Cracking the Pricing Code: Guidelines for Cross-Border Investments
Written By
Darshana Chauhan
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AI Summary
- RBI's pricing guidelines for cross-border investments are issued under paragraph 8 of Master Circular No. RBI/FED/2017-18/60, Master Direction No. 11/2017-18.
- Equity instruments issued by an Indian company to a person resident outside India must be priced at not less than the fair value determined through an internationally accepted pricing methodology on an arm's length basis.
- Valuation for equity issuance and transfer must be certified by a Chartered Accountant, a SEBI registered Merchant Banker, or a practicing Cost Accountant.
- For instruments convertible into equity, the price or conversion formula must be fixed upfront at the time of issue, and the conversion price cannot be lower than the fair value determined at issuance under FEMA rules.
- A company issuing convertible instruments must comply with both the equity pricing norm and the conversion pricing norm at the same time.
- Shares issued to a person resident outside India through subscription to the Memorandum of Association under the Companies Act, 2013 must be issued at face value, subject to entry route and sectoral caps, with no valuation report required.
- Transfer of equity instruments from a resident to a non-resident must be priced at not less than the certified fair value, while transfer from a non-resident to a resident must be priced at not more than the certified fair value.
- Investment in an LLP by way of capital contribution or acquisition of profit share must be priced at not less than the fair price, certified by a Chartered Accountant, a practicing Cost Accountant, or a Central Government panel approved valuer.
- Capital contribution to an LLP at the time of incorporation by a person resident outside India is exempt from the valuation certificate requirement, subject to entry route and sectoral caps, similar to the exemption for MOA subscription.
Blog Content Overview
Navigating RBI’s Pricing Guidelines is like playing a game of Monopoly—except the board is India’s financial landscape, and the rules ensure fair play for all! Whether you’re issuing fresh equity, converting instruments, or transferring shares across borders, the price tag can’t be a wild guess.
Get ready to crack the pricing code issued under paragraph 8 of Master Circular no. RBI/FED/2017-18/60-FED Master Direction No.11/2017-18. Here’s a crisp and clear breakdown :
| Equity instruments issued by a Company to a person resident outside India | The price of equity instruments of an Indian Company issued by it to a person resident outside India should not be less than the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. |
| Instruments Convertible into equity issued by a Company to a person resident outside India | The price/ conversion formula of the instrument is required to be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA rules. Note: Where a Company is issuing securities convertible into equity, it has to adhere to both point I and II. |
| Subscription to Memorandum of Association | Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps and no valuation report will be required in this case. |
| Equity instruments transferred by a person resident in India to a person resident outside India | The price of equity instruments of an Indian Company transferred by a person resident in India to a person resident outside India should not be less than the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. |
| Equity instruments transferred by a person resident outside India to a person resident in India | The price of equity instruments of an Indian Company transferred by a person resident outside India to a person resident in India should not exceed the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. |
| Investment in LLP | Investment in an LLP either by way of capital contribution or by way of acquisition/ transfer of profit shares, should not be less than the fair price worked out as per any valuation norm which is internationally accepted/ adopted as per market practice (hereinafter referred to as “fair price of capital contribution/ profit share of an LLP”) and a valuation certificate to that effect should be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government. Note: We understand that where a person resident outside India contributes to the Capital of an LLP at the time of incorporation, in compliance with the provisions of the LLP Act, 2008, such investments shall be made subject to entry route and sectoral caps and no valuation report will be required in this case. |
| Transfer of capital contribution/ profit share of an LLP | In case of transfer of capital contribution/ profit share of an LLP from a person resident in India to a person resident outside India, the transfer should be for a consideration not less than the fair price of capital contribution/ profit share of an LLP. In case of transfer of capital contribution/ profit share of an LLP from a person resident outside India to a person resident in India, the transfer should be for a consideration which is not more than the fair price of the capital contribution/ profit share of an LLP. |
*Source: https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
Non-applicability of pricing guidelines
The pricing guidelines shall not apply where investment in equity instruments (whether acquired/transferred) by a person resident outside India on a non-repatriation basis – meaning that any profits, dividends, or income generated from such investments shall remain in India and shall not be remitted to the investor’s home country.
Conclusion
In the world of cross-border investments, pricing isn’t a shot in the dark—it’s a well-calibrated process; When it comes to cross-border investments, RBI’s pricing guidelines are here to keep things fair, transparent, and opportunity-filled for everyone! Whether you’re issuing, converting, or transferring equity, the rules ensure that every deal is backed by solid valuation. So, go ahead, explore the possibilities, make informed moves, and let the numbers work in your favor!
About the Author
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Darshana Chauhan
Principal Associate | Compliance | darshana@treelife.in
Manages compliance for acquisitions, fundraising, and due diligence with meticulous execution. Ensures adherence to the Companies Act and FEMA while delivering seamless regulatory solutions.
We Are Problem Solvers. And Take Accountability.
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