July 21, 2014
Pursuant to a circular dated July 15, 2014[1] and a notification ("RBI Notification")[2], the Reserve Bank of India ("RBI") has amended the pricing guidelines that are applicable for the issuance or transfer of equity shares, compulsorily convertible preference shares and compulsorily convertible debentures of unlisted Indian companies. No changes have been made to the pricing guidelines for the issuance or transfer of equity shares, compulsorily convertible preference shares and compulsorily convertible debentures of Indian companies listed on a stock exchange in India.
These amendments seek to provide greater freedom to parties to determine the pricing for equity instruments and to move to a more acceptable market-based approach for pricing, while ensuring that a non-resident investor is not guaranteed an assured exit price.
Amendments
The table below sets out the amendments brought about by the RBI Notification and a comparison between these and the earlier pricing requirements.
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Earlier Requirements |
Revised Requirements as per the RBI Notification
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Issuance of equity shares /compulsorily convertible debentures/compulsorily convertible preference shares to a non-resident |
The price to be paid by the non-resident should not be less than the price calculated based on the discounted free cash flow method, determined by a chartered accountant or a Category I merchant banker registered with the Securities and Exchange Board of India ("DCF Method"). |
The price to be paid by the non-resident should not be less than the fair valuation of shares determined as per an internationally accepted pricing methodology for valuation of shares on an arm’s length basis and certified by a chartered accountant or a merchant banker registered with the Securities and Exchange Board of India ("Fair Valuation Method").
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Transfer of equity shares /compulsorily convertible debentures/compulsorily convertible preference shares by a resident to a non-resident
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The price to be paid by the non-resident should not be less than the price calculated based on the DCF Method. |
The price to be paid by the non-resident should not be less than the price calculated based on the Fair Valuation Method.
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Transfer of equity shares /compulsorily convertible debentures/compulsorily convertible preference shares by a non-resident to a resident
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The price to be paid by the resident should not exceed the price calculated based on the DCF Method. |
The price to be paid by the resident should not exceed the price calculated based on the Fair Valuation Method. |
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Transfer of equity shares by a non-resident to a resident pursuant to the exercise of a put option |
The price to be paid by the resident should not be more than the price determined based on ‘return of equity’ ("ROE") as per the last audited balance-sheet of the Indian company. ROE was defined as profit after tax / net worth (including all free reserves and paid up capital).
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The price to be paid by the resident should not exceed the price determined as per the Fair Valuation Method. |
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Transfer of compulsorily convertible debentures or compulsorily convertible preference shares by a non-resident to a resident pursuant to the exercise of a put option |
The price to be paid by the resident should not exceed the price determined as per the Fair Valuation Method. |
No Change |
The balance sheet of the Indian company whose equity shares, compulsorily convertible preference shares or compulsorily convertible debentures are transferred, should disclose the details of valuation and pricing methodology adopted for such transfer.
[1] A.P. (DIR Series) Circular No. 4, Reserve Bank of India.
[2] Notification No. FEMA 306/2014 -RB.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Singapore office:
Jai S. Pathak (+65 6507 3683, [email protected])
Priya Mehra (+65 6507 3671, [email protected])
Bharat Bahadur (+65 6507 3634, [email protected])
Karthik Ashwin Thiagarajan (+65 6507 3636, [email protected])
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