In this blog post, Shubham Aparijita, a student at Symbiosis Law School, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the pricing of shares issued to residents outside India. 

Introduction

Instruments that can be issued to a non-resident under the FDI route

A non-resident can subscribe to equity shares, or fully and mandatorily convertible preference shares and debentures. Optionality clause[1] in equity shares, fully, compulsorily and mandatorily convertible debentures and shares are also allowed. Optionality convertible or redeemable securities can be issued under the external commercial borrowings (ECB) policy, which is very restrictive.

The price of shares transferred from resident to a non-resident and vice versa should be determined as under:

1. Transfer of shares from a resident to a non-resident:
   • In the case of listed shares, at a price which is not less than the price at which a preferential allotment of shares would be made under SEBI guidelines.
   • In the case of unlisted shares at a price which is not less than the fair valuation as per any internationally accepted pricing methodology on arm’s length basis to be determined by a SEBI registered Category-I- Merchant Banker/Chartered Accountant.
2. Transfer of shares from a non-resident to a resident – The price should not be more than the minimum price at which the transfer of shares would have been made from a resident to a non-resident.

In any case, the price per share arrived at as per the above method should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

Pricing of shares issued

The price at which he can acquire shares of an Indian company is governed by the Foreign Exchange Management Act (FEMA[2])

A foreigner may purchase securities of an Indian company under the following headings:-

1. Transfer from a resident to a non-resident
2. Transfer from a non-resident to a resident
3. Transfer from non-resident to a non-resident.

• Transfer from a resident to a non-resident

A non-resident can purchase securities of an Indian company under a private arrangement. In such a case, as money is coming into India, the FDI Policy imposes a floor price. The minimum permissible price at which shares can be sold to a non-resident must be determined by Charter Accountant or SEBI Registered Category I merchant banker (in the case of an unlisted company) as per any intentionally accepted pricing methodology on arm’s length basis . In the case of a listed company, the floor price is computed by looking at the volume weighted average of historical market prices for 26 weeks.

• Transfer from non-resident to a resident:

In this case, a ceiling is applied by FDI policy. Transfer of existing shares by a non-resident to a resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a no resident as:

Filing Requirement: Form FC-TRS is required to be submitted to the AD Category – I bank in case of a transfer from a resident to a non-resident or vice-versa, within 60 days from the date of the amount of consideration. The resident has the responsibility of submission of a form. The form is then submitted by the AD- a Category I Bank to the RBI. Pricing issues also emerge with respect to non-residents holding put options- they have the right to compel the Indian promoters to purchase their shares on exercise options. In case of put options, the price is determined on the basis of the type of security sold as:

• The price of equity shares must be capped on the basis of the specific method known as the return on the equity method.
• The price of any convertible instruments must be arrived at in accordance with any internationally accepted pricing methodology. A SEBI registers Category Merchant Banker, or a Chartered Accountant is responsible for providing a certificate for arriving at the price.

• Transfer from a non-resident to a non-resident

Price of shares purchased by a non-resident from another non-resident shareholder is not regulated under FDI policy, as the transaction does not involve inflow or outflow of foreign exchange

• Subscription to a company’s shares

As per the FDI Policy, shall not be less than:

• In case of a listed company, the price worked out in accordance with the SEBI guidelines, as applicable
• In the case of an unlisted company- fair valuation of shares done by a SEBI registered Category-I Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis.

However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Demat Accounts under PINS

If you want to buy shares as an NRI, you would need to open a Demat account under the Portfolio Investment Scheme (PINS). In this demat, you can buy shares with funds in your NRE account, and sale proceeds can be credited to NRE account for repatriation. If you choose to buy the shares on non-repatriable basis, then, the proceeds will be credited to the NRO account. You must maintain two separate demat accounts for repatriable and non-repatriable shares. Recently, the RBI also specified that an NRE must have a separate account linked to the PINS Demat account. It cannot be the NRO or NRE account through which other routine transactions are conducted. Once you become a resident again, you must close the PINS account.

PORTFOLIO INVESTMENT SCHEME

The Foreign Exchange Management Act 2000 defines the Portfolio Investment Scheme, permitting non-resident Indians and foreign institutional investors to buy and sell shares and convertible debentures of Indian companies, and units of domestic mutual funds at any of the Indian stock exchanges. Purchase of shares of any company from the secondary market is subject to a ceiling of 5% of the paid-up share capital and 5% of the paid-up value of each series of debentures.

FDI IN REAL ESTATE

NRIs can contribute, exchange, give and acquire enduring property. NRIs holding Indian identifications and people of Indian starting point (PIOs) appreciate equality of status. The RBI has conceded general authorization to individual occupant outside India holding Indian travel papers and PIOs to purchase private and business properties in India.

Both NRIs and PIOs can put resources into restricted organisations occupied with real estate development. The paid-up value of shares/convertible debentures obtained by NRI, on both repatriation and non-repatriation premise have a cutoff of five for every penny of the paid-up capital/paid-up estimation of every arrangement of debentures. The total paid-up estimation of shares/convertible debentures acquired by all NRIs can be raised to 24% of the paid-up capital of the organisation/paid-up value of arrangement of debentures.

Foreign Direct Investment is supported and allowed, subject to specific conditions, in the accompanying land segments in India. It incorporates lodging improvement, tourism, friendliness, doctor’s facilities, and resorts township advancement, advancement of business land, developed foundation, lodging and development activities, lodging and development ventures, building instructive organisations, building recreational offices, framework ventures at both regional and local level and Special Economic Zones.

FDI IN RETAIL SECTOR

FDI can supplement and supplement the Indian business and make it comprehensively aggressive, open up fare showcases and give access to worldwide quality merchandise and administrations. It can raise assets through mechanical up degree, ideal usage of human and normal assets, and in reverse and forward linkages.

There are promising fields like the nourishment preparing area in the nation. Remote retail mammoths will purchase prepared nourishment from the nation. Foreign direct investment(FDI) in retail space, particular products retailing like games merchandise, gadgets and stationery is likewise being pondered. The administration needs to walk a tightrope to guarantee a `level playing field’ for everybody.

On issue of shares to foreign investor:

Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office of RBI:

• Certificate from the Company Secretary of the company accepting investment from person resident outside India certifying that:
  • All the requirements of the Companies Act, 1956 have been complied with;
  • Terms and conditions of the Government approval, if any, have been complied with;
  • The company is eligible to issue shares under these Regulations; and
  • The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;

Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the person resident outside India.

Conclusion

The estimating as to issue and exchange of shares to non-occupants were represented by the CCI rules. These have been supplanted with the reduced income strategy which depends on the future profit. However, RBI has made a refinement in evaluating as for the issue of offer on special premise when contrasted with the typical issue as the same would be secured by the RBI rules to be recommended.

The cost of shares issued to people inhabitant outside India under the FDI plan might be worked out on the premise of SEBI rules in the event of recorded organisations. In the case of unlisted organisations, valuation of shares must be done by a Chartered Accountant as per the rules issued by the past Controller of Capital Issues.

References: 

[1] (with a minimum lock-in of one year period before such option can be exercised)

[2] Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 Notification No. FEMA 20 /2000-RB dated 3rd May 2000