India: RBI Revises Pricing Guidelines Applicable to Equity Transfers between Indian Residents and Non-Residents

Last Updated: 3 June 2010
Article by David Makarechian and Anirudh Rastogi

The Reserve Bank of India (RBI), Foreign Exchange Division, has revised its guidelines for pricing equity interests that are transferred between Indians and non-residents of India. The revised guidelines are contained in notifications released in April and May 2010, amending the applicable foreign exchange management regulations. They apply to equity shares, including compulsorily convertible preference shares and compulsorily convertible debentures. The revised guidelines will impact the determination of pricing in certain equity transfers.

The revised pricing guidelines appear to be an effort to simplify, consolidate and conform pricing guidelines. For example, under the new scheme, all transfers of listed company shares (whether or not a "preferential allotment" or a brokered, exchange transactions) are to be made using the SEBI guidelines for preferential allotments, and all transfers of non-listed shares are to be made at not less than price determined under the discounted cash flow (DCF) method.

However, a number of new potential problems are created under the guidelines, and questions unanswered. They may become problematic in valuing shares of unlisted companies in which the DCF method would otherwise not be a preferred method of valuation of equity interests.

An Indian company is permitted to issue equity shares to non-residents of India subject to the Government of India's Foreign Direct Investment (FDI) policy. "Non-Residents of India" refers to non-Indian nationals, non-resident Indians (NRIs) and foreign institutional investors (FIIs).
The FDI policy includes restrictions on ownership in certain industry sectors, and pricing guidelines that apply to the transfer by way of sale of any shares between Indian residents and non-residents. Under the previous pricing guidelines, the transfer price for listed companies occurring on a stock exchange was the "ruling market price," and the transfer price for non-listed companies was to be the fair value as determined by an Indian chartered accountant using guidelines issued by the erstwhile Controller of Capital Issues (CCI), the predecessor of the Securities and Exchange Board of India (SEBI).1 The current guidelines for valuing shares are now amended.

The revised pricing guidelines affect the transfer by way of sale of shares in unlisted companies, listed companies and "preferential allotments" made in listed companies.

Transfer by Sale of Shares in Unlisted Companies

The pricing guidelines previously in effect for the transfer by way of sale of shares of an unlisted company to a non-resident of India by a resident were intended to ensure that transfers were made at fair value. The stated objective of the CCI guidelines were to make the best reasonable judgment of the value of an equity share of a company based upon the net asset value of the company and the profits earning capacity value of the company.2 The profits earning capacity value was determined by capitalizing the after tax profits of a company at prescribed rates depending upon economic sector.3 This valuation approach relied upon past profits of the subject company to determine the potential future earnings capacity of the business.

Under the revised guidelines, the approach taken in the CCI guidelines are abandoned, and the applicable transfer price for unlisted shares is required to be at not less than the price determined based upon the DCF method as determined by a SEBI registered Category - I Merchant Banker or a Chartered Accountant.4 The revised guidelines do not provide detailed guidance concerning the implementation of the discounted cash flow valuation method, such as the range of applicable discounts. Thus in a transfer by way of sale of unlisted shares from a resident to a non-resident of India, it will be necessary for the parties to procure a valuation that is certified by a SEBI registered Category - I Merchant Banker or a Chartered Accountant.5 The valuation prepared by such professional must show, using a DCF method, a valuation not lower than the one negotiated by the transerfee and transferor. It will be submitted as part of the documentation associated with the sale to the applicable authorized dealer branch.

In mandating use of the DCF method for valuing unlisted shares, the RBI presumably determined that projected future cash flows rather than past profitability or existing net assets provides a more appropriate value of equity interests that are not listed on an exchange. It is important to note that the valuation determined by the DCF method would be a "floor." The requirement to utilize a DCF valuation would not be problematic so long as it determines a price that is the same or less than the price negotiated by the parties. However, a practical problem may arise if the shares are associated with a business where future cash flows are expected to be volatile or highly speculative. In those circumstances, a DCF analysis may not be an optimal to arrive at an appropriate valuation, but under the revised pricing guidelines, its use is required.

Transfer by Sale of Shares in Listed Companies and Preferential Allotments

The revised pricing guidelines also impact the valuation method to be used on the transfer by way of sale of listed companies, and preferential allotments made by listed companies. The previous rules contemplated transfers completed on the stock exchange through a registered merchant banker or stock broker, or off exchange transfers. In the former case, the transfer of listed company shares made by way of a sale by a resident to a non-resident could be made only at a price equal to the "ruling market price."6 In the latter case, the price was to be determined by taking the average quotations (average of daily high and low) for one week preceding the date of application, and permitted a variation of up to five percent.7 However, where the shares were being sold by a foreign collaborator or foreign promoter of the Indian company to the existing promoters in India with the objective of passing management control in favor of the resident promoters, the price could be up to 25 percent over market price calculated in the same manner.8

