Share Based valuation for RBI under FEMA

For Foreign Direct Investment (FDI) transactions, an Indian company may issue equity shares/compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) to a person resident outside India under the FDI policy, subject to inter alia, compliance with the pricing guidelines.

In order to make the valuation of shares in line with global business valuation practices, Reserve Bank of India (RBI) has introduced revised valuation guidelines for FDI allowing use of any internationally acceptable pricing method which until a few years back was based on Discounted Cash Flow Method only, a prominent method based on Income Approach of valuation which is entirely based on the "Future Cash Earning Capacity" of any business and thus often lead to optimum value scenario (from exchange control perspective).

RBI vide its 2016 consolidated FDI policy effective from June 7th 2016 has notified the pricing guidelines in case of Transfer or Issue of Security by a Person Resident Outside India as regards Foreign Direct Investment (FDI), accordingly for all unlisted companies having FDI, the fair valuation of shares has to be done as per any internationally accepted pricing methodology for valuation of shares on arm's length basis, duly certified by, inter alia, a SEBI registered Merchant Banker. We, at Intellicity Capital, provide valuation of shares as per RBI requirements.