The salient features of the New Notification are enumerated below. I have tried to capture the difference between the regulations as they exist now vis-à-vis after the issue of the New Notification.
I. PRICING GUIDELINES AS APPLICABLE TO ISSUE OF SHARES TO NON RESIDENTS
Current position
The current provisions state that an Indian company must issue shares to non resident investors at a minimum price which should not be lower than:
|
Valuation Criteria |
Valuation Method |
|
For Companies whose shares are listed on a recognized stock exchange |
Price worked out in accordance with the applicable Securities and Exchange Board of India (‘SEBI’) guidelines |
|
For Companies whose shares are not listed on a recognized stock exchange |
Fair valuation of shares, which is required to be undertaken by a Chartered Accountant to determine the price in accordance with the erstwhile Controller of Capital Issues (‘CCI’) Guidelines |
Provisions specified under the New Notification
The New Notification now mandates that the price on issue of shares by an Indian company to a non resident should not be lower than:
|
Valuation Criteria |
Valuation Method |
Change from existing provisions |
|
For Companies whose shares listed on a recognized stock exchange |
Price worked out in accordance with the applicable Securities and Exchange Board of India (‘SEBI’) guidelines |
No Change |
|
For Companies whose shares not listed on a recognized stock exchange |
Fair valuation of shares required to be undertaken by a SEBI registered Categoryâ€I Merchant Banker or a Chartered Accountant, in accordance with Discounted Free Cash Flow (‘DFCF’) method |
· SEBI category merchant bankers can also carry out the valuation in addition to Chartered Accountants · DFCF method of valuation replaces the CCI guidelines |
|
Preferential Allotments |
Price as computed under transfer of shares from resident to non resident in accordance with the RBI guidelines issued from time to time. |
RBI has not prescribed any new guidelines in this relation. As per the current regulatory framework, the CCI guidelines are to be applied for transfer of shares of Indian unlisted companies from Indian residents to nonâ€residents. |
Author’s Insights
The CCI guidelines for the valuation of shares of unlisted companies use conservative method of valuation by considering an average of the Net Asset Value (‘NAV’) of the company and the company’s Profit Earning Capacity Value (‘PECV’), which was arrived at based on its past financial performance. Whereas the notification instead specifies DFCF method which is based on future free cash flows. Since the valuation of shares is a future oriented practice, DFCF method is more appropriate as compared to CCI Guidelines. Also price to be computed using the DFCF method would normally be higher than that computed under the erstwhile CCI guidelines.
II. PRICING GUIDELINES APPLICABLE TO RIGHTS ISSUE
Current Position
The FEMA regulations required that if an Indian company issues shares by way of right issue to a non resident then the price of such shares should not be less than the price at which such offer of right issue is made to an Indian resident investor.
Provisions specified under the New Notification
The New Notification now mandates that in case of right issue of shares by an Indian company to a non resident the price should not be lower than:
|
Valuation Criteria |
Valuation Method |
|
For Companies whose shares listed on a recognized stock exchange |
Price as determined by the company |
|
For Companies whose shares not listed on a recognized stock exchange |
Price at which such offer of right issue is made to Indian resident investors |
Author’s Insights
The New Notification gives more realistic approach to the pricing of right issue. Now the price of the right issue of listed shares would be determined on the basis of prices of such shares at the time of issue, which gives more appropriate basis of pricing.
Grey Areas
Some areas have been left untouched by the New Notification and require greater clarity from the government:
· In relation to pricing of shares, the New Notification defines three methodologies; it is unclear whether these methodologies are to be read independently or cumulatively.
· The meaning and scope of a preferential allotment, particularly in the case of a private limited company is not spelt out and consequently the treatment of cases that would not qualify as a preferential allotment is also unclear.
· The status of the applicability of pricing guidelines on share application money received but pending allotment on the effective date of notification is not clear.
_______
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 the participants get through BIG4s, MNCs and top Law Firms.
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