New Pricing Regulations for Issues of Shres to Non Residents

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) from Indian residents to persons resident outside India (‘non-residents’) and vice-versa, as stipulated in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations (hereinafter referred to as the new circular) clarifying the doubts on pricing guidelines for transfer of shares.

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

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:

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 welcome move from Reserve Bank since DFCF method is less exposed to market fluctuations and is based on the underlying characteristics of the firm. However, DFCF method produces results which are only as reliable as the assumptions and can often be manipulated with ease.

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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The Author is Chartered Accountant and a licentiate Company Secretary and is a Partner with NMA, a boutique CA Firm.  He has more than 8 years of experience in Tax and Regulatory matters and has also worked with Deloitte Haskins & Sells.  Nirav is also a Lead Advisor to Promaynov (www.promaynov.com), a firm engaged in providing executive training and mentoring programmes to CAs and Lawyers which helps them hone their skills to compete with the best in the industry.