Central bank liberalizes foreign investment norms

The Reserve Bank of India (RBI) has recently brought about significant changes to exchange control norms which are likely to contribute greatly towards facilitating foreign investments into India and providing commercial freedom to parties in structuring cross-border transactions.

Pricing guidelines eased

The RBI has had a series of flip-flops in the past over guidelines on pricing for acquisition/transfer of shares in an Indian company by non-resident investors, which have ranged from norms based on the discounted cash flow (DCF) method to norms, in relation to foreign direct investment (FDI) instruments with optionality clauses, based on return on equity (RoE).However, the RBI, in line with its latest policy statements, has now decided to take a leap of faith by permitting parties to select any internationally accepted pricing methodology to govern their transactions in respect of unlisted securities, so long as the transaction is on an arm’s length basis. Further, the RBI has retained its fundamental philosophy that a non-resident investing in an FDI instrument should not be granted any assured exit price.

The new guidelines are a noteworthy step toward capital account convertibility for India. The earlier pricing restrictions were a major irritant for foreign investors who struggled to relate to and comply with the rigid framework prescribed by the RBI. These norms were also often taken advantage of by Indian entities subsequently wishing to renege on their contractual commitments.

Luthra & Luthra Law Offices is a full-service law firm with offices in New Delhi, Mumbai and Bangalore. Sundeep Dudeja is a partner and Varsha Nair is an associate at the firm.