Regulatory changes without bite

Close on the heels of the new consolidated FDI policy (which this column discussed last month), comes yet another regulatory change that is impacting deal-making in India with foreign money. The Reserve Bank of India (RBI) has, through a notification issued on 7 April and a circular dated 4 May, amended the manner in which cross-border share transfers and share issues are to be valued. We discuss below the valuation norms for unlisted companies. (For implications of these regulatory changes on M&A transactions, see page 53.)

The change

Any issue or transfer of shares of an Indian unlisted company by an Indian resident to a non-resident is subject to a minimum floor price. Similarly, any sale by a non-resident of shares of an Indian unlisted company to a resident is subject to a maximum price cap.

The RBI used to require that the price threshold for foreign investment inflows be the fair market value of the shares determined by a chartered accountant in accordance with the guidelines laid down by the erstwhile Controller of Capital Issues (CCI). These guidelines were issued in 1990 and the regulator has now replaced the CCI valuation method with the discounted free cash flow method (DCF), which is the preferred valuation norm globally.

Sawant Singh is a partner at Phoenix Legal in Mumbai where Akanksha Midha is an associate. They can be reached at sawant.singh@phoenixlegal.in and akanksha.midha@phoenixlegal.in.