FEMA ALERT- FDI PRICING GUIDELINES REVISED Reserve Bank of India Bi- Monthly Policy- Part B Development and Regulatory Policies Reserve Bank Of India ( RBI ) rolled out First Bi Monthly Policy Statement, 2014-15 dated April 1, 2014, part B of which constitutes Development and Regulatory Policies addressing several areas of which pricing of Foreign Direct Investment is one of the most crucial one. As per the policy statement by RBI as mentioned above, all the existing guidelines relating to valuation in case of acquisition/sale of shares stands withdrawn and accordingly, such transactions will henceforth be based on acceptable market prices. Operating guidelines in this regard will soon be notified. Background RBI vide notification no FEMA 205/2010 dated April 7, 2010 mandates pricing of shares by appplying Discounting Cash Flow Method ( DCF ) of valuation. DCF is one of the most practical method , as it is based on Income Approach of valuation, which is based entirely on the Future Cash Earning Capacity of any business and thus it leads to reflect the optimum value of business. However DCF is often challenged by some factors like Start-up Valuation , minority interest etc. Many times it proves to be a failure in reflecting proper value of business during the start up phase. Best Approach RBI has recommended to value any sale or purchase of shares as per best market practices. Therefore not only Discounted Cash Flow method, but the following methodologies may be considered while valuing FDI permissible instruments: a) Market Multiple Method, b) Comparable Transaction Method, c) Net Asset Value Method d) Any other appropriate method , considering the nature of business. Unaddressed issue: The amendment in pricing guidelines, are for acquisition and sale of shares, however it is still not addressed that which approach will be used in case of fresh issue of shares. We need to wait for RBI’s clarification. Conclusion Post Change in the pricing guidelines effective from April 1, 2014, there would be no mandatory requirement to value FDI permissible instrument using Discounted Cash Flow method. It can be any method as mentioned above considering the nature of business. RSC’s Note There could be no other method better than DCF to value FDI permissible instruments. The only reason we can think that had triggered the change in pricing guidelines is the recent dispute with Income Tax Department relating to pricing of shares in some cases. Waiting for other views as well.
Posted on: Sat, 05 Apr 2014 03:14:26 +0000
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