Delve into FEMA provisions and pricing rules for equitable investment oversight in India, balancing financial markets' stability and foreign capital flows.
Indian firms are allowed to offer equity shares, compulsorily and fully convertible debentures, as well as fully and compulsorily convertible preference shares, in accordance with the pricing guidelines specified in the Foreign Exchange Management (Transfer or Issue of Security to a Person Resident outside India) Regulations, 2000 (FEMA Provisions and Regulations).
In order to oversee foreign investments, the RBI modified the FEMA Regulations 2000 in 2017 and made it publicly available on 7 November 2017, under FEMA.
Provisions of FEMA
- It grants the Central Government the authority to oversee the movement of payments to and from individuals located outside the nation
- All financial transactions related to foreign securities or currency exchange cannot occur without obtaining approval under FEMA. These transactions must be executed through designated ‘Authorised Persons’
- In the broader public interest, the Indian government has the ability to prohibit an authorised individual from engaging in foreign exchange transactions within the current account
- FEMA also empowers the RBI to impose restrictions on capital account transactions, even if they are conducted through authorised intermediaries
- Under this legislation, Indian residents within the country are permitted to engage in foreign exchange and foreign security transactions, as well as own immovable property in a foreign country, provided they acquired or inherited such assets while residing abroad.
Pricing Guidelines Under FEMA Regulations
The RBI’s guidelines provide a framework for determining the pricing of various types of capital instruments. These pricing guidelines can be summarised as follows:
Whenever an Indian company issues a capital instrument, the price should not fall below:
- Listed Companies or Delisting Process: For listed companies or during the delisting process, the pricing should conform to the relevant SEBI guidelines
- Unlisted Companies: In the case of unlisted companies, the fair value should be determined using an international pricing methodology. This determination should be certified by a Chartered Accountant, Banker, Cost Accountant, or SEBI Registered Merchant
- Convertible Capital Instruments: When dealing with convertible capital instruments, such as convertible bonds or preference shares, the conversion price should not be lower than the fair value at the time of issuing these capital instruments, in accordance with FEMA regulations
- Swap Capital Instruments: Valuation of swap capital instruments should be conducted either by a Merchant Banker registered with SEBI or an Investment Banker located outside India and registered with the relevant authority in the host country
- Shares Issued to Persons Outside India: When an Indian company issues shares to individuals residing outside India as per the provisions of the Companies Act, 2013, through subscription to the Memorandum of Association, the valuation of this investment should be based on the face value and must adhere to the prescribed entry route
- Convertible Capital Instruments (e.g., Share Warrants): In cases involving convertible capital instruments like share warrants, the pricing should not be set below the fair market value established at the time of issuing these warrants.
| Particulars | Pricing Guidelines for Listed Companies | Pricing Guidelines for Unlisted Companies |
| Price for capital instruments issued by an Indian company to non-residents must not be less than | Comply with the relevant SEBI guidelines | Determine fair value through international pricing methodology, certified by CA, Banker, Cost Accountant, or SEBI Registered Merchant |
| Price for capital instruments from a resident in India to a non-resident must not be less than | Follow SEBI guidelines or the preferential share allotment price per SEBI guidelines | Establish fair value through international pricing methodology, certified by CA, Banker, Cost Accountant, or SEBI Registered Merchant |
| Price for capital instruments from a resident in India to a non-resident must not exceed | Adhere to SEBI guidelines or the preferential share allotment price per SEBI guidelines | Calculate fair value using international pricing methodology, certified by CA, Banker, Cost Accountant, or SEBI Registered Merchant |
Non – Applicability Of Pricing Guidelines Under FEMA Regulations
The pricing guidelines outlined in FEMA Regulations do not apply to investments in capital instruments by non-residents in India on a non-repatriation basis. Additionally, these pricing guidelines do not affect:
- Share transfers conducted through sales in compliance with SEBI Regulations. However, it’s essential to attach a Chartered Accountant’s certificate confirming compliance with SEBI guidelines when filing Form FC-TRS with the AD Bank
- Regardless of whether shares are acquired through subscription, acquisition, whether partly or fully paid up, or convertible or not, they must be valued according to RBI’s pricing guidelines, subject to periodic amendments. The valuation of shares is mandatory before issuance or transfer to any person residing outside India, in line with existing FEMA and FDI policy regulations.
Conclusion
The revision of pricing guidelines in FEMA Regulations aimed to enhance the monitoring of share transfers to individuals residing outside India. Companies issuing shares and debentures must ensure that the price does not fall below the value determined in accordance with various provisions under SEBI and FEMA regulations. For more FEMA related queries reach out to our experts for top legal solutions.
