Fair value norms for share transactions by foreign investors eased

The fair value needs to be certified by a chartered accountant or a merchant banker registered with Sebi

To provide more flexibility on foreign direct investment (FDI), the Reserve Bank of India (RBI) has allowed non-residents to issue and transfer shares of unlisted companies on determination of a fair value, in accordance with internationally accepted pricing methods.

The fair value needs to be certified by a chartered accountant or a merchant banker registered with the Securities and Exchange Board of India (Sebi). However, the pricing of the share shall not be less than the fair value for issue and transfer, said RBI.

Earlier, the methodology for share valuation was laid down and had to be done by a Sebi-registered merchant banker or a chartered accountant on the discounted free cash flow method. On issue of shares to non-residents, the price for transfer had to be in line with the pricing guidelines laid down by RBI from time to time, where the issue of shares was by preferential allotment. This provision has been removed.

For issue of shares of listed companies, the price shall be worked out in accordance with Sebi guidelines. When shares are transferred, the price shall not be less than the one at which a preferential allotment can be made under Sebi guidelines, said RBI.

It also said when a transfer of shares is made by non-residents to residents, the price shall not be more than the minimum at which the transfer can be made from a resident to a non-resident.

“The attempt is to attract foreign flows. The flows will also help the rupee. Maybe the government wants these foreign institutional investors to broadbase their investments in even mid-cap stocks and not only large-caps. It will also help to boost foreign exchange reserves of the central bank,” said a currency dealer with a state-run bank.

RBI DECISIONS

• RBI allowes non-residents the issue and transfer shares of unlisted companies on determination of a fair value
• The pricing of the share shall not be less than the fair value for issue and transfer
• For issue of shares of listed companies, the price shall be worked out in accordance with Sebi guidelines
• When shares are transferred, the price shall not be less than the one at which a preferential allotment can be made under Sebi guidelines