Entry India - Pricing Guidelines of Foreign Direct Investments (FDI) in India under different statues - Part 2

 

Pricing guidelines

 

Price of shares issued to persons resident outside India by company under the FDI Policy, shall not be less than:

(a)      the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company are listed on any recognised stock exchange(RSE) in India;

(b)      the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India;

 

EQUITY instruments issued on or after December 30, 2013 can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

 

Transfer by a person resident outside India of capital instruments containing an optionality clause:

A person resident outside India holding capital instruments of an Indian company containing an optionality clause in accordance with FEMA 20(R) and exercising the option/ right, can exit without any assured return, subject to the pricing guidelines prescribed under FEMA 20(R) and a minimum lock-in period of one year or minimum lock-in period under FEMA 20(R), whichever is higher.

Capital instruments transferred by a person resident outside India to a person resident in India:

The guiding principle would be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at the price prevailing at the time of exit.

 

Fresh issue of shares: 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.

The above pricing guidelines are also applicable for issue of shares against payment of lump sum technical know how fee / royalty or conversion of ECB into equity or capitalization of pre incorporation expenses/import payables (with prior approval of Government).

Preferential allotment: In case of issue of shares on preferential allotment, the issue price shall not be less that the price as applicable to transfer of shares from resident to non-resident.

Issue of shares by SEZs against import of capital goods:
In this case, the share valuation has to be done by a Committee consisting of Development Commissioner and the appropriate Customs officials.



Right Shares: The price of shares offered on rights basis by the Indian company to non-resident shareholders shall be;


i.    In the case of shares of a company listed on a recognised stock exchange in India , at a price as determined by the company.

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

Acquisition/ transfer of existing shares (private arrangement).


The acquisition of existing shares from Resident to Non-resident (i.e. to incorporated non-resident entity other than erstwhile OCB, foreign national, NRI, FII) would be at a;

(a) negotiated price for shares of companies listed on a recognized stock exchange in India which shall not be less than the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable, provided the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares. The price per share arrived at should be certified by a SEBI registered Merchant Banker or a Chartered Accountant.
(b) negotiated price for shares of companies which are not listed on a recognized stock exchange in India which shall not be less than the fair value to be determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow(DCF) method.
Further, transfer of existing shares by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign national, NRI, FII) to Resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident as given above.

The pricing of shares / convertible debentures / preference shares should be decided / determined upfront at the time of issue of the instruments. The price for the convertible instruments can also be a determined based on the conversion formula which has to be determined / fixed upfront, however the price at the time of conversion should not be less than the fair value worked out, at the time of issuance of these instruments, in accordance with the extant FEMA regulations.



Price of shares transferred by a person resident in India to a person resident outside India or Vice versa should not be less than: (Refer to Rule 21)

(a)      the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company; or

(b)      the price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable

(c)      the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company

[1][Explanation: In case of convertible equity instruments, the price or conversion formula of the instrument should be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with these rules.]

(3)      The guiding principle would be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at the price prevailing at the time of exit.

(4)      In case of swap of capital instruments, irrespective of the amount, valuation will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

(5)      In case of share warrants, their pricing and the price/ conversion formula shall be determined upfront.

(6)      In case of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps

(7)      The pricing of the partly paid equity shares shall be determined upfront.

(8)      The pricing guidelines will not apply for investment in capital instruments by a person resident outside India on non-repatriation basis.

(9)      The pricing guidelines will not be applicable for any transfer by way of sale done in accordance with SEBI regulations where the pricing is prescribed by SEBI. A Chartered Accountant’s Certificate to the effect that relevant SEBI regulations/ guidelines have been complied with has to be attached to the form FC-TRS filed with the AD bank.

(10)    If a Company going through delisting process the pricing of shares should be as per SEBI (Delisting of Equity Shares) Regulations, 2009.

(11)    In case of Transfer of shares from Resident to Non-Resident Price of shares shall not be less than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis

(12)    In case of Transfer of shares from Non-Resident to Resident Price of shares shall not be more than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis

(13)    Pricing not applicable for transfers between two Non-Residents

RBI vide circular 4 dated 15 July 2014, has replaced the DCF valuation norms with Internationally Accepted Pricing Methodology on an arm’s length basis (e.g. unlike section 56(2)(vii) under Income-tax Act, Wealth Tax, Transfer Pricing, CCI, SEBI for Preferential allotment, Stamp Duty). In spite of DCF being made non-mandatory, DCF method will continue to remain the mainstay in all valuations

 

 

[1]          Ins. w.r.e.f 17-10-2019, by the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019, vide S.O. 4355(E), dt. 5-12-2019.