In its first Bi-monthly Monetary Policy Statement, 2014-15, the RBI has expressed its intention to remove all applicable pricing guidelines that were hitherto applicable to acquisition and sale of shares by foreign investors. The RBI until 2010 had prescribed pricing guidelines for acquisition and sale of shares by foreign investors in unlisted India companies based on the formula prescribed by the erstwhile Controller of Capital Issues. Subsequently, in 2010, the RBI introduced the DCF Method i.e. the discounted cash flow valuation method which took into account the future performance potential of a particular company. Recently, the RBI prescribed the RoE (Return on Equity) based pricing method for options.
However, in a rather unexpected move, the RBI has decided to shift from the existing model to a model where under the pricing in relation to transactions of acquisition and sale would be based on acceptable market practices. This change is a part of several other changes that the central bank seeks to implement in the interest of attracting long term investors.
The move has been a pleasant surprise for a lot of investors and is expected to give the required impetus to inbound investment. However, the RBI has informed that operating guidelines will be notified separately and one would have to wait until such guidelines are notified in order to evaluate the actual implication of this decision. On a broader level, the inclination of the regulator to move towards a more liberalised regime has brought a sigh of relief to most and hopefully this attitude would be reflected in other changes in relation to foreign investments that may be seen in the near future.