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FEMA
Transfer or Issue of Security by a Person Resident
Outside India Regulations 2017
Pointers
• Types of Capital Instruments • Pricing guidelines
• What is Convertible Note • - frequent/infrequent
• Foreign investment in E-com business • PRO to PRO
• What is FDI and FPI • PRO to PRI
• Foreign Investment means • PRI to PRO/PRI
• Group Company • Downstream investment
• Prohibited Sectors • Strategic Downstream inv.
Foreign Investment- Definition
• ‘Foreign Investment’ means any investment made by a person
resident outside India on a repatriable basis in capital instruments of
an Indian company or to the capital of an LLP.
• (2) An issuer may determine the coupon rate and conversion price of
convertible debt instruments in consultation with the lead merchant
banker or through the book building process.
• (3) The issuer shall undertake the book building process in a manner
specified in Schedule XI to the ICDR.
Pricing in Right Issue
• The issue price shall be determined in consultation with the
designated stock exchange.
• No issuer shall make a rights issue of equity shares unless it has made
reservation of equity shares of the same class in favour of the holders
of outstanding compulsorily convertible debt instruments ,if any, in
proportion to the convertible part thereof.
• The equity shares so reserved for the holders of fully or partially
compulsorily convertible debt instruments shall be issued at the time
of conversion of such convertible debt instruments on the same
terms at which the equity shares offered in the rights issue were
issued.
Pricing in Preferential Issue- Frequently traded shares
• The provisions of ICDR shall not apply where the preferential issue of equity
shares is made to the consortium of banks and financial institutions pursuant to
conversion of their debt, as part of the strategic debt restructuring scheme in
accordance with the guidelines specified by the Reserve Bank of India, subject to
the following conditions:
• conversion price shall be determined in accordance with the guidelines specified by the
Reserve Bank of India for strategic debt restructuring scheme, which shall not be less than
the face value of the equity shares;
• conversion price shall be certified by two independent qualified valuers, and for this
purpose 'valuer' shall have the same meaning as assigned to it under clause (r) of sub
regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Sweat
Equity) Regulations, 2002;
Issue Price of Capital Instruments- Unlisted Company
• Other factors :
• Control premium,
• Minority discount
• Judicial pronouncements
Issue price of convertible capital instruments
• in case of convertible capital instruments, the price/ conversion
formula of the instrument should 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 these Regulations.
Acquisition through a rights issue or a bonus issue
• A person resident outside India and having investment in an Indian
company may make investment in capital instruments (other than share
warrants) issued by such company as a rights issue or a bonus issue
provided that:
• The offer made by the Indian company is in compliance with the provisions of the
Companies Act, 2013;
• Such issue shall not result in a breach of the sectoral cap applicable to the company;
• Such investment made through rights issue or bonus issue shall be subject to the
conditions as are applicable at the time of such issue.
• In case of a listed Indian company, the rights issue to persons resident
outside India shall be at a price determined by the company;
• In case of an unlisted Indian company, the rights issue to persons resident
outside India shall not be at a price less than the price offered to persons
resident in India.
Transfer of capital instruments of an Indian listed company by a
resident to a person resident outside India
• the price of capital instruments of an Indian company transferred from
a person resident in India to a person resident outside India shall not
be less than:
• the price worked out in accordance with the relevant Securities and Exchange
Board of India guidelines in case of a listed Indian company;
• the price at which a preferential allotment of shares can be made under the
Securities and Exchange Board of India Guidelines, as applicable, in case of a
listed Indian company or in case of a company going through a delisting process
as per the Securities and Exchange Board of India (Delisting of Equity Shares)
regulations, 2009;
Transfer of capital instruments of an Indian unlisted company
by a resident to a person resident outside India
• the price of capital instruments of an Indian company transferred
from a person resident in India to a person resident outside India
shall not be less than:
• the valuation of capital 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 Securities and Exchange Board of India registered Merchant Banker or
• a practicing Cost Accountant.
Valuation of Capital instrument for transfer by a person
resident outside India to a resident- listed company
• transferred by a person resident outside India to a person resident in
India shall not exceed:
• the price worked out in accordance with the relevant Securities and Exchange
Board of India guidelines in case of a listed Indian company;
• the price at which a preferential allotment of shares can be made under the
Securities and Exchange Board of India Guidelines, as applicable, in case of a
listed Indian company or in case of a company going through a delisting
process as per the Securities and Exchange Board of India (Delisting of Equity
Shares) regulations, 2009;
Valuation of Capital instrument for transfer by a person
resident outside India to a resident- Unlisted company
• transferred by a person resident outside India to a person resident in
India shall not exceed:
• where the difference between the said value and the sale price does not
exceed the percentage approved by the Reserve Bank, from time to time, of
the Indian party's actual export realisation of the previous year, the Indian
party may write-off to the extent of the difference, the capital invested in the
overseas JV/WOS;
• where such difference is more than the percentage approved by the Reserve
Bank, from time to time, of the Indian party's actual export realisation of the
previous year, the Indian party shall apply to the Reserve Bank for permission
to write -off the capital invested, which permission may be granted subject to
such conditions as the Reserve Bank considers appropriate.
Valuations in Banking
Regulations
Basics
• Prudential Norms for NPA Classification
• Prudential Norms for Investments Classification
• Valuation norms for Investments, Pref. & Equity Shares
Valuation in Banking Regulations- scope
• Investment portfolio- in terms of Prudential Norms for Classification,
Valuation and Operation of Investment Portfolio by Banks issued by
RBI.
• The bank should decide the category of the investment at the time of
acquisition and the decision should be recorded on the investment
proposal.
Valuation - HTM
• Investments classified under HTM need not be marked to market and
will be carried at acquisition cost, unless it is more than the face
value, in which case the premium should be amortised over the
period remaining to maturity.
• The individual scrips in the ‘Held for Trading’ category will be marked
to market at monthly or at more frequent intervals and provided for.
• The board of banks shall lay down detailed policies and guidelines on sale of their
stressed assets to Securitisation Companies (SCs)/Reconstruction Companies (RCs).
The policy, inter alia, shall cover the following aspects:
• Financial assets to be sold;
• Valuation procedure to be followed to ensure that the realisable value of financial assets is
reasonably estimated;
• Delegation of powers of various functionaries for taking decision on the sale of the financial
assets; etc.
Policy on Valuation
• Banks should have clear policies with regard to valuation of assets
proposed to be sold.
• In particular it must be clearly specified as to in which cases internal
valuation would be accepted and where external valuation would be
needed.
• However, in case of exposures beyond Rs.50 crore, banks shall obtain
two external valuation reports
Policy on Valuation
• The discount rate used by banks in the valuation exercise shall be spelt out in
the policy. This may be either cost of equity or average cost of funds or
opportunity cost or some other relevant rate, subject to a floor of the
contracted interest rate and penalty, if any.
• The cost of valuation exercise shall be borne by the bank, to ensure that the
bank's interests are protected.
Debt Aggregation – First right of refusal
• A bank offering stressed assets for sale shall offer the first right of
refusal to a SC/RC which has already acquired the highest and at the
same time a significant share (~25-30%) of the asset, for acquiring the
asset by matching the highest bid.
• This requires the process of price discovery via auction to be done
first.
Thank You.