Under the revised pricing guidelines, transfers of listed company shares by residents to non-residents are required to be made at not less than the price at which a preferential allotment may be made under the applicable SEBI rules.9 The applicable SEBI rules for the pricing of preferential allotments is contained in the Issue of Capital and Disclosure Requirements Regulations, 2009. In general, the SEBI rules provide for a calculation based upon an average weekly high and low closing price over a trailing six month period, or a trailing two week period, from the "relevant date."10 There is a slight modification if the allotment is being made by a company that has been listed for six months or more.11

One impact of the revised pricing guidelines is to conform the manner of computing the minimum transfer price of preferential allotments and other transfers by sale of listed company shares from residents of India to non-Residents. Any such transfer must now be priced at least at the market price, determined in accordance with the SEBI rules. Therefore, in a transaction in which a non-resident of India is acquiring shares in a listed company, even if the shares are being acquired other than in a brokered transaction through an exchange, the transfer must be at market price.

The rule did not, however, conform the different pricing requirements that apply when the transfer is being made by non-residents to residents. As noted above, the previous rules permitted up to a 5% variation from the market price when non-residents transferred shares of a listed company in an off-exchange transactions back to a resident of India (up to 25% when control is being transferred). This effectively means that residents could pay a premium of up to 25% above the market price in shares that were acquired from non-residents by residents in control transactions. Curiously, the new rule specifies that such transfers cannot be made at more than the minimum price permitted under the SEBI pricing guidelines for preferential allotments.


The revised pricing guidelines appear to be an effort to simplify, consolidate and conform pricing guidelines. For example, under the new scheme, all transfers of listed company shares (whether or not a "preferential allotment" or a brokered, exchange transactions) is to be made using the SEBI guidelines for preferential allotments, and all transfers of non-listed shares are to be made at not less than price determined under the DCF method.

However, a number of new potential problems are created, and questions unanswered. Does mandating the use of the DCF approach to all transfers of unlisted shares overly limit the flexibility that a valuation expert may use in trying to accurately value a company? Almost certainly. In arriving at a valuation, a valuation expert might often use a variety of valuation methods, including the previously used net asset value method, or income or cash flow multiples based on market comparables. What if future cash flows are indeterminate? The RBI did not provide guidance for such circumstances, including what range of discounts would be permitted. In addition, it is entirely possible that the DCF approach would result in an amount greater than the amount negotiated by the parties. In such circumstances, the pricing guidelines could directly impact the commercial negotiations.

Another possible area of concern is the disparity in the pricing guidelines concerning the transfer of shares of a listed company from a non-resident to a resident in an off-exchange transaction. In this one circumstance -- and not in any other transfer scenario contemplated by the revised guidelines -- the permissible transfer price is capped at the minimum price permitted by the SEBI guidelines. In all other circumstances, the RBI pricing guidelines set a floor relative to the negotiated price. This would appear to be an attempt to limit the premium that can be charged when transferring shares back to residents, very possibly resulting in the regulatory price determination trumping the commercial one.

We plan to monitor future RBI pronouncements on this topic and bring them to the attention of our clients and friends outside of India who are considering investments there.


1. Clause 2.2, Annex to A.P. (DIR Series) Circular No. 16 dated October 4, 2004 ("2004 Pricing Guidelines").

2. Clause 5, CCI guidelines.

3. Clause 7.1, CCI guidelines.

4. Annex-I to A.P. (DIR Series) Circular No. 49 dated May 04, 2010.

5. Id.

6. Clause 2.3(a)(i), Annex to 2004 Pricing Guidelines.

7. Clause 2.3(a)(ii), Annex to 2004 Pricing Guidelines.

8. Id.

9. Annex-I to A.P. (DIR Series) Circular No. 49 dated May 04, 2010.

10. See Regulation 76, SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 ("ICDR"). "Relevant date" is defined to mean:(a) in case of preferential issue of equity shares, the date thirty days prior to the date on which the meeting of shareholders is held to consider the proposed preferential issue; provided, that in case of a preferential issue of equity shares pursuant to a scheme approved under the Corporate Debt Restructuring framework of Reserve Bank of India, the date of approval of the Corporate Debt Restructuring Package shall be the relevant date. (b) in case of preferential issue of convertible securities, either the date thirty days prior to the date on which the meeting of shareholders is held to consider the proposed referential issue or a date thirty days prior to the date on which the holders of the convertible securities become entitled to apply for the equity shares.

11. See Regulation 76(1), ICDR. If the company has been listed for less than six months, the shares must be allotted at not less than the higher of: (A) the price at which the shares were issued in such company's initial public offer or the value per share arrived at in a scheme of arrangement pursuant to which the equity shares were listed; (B) the average of the weekly high and low of the closing prices of the equity shares for the period the shares have been listed; and (C) the average of the weekly high and low of the closing prices of the shares during the two weeks preceding the relevant date; provided, the price must be recomputed by the issuer on completion of six months from the date of listing with reference to the average of the weekly high and low of the closing prices of the shares during such six months and if such recomputed price is higher than the price paid on allotment, the difference must be paid by the allottees to the issuer.

O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.