Reserve Bank revises FDI valuation norms

 

The Reserve Bank of India has revised its pricing guidelines for foreign direct investment (FDI), suggesting the valuation norms will now be on the basis of market prices.

"It has been decided to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares…such transactions will henceforth be based on acceptable market practices. Operating guidelines will be notified separately," said the RBI monetary policy document.

A lawyer with a legal firm said this looks likely to scrap the practice of valuing shares on a discounted cash flow (DCF) basis or valuing a company on the basis of how much cash it generates.

"There were also disputes with the tax department on valuation as a result of the same. It is expected that this will bring uniformity to these practices," he said, declining to be identified.

The DCF methodology was faulted on account of its failure to properly value transactions, including investments, in early stage companies. Such entities generated little in the form of cash and created difficulties for strategic investors looking to take a stake, say experts. Market watchers had noted investors look at factors other than cash flow in deciding investment; including the quality of management and nature of the business.

RBI follows the DCF method of valuation for unlisted companies and valuation in terms of the Securities and Exchange Board of India Regulations for listed ones.