Pursuant to the notification dated May 23, 2014 (which came into effect from July 8, 2014, being the date of publication in Official Gazette of India), RBI has replaced the Discounted Cash Flow (“DCF”) pricing / valuation methodology of equity shares with any internationally accepted pricing methodology for valuation of shares on arm’s length basis.

New pricing norms

With effect from July 8, 2014, the valuation inter alia in case of (a) issue of equity instruments by unlisted entities to non residents under the FDI route and (ii) transfer of shares of unlisted entities having exit rights like put option under the FDI route have to be done as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

Pursuant to the said circular, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) have been suitably amended. 3. Comments and Analysis

The aforesaid transition from DCF method to any internationally accepted pricing methodology was first indicated under para 24 of RBI’s first bi-monthly monetary policy statement, 2014-15 issued on April 1, 2014 by the RBI, wherein it was decided to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares and accordingly and such transactions were henceforth proposed to be based on acceptable market practices. However, the said statement mentioned that the operating guidelines would be notified separately.

Subsequently, pursuant to the aforesaid notification of May 23, 2014 (which was published in the Gazette on July 8, 2014), RBI brought the change. Strangely, while the said notification (post publication in the Gazette) was displayed on the website of the Official Gazette of India on July 8, 2014, the same (to the best of our knowledge) was not put up on the website of RBI till July 14, 2014 (under the notification link of RBI’s website for both the dates).

Anyways, this move of RBI is of course a positive change considering that parties have the flexibility to adopt any internationally accepted pricing methodology for valuation of shares and frees them from the rigidity of following the DCF valuation.

While the pricing for issue of shares has been changed as above, there is no corresponding change effected for transfer of shares from a resident to a non resident (for instruments without any exit rights like put and call options) and is apparently a drafting anomaly which may be expected to be clarified by RBI.

About Bulwark Solicitors

Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.


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