Impact of revised pricing guidelines

The Reserve Bank of India (RBI) recently amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 (FEMA Regulation) with respect to the issue price for a preferential issue of shares by unlisted companies in India. The amendment came into effect on 21 April.

In terms of the amendment the minimum issue price for a preferential issue of shares should be the higher of (i) the fair valuation of shares computed by a chartered accountant or a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) in accordance with the discounted free cash flow (DCF) method and (ii) the price applicable to transfer of shares from residents to non-residents in accordance with the pricing guidelines issued by the RBI from time to time.

Until now, shares of unlisted companies transferred to non-residents were priced according to the guidelines issued by the erstwhile Controller of Capital Issues (CCI). However, the revised pricing guidelines for the transfer of shares, preference shares and convertible debentures issued by the RBI on 4 May, does away with the need for two valuations for preferential issues by unlisted companies and introduces the DCF method in place of the CCI guidelines.

Pooja Ramchandani is a senior associate at Amarchand & Mangaldas & Suresh A Shroff Co.