The Reserve Bank of India (“RBI”) has recently modified the existing pricing guidelines governing subscription to, or transfer of, shares of unlisted Indian companies by, or to, non-residents, and for exit from investment in equity shares with or without optionality clauses of unlisted Indian companies, vide its A.P. (DIR Series) Circular No. 4 dated July 15, 2014.
In terms of the above circular, henceforth, the issue and transfer of shares of unlisted Indian companies, including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses, would be at a price worked out as per “any internationally accepted pricing methodology” on arm’s length basis, while ensuring that non-resident investors are not guaranteed any assured exit price on their investments. The investments with optionality clauses will, however, continue to be subject to a lock-in period of 1 (one) year in accordance with the A.P. (DIR Series) Circular No. 86 dated January 9, 2014 (refer our newsletter of January 31, 2014).
Indian companies registering transfer of its shares or debentures inter se residents and non-residents will also have to disclose in its balance sheet for the relevant year, the details of valuation of such shares/debentures, the pricing methodology adopted, and the agency that has given/certified the valuation.
RBI Recognises Partly Paid-Up Shares and Warrants as Permissible Instruments for FDI and FPI
In terms of A.P.(DIR Series) Circular No.3 of July 14, 2014, the RBI has now also recognised partly paid-up equity shares and warrants as eligible instruments for the purpose of making foreign direct investments (“FDI”) and foreign portfolio investments (“FPI”) in Indian companies.
In terms of the above circular, the pricing for partly paid up shares and warrants will need to be determined upfront and 25% of the total consideration amount (including share premium, if any) for both these instruments, will need to be received upfront.
The balance consideration amount towards fully paid shares will be receivable within a period of 12 (twelve) months, except where the issue size exceeds Rs. 500 Crore (and in case of listed companies, the issuer additionally complies with complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations).
In case of warrants, the balance consideration towards fully paid up equity shares (after conversion of warrants) has to be received within a period of 18 months. Also, in case of warrants, the price at the time of conversion should not be lower than (and can be more than) the fair value worked out at the time of issuance of the warrants. Thus, the investee company would be free to receive consideration more than the pre-agreed price for each warrant.
In case the Indian investee company’s activity/sector falls under government route, it would need prior approval of the Foreign Investment Promotion Board for issue of partly-paid shares/ warrants. Further, the Indian company will need to ensure that the sectoral caps are not breached after the shares get fully paid-up or warrants get converted into fully paid equity shares.
Any forfeiture of the amount paid upfront on non-payment of call money shall be in accordance with the provisions of the Companies Act, 2013 and Income tax provisions, as applicable.