The Reserve Bank of India recently revised the pricing guidelines with respect to issue and transfer of shares under the FDI Policy. Earlier, in unlisted companies, the floor price was computed on the basis of valuation done as per Discounted Free Cash Flow method by a merchant banker or a chartered accountant.  This requirement has now been done away with. Now, in case of issue of shares to non-resident by unlisted company, transfer of shares by an unlisted resident company to a non-resident or in transfer of shares by a non-resident to a resident unlisted company, the issue or the transfer price must be based on fair valuation of shares computed in accordance with any internationally accepted pricing methodology on arm’s length basis. The price calculated must be duly certified by a chartered accountant or a merchant banker. The non-resident investor at time of their exit may sell their securities at a fair price computed as above.

In listed companies, the transfer or issues of shares, including CCPS and CCDs, shall be as per SEBI guidelines. Also, in shares with optionality clauses, the non-resident investor can exit at the market price prevailing on the recognised stock exchanges subject to the stipulated lock-in period.

This is a positive shift, moving away from a strict and often rigid formula which at times restricted genuine commercial activity. Instead the new norm allows a more flexible and business friendly principles based valuation methodology.

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Date:September 28, 2015