Pricing Guidelines for FDI instruments with optionality clauses
27 January, 2014
The Reserve Bank of India has
laid down guidelines for buy-back of certain securities from investors residing
outside India, who had been issued these securities under the Foreign Direct
Investment (FDI) Scheme.
The guidelines issued on
9-1-2014 are part of the changes whereby RBI has allowed optionality clause in
equity shares and compulsorily and mandatorily convertible preference
shares/debentures to be issued under the FDI Scheme to a person resident
outside India. This clause will oblige buy-back of securities from the investor
at the price prevailing/value determined at the time of exercise of the
optionality so as to enable the investor to exit without any assured return.
Conditions for optionality - Pricing guidelines
As per RBI A.P. (DIR Series)
Circular No. 86, in the case of listed companies, the non-resident investor
would be able to exit, after the minimum lock-in period of one year, at the
market price prevailing at the recognised stock exchanges.
In the case of unlisted
companies, exit from investment in equity shares of the investee company would
be permissible at a price not exceeding the one arrived at on the basis of
Return on Equity (RoE) as per the latest audited balance sheet of the company.
RoE in this regard would mean ‘profit after tax / net worth and that net worth
would include all free reserves and paid up capital. The Circular also holds
that any agreement permitting return linked to equity as stated will not be
treated as violation of FDI policy or the FEMA Regulations.
Exit from investments in
Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible
Preference Shares (CCPS) is allowed at a price worked out according to any internationally
accepted pricing methodology at the time of exit. The same should be duly
certified by a Chartered Accountant or a SEBI registered Merchant Banker.
Corresponding amendments in this regard have also been made in Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000 by Notification No. FEMA 291/2013-RB published in
gazette on 31-12-2013.