The Reserve Bank of India (RBI) has issued a Notification no. FEMA 205/2010-RB dated 7 April 2010 which has amended the pricing norms for issue of shares by an Indian company to a person resident outside India. This Notification comes into force from date of its publication in the Official Gazette i.e. 21 April 2010.
Key amendments brought out by the said Notification are as under:
1) Right Issue
The FEMA Regulation (Regulation 6(2)(iv) of Notification No. FEMA 20/2000-RB dated May 3, 2000) dealing with the pricing of the equity shares or preference shares or convertible debentures offered by an Indian company on ‘right basis’ to persons resident outside India has been changed as under:
| Old provisions | New provisions |
| The offer price for equity shares or preference shares or convertible debentures on right basis is not lower than that at which the offer is made to resident shareholders | (a) If the shares of a Company are listed on a recognised stock exchange in India, then the offer on right basis can be at a price determined by the Company(b) If the shares of a Company are not listed on a recognised stock exchange in India, then the offer on right basis will not be less than the price offered to resident shareholders. |
Our Comments: The new provisions do not incorporate pricing for convertible debentures offered by an Indian company on ‘right basis’ to persons resident outside India.
2) Other Issue
Schedule 1 to the FEMA Notification3 deals with Foreign Direct Investment (FDI) Scheme. The provisions4 dealing with pricing of shares issued to persons resident outside India by an Indian company have been changed as under:
| Old provisions | New provisions |
| (a) If issuing company is listed on any recognised stock exchange in India, then the price of such shares will not be less than the price worked out in accordance with Securities Exchange Board of India (SEBI) Guidelines | a) If shares of the company are listed on any recognised stock exchange in India, then the price of such shares will not be less than the price worked out in accordance with SEBI Guidelines; |
| (b) For all other cases, the price of the such shares will not be less than fair valuation done by Chartered Accountant (CA) as per the guidelines issued by the erstwhile Controller of Capital Issues | b) If the shares of the company are not listed on any recognised stock exchange in India then the price of such shares will not be less than the fair valuation of shares done by a SEBI registered Category-I Merchant Banker or a CA as per the Discounted Free Cash Flow (DCF) Method; and |
| (c) If the issue of shares is on Preferential Allotment then the price of such shares will not be less than the price as applicable to transfer of shares from resident to non? resident as per the RBI pricing guidelines |
Our Comments:
- It is not clear if the provision relating to issue of shares on Preferential Allotment also relates to listed companies.
- The Notification does not clarify on grandfathering of existing investments in convertible instruments issued before 21 April 2010.
- The Notification does not clarify the position for convertible instruments under the recent Consolidated FDI Policy dated 31 March 2010. The said Policy clarified that conversion price into equity with respect to convertible capital instruments should be determined upfront at the time of issue of such instruments.
- There are no specific parameters (such as discount rate, Weighted Average Cost of Capital, growth rate, no. of years of cash flow, etc.) prescribed for the DCF method.
- It is expected that the RBI will come out with a Circular and throw more light on the amendments.
if a company is newly formed and the shares are subscribed by a Foreign company operating from outside india, whether the new pricing norms issued by RBI will apply.