FEMA

All you need to know about Pricing Guidelines for Securities under FEMA Regulations

Indian companies’ issues equity shares; compulsorily & fully convertible debentures and fully, compulsorily convertible preference shares based on pricing guidelines norms prescribed under Foreign Exchange Management (Transfer or Issue of Security to a Person Resident outside India) Regulations, 2000^[1] (“FEMA Regulations”).

To regulate foreign investment, the RBI had amended the FEMA Regulations 2000 in 2017 under FEMA and published it on 7 November 2017.

In the article, we will discuss RBI’s changes with respect to price guidelines under FEMA Regulations.

Amendment in Pricing guidelines under FEMA Regulations

RBI’s direction states the pricing guidelines for various form or number of ways to price capital instrument. The pricing guidelines can be summarized as follows.

At whatever time, the Indian company issues a capital instrument, then the price must not be less than:

• The price is in accordance with relevant SEBI guidelines for listed company or when it is going through the delisting process.
• For an unlisted company, the fair value is determined as per the international pricing methodology, which should be duly certified by CA or Banker or Cost Accountant or SEBI Registered Merchant.
• For a convertible capital instrument, the price of conversion must not be less than the fair value at the time of issuance of the capital instruments in accordance with the FEMA regulations.
• In case of swap capital instrument, the valuation will be made by a Merchant Banker Registered with the SEBI or an Investment banker outside India registered with the appropriate authority in the host country.
• When an Indian Company issues shares to a person resident outside India in accordance with the provisions of Companies Act, 2013 by subscription to the MoA (memorandum of Association), then such investment must be valued at the face value subject to entry route.
• The price in case of convertible capital instrument in case of share warrants must not be lower than the fair market value determined at the time of issuance of such warrants.

Particulars	Listed Company	Unlisted Company
Price for capital Instruments issued to the person outside India by an Indian company, must not be less than	The price is in accordance with relevant SEBI guidelines	The fair value is determined as per the international pricing methodology, which should be duly certified by CA or Banker or Cost Accountant or SEBI Registered Merchant
Price for capital instruments from a resident in India to non – resident, must not be less than	The price is in accordance with relevant SEBI guidelines or the price at which preferential shares are allotted as per SEBI guidelines	The fair value is determined as per the international pricing methodology, which should be duly certified by CA or Banker or Cost Accountant or SEBI Registered Merchant
Price for capital instruments from a resident in India to non – resident, must not be more than	The price is in accordance with relevant SEBI guidelines or the price at which preferential shares are allotted as per SEBI guidelines	The fair value is determined as per the international pricing methodology, which should be duly certified by CA or Banker or Cost Accountant or SEBI Registered Merchant

1. The price of party paid equity shares must be determined upfront.
2. Under FEMA regulations, the pricing guidelines apply for all Indian companies to buy back shares in case of mergers, demerger and amalgamation with prior approval of NCLT or competent authority.

Non – Applicability of pricing Guidelines under FEMA Regulations

The pricing guidelines under FEMA Regulations are not applicable for any investment in capital instruments by non-resident in India on the non repatriation basis.

Further, the pricing guidelines shall not be applicable on:

• Share transfer via sale in accordance with SEBI Regulations;

However, a Chartered Accountant’s certificate is must to the effect that the SEBI guidelines have been complied with and has to be attached with Form FC-TRS filed with the AD Bank.

On overall remarks of pricing guidelines on Shares, either on subscription or acquisition though partly or fully paid up or convertible or not the shares price needs to be valued according to RBI pricing guidelines as amended from time to time. At any cost, the transfer of share needs to be valued before issue/transfer to any person resident outside India to comply with the regulation on extant FEMA and FDI policy.

Conclusion

The revision in the pricing guidelines under FEMA Regulations was needed to have a better monitoring the transfer of shares to the person residing outside India. The price at which the companies are issuing shares, debentures must not be less than the price determined in accordance with various provisions under SEBI & FEMA regulations.

Read our article:FEMA Guidelines for Export of Goods and Services (Amendment) Regulations, 2021