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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.
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