arrived at isn’t the Fair Value of Shares in most cases but because this requirement was imposed by RBI so the same had to be complied with.

However, RBI has relaxed the requirement of Fair Valuation of Shares on the basis of DCF method vide its Master Circular No. 15/2014-15 where it says “Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be :

• on the basis of SEBI guidelines in case of listed companies.
• not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per as per any internationally accepted pricing methodology on arm’s length basis.”

Thus, though the aforementioned requirement to value Shares on the basis of DCF method has been done away and substituted with any internationally accepted pricing methodology on Arm’s length basis but still the clarity w.r.t. the same is missing. There is no clarity regarding the pricing methods which are considered as internationally accepted by RBI.

The main point is that when Reserve Bank of India can issue guidelines w.r.t. pricing compliance, as mentioned above, then why can it not provide clarity as to which pricing method would it consider as internationally acceptable in the light of current scenario and requirements so that the respective professionals, Chartered Accountants in this case, get the due clarity.

Such valuation reports have become a mere formality as the respective official accepting such reports pays more attention to its format rather than its substance.

Various Government agencies emphasise that Chartered Accountants need to improve the quality of their work, though they are correct to an extent but, among others, Chartered Accountants are not the only ones responsible for it because various guidelines which are being issued by the respective Government departments carry an element of ambiguity which later on becomes the bone of contention leading to confusion, wastage of time and chaos.

Thus, request RBI to provide clarity w.r.t. the internationally accepted pricing methodologies so as to enable us to move in the right direction without wasting time and energy thereby empowering us to improve our efficiency and quality in terms of work.