New Pricing Regulations
On 4th May, 2010, the Reserve Bank of India has issued Circular Number 49 amending the pricing guidelines that are applicable to transfer of shares (and Preference Shares and Debentures mandatorily convertible to equity shares) fr
Salient features of the notification are enumerated below:
I. Pricing guidelines as applicable to transfer of shares to non residents Investor
The circular now clarifies that on issue of shares by a resident investor to a non resident the price should not be lower than
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Valuation Criteria |
Valuation Method |
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For Companies whose shares listed on a recognized stock exchange |
the price at which a preferential allotment of shares can be made in accordance with the applicable SEBI guidelines |
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For Companies whose shares not listed on a recognized stock exchange |
the fair valuation of shares, which is required to be undertaken by a SEBI registered Category-I Merchant Banker or a Chartered Accountant, in accordance with Discounted Free Cash Flow (‘DFCF’) method |
II. Pricing guidelines applicable to transfer of shares from non resident to resident
The circular now explains that a non-resident shall transfer shares to a resident at a price, which shall not be more than the minimum price as prescribed in the case of transfer of shares from a resident to a non-resident. More specifically:
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Valuation Criteria |
Valuation Method |
|
For Companies whose shares listed on a recognized stock exchange |
the price at which a preferential allotment of shares can be made in accordance with SEBI Guidelines |
|
For Companies whose shares not listed on a recognized stock exchange |
the valuation of shares to be undertaken by SEBI registered Category I Merchant Banker or a Chartered Accountant, as per the DFCF method |
Impact of Notification
The new circular projects that RBI has discarded the CCI valuation methodology and adopted a more contemporary Discounted Cash Flow methodology. While, DFCF method is considered to be more scientific and relevant for valuation of shares, CCI methodology is based largely on historical performances wherein the differences in valuation are normally within an acceptable range. This is a welc
For the valuation of shares acquired by resident through a non resident In the context of a resident acquiring shares from a non-resident, there is a possibility that the ceiling on price stipulated by the Circular could be lower than the price computed in accordance with the methodology prescribed by the Central Board of Direct Taxes (‘CBDT’) vide its Notification dated April 8, 2010 for computing the fair value to shares. Considering the same, there could be situations where tax liability arises simply because of the limits laid down under the exchange control regulations which will not be fair and needs to be looked into.
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