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RBI Liberalizes Foreign Entry/Exit

Published on Mon, Jul 14,2014 | 20:13, Updated at Tue, Jul 15 at 21:19Source : |   Watch Video :

It’s a landmark change in India’s foreign investment policy. After decades of prescribing the valuation formula based on which foreign investors can buy unlisted shares in India, the RBI has now adopted a more liberal stance. CNBC-TV18's Menaka Doshi reports on the details and if this is good news for India Inc?

It is great news! That’s because it cleans up and simplifies the entire process of foreign investment coming and going out of India. And as you know, no foreign investor wants ambiguity on the potential price at which he can exit. So this is very good news. Now let me tell you what has happened so far.

When it came to foreign investment in India - first there was the CCI formula, then DCF and now RBI has finally shifted to internationally accepted pricing methodologies.Its latest notification, effective July 8th , says- ‘in case of equity shares, preference shares or debentures of unlisted company, at a price not exceeding that arrived at as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis, duly certified by a chartered accountant or a sebi registered merchant banker.’

So here’s how it works


  1. Issue of shares to non-resident: At price more than price arrived at via internationally accepted pricing methods
  2. Transfer of shares to non-resident: Awaiting RBI circular, expect same norm


  1. Transfer from non-resident to resident: At price less than price arrived at via internationally accepted pricing methods
  2. Expected that same norms will apply to warrants & partly paid equity shares pricing. But this is by implication, no explicit clarification.

That brings us to Call & Put options!

Earlier this year, RBI had said the while a foreign investor must exit unlisted shares at a DCF-based price, if the exit is linked to an option, then it must not be ata price more than an Return on Equity price!

Now it says: ‘the guiding principle would be that the non-resident investor is  not guaranteed any assured exit price at the time of making such investment/agreements and shall exit at the price prevailing at the time of exit, subject to lock-in period requirement.’


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