Volume 2, Issue 1


7th May, 2010


Business Alert
Revised Pricing Guidelines for Transfer and Issue of Shares

Foreign Direct Investments (FDI) into India are subject to Pricing Guidelines prescribed by Reserve Bank of India (RBI). As per these guidelines, a Benchmark Price is determined as per the valuation method prescribed.

By way of Notification No. FEMA205/2010‐RB dated 7th April 2010 and Circular No. 49 dated 4th May 2010, the Reserve Bank of India (RBI) has amended the FDI Regulations regarding pricing guidelines. These notifications are in force from the date of its publication in the Official Gazette i.e. 21st April 2010.

The guidelines in relation to transfer or issue of shares from a resident to a nonresident and for transfer of shares from a non‐resident to a resident have been amended for listed and unlisted shares. These changes have been summarized below:

Transfer or Issue of Shares by a Resident to a Non‐Resident
Type of Shares
Previous Guidelines
Revised Guidelines
Listed Companies – Transfer of Shares by a resident to a nonresident In principle, the previous guidelines prescribed valuation around the prevailing market price Price for transfer shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines.
Unlisted Companies – Issue/Transfer of Shares, Preferential Issue of Shares Price of shares should not be lower than the fair valuation arrived at by a chartered accountant as per ex‐ CCI valuation. Price of shares should not be lower than the fair valuation done by a SEBI registered Category‐1 Merchant Banker or a Chartered Accountant as per Discounted Cash Flow (DCF) method.
 
Transfer or Issue of Shares by a Non‐Resident to a Resident
Type of Shares
Previous Guidelines
Revised Guidelines
Listed Companies – Transfer of Shares by a non‐resident to a resident In principle, the previous guidelines prescribed valuation around the prevailing market price Price for transfer shall not be higher than the price at which a preferential allotment of shares can be made under the SEBI Guidelines.
Unlisted Companies – Transfer of Shares Where the share consideration was less than Rs. 2 million, any valuation methodology. For larger size transactions, at a price not more than the lower of two independent valuations, one by a statutory auditor and the other by a Chartered Accountant or Category I Merchant Banker registered with SEBI. The transfer of shares shall be at a price not more than the fair value to be determined by a SEBI registered Category‐I‐Merchant Banker or a Chartered Accountant as per the DCF method.
 

Our Comments

  • Suitability of the approaches for valuations depends upon various conditions prevailing in each case. The DCF method is based on the premise that the value of a Company is a direct function of the cash generating ability of its business. In certain situations, in order to reach the Fair Value, other approaches like the Asset Approach or Market Comparables Approach may be more appropriate than the DCF method. However the amended Pricing Guidelines have not specifically permitted the use of any other approach.
  • In relation to issue or transfer of shares from a resident to a non‐resident, the guidelines prescribe a minimum valuation. In the past, the CCI method usually used to result in a lower valuation and parties were free to agree on a price higher than that determined as per CCI Guidelines. However, now with DCF being prescribed, the valuation may turn out to be even higher than the commercial consideration agreed between parties on an arm’s length basis. In such situations, the regulations may make certain transactions prohibitive if one truly follows the method prescribed.