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February 2014

A. P. (DIR Series) Circular No. 86 dated 9th January, 2014

By Gaurang Gandhi, Chartered Accountant
Reading Time 2 mins
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Foreign Direct Investment – Pricing Guidelines for FDI instruments with optionality clauses

This circular permits the issue of equity shares and compulsorily and mandatorily convertible preference shares/debentures under FDI Scheme to a person resident outside with an “optionality clause”. Under this clause, after a minimum lockin period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed), the non-resident investor exercising option/right of buy-back will be eligible to exit without any assured return at the price prevailing/ value determined at the time of exercise of the option. The lock-in period will be effective from the date of allotment of such shares or convertible debentures unless otherwise prescribed.

Valuation will be as under: –

(i) In case of a listed company, the market price prevailing at the recognised stock exchanges.

(ii) In case of unlisted company, price not exceeding that arrived at on the basis of Return on Equity (i.e. Profit After Tax/Net Worth – where Net Worth would include all free reserves and paid up capital) as per the latest audited balance sheet.

(iii) Compulsorily Convertible Debentures (CCD) and Compulsorily Convertible Preference Shares (CCPS) are to be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit and which is to be duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

All existing contracts will also have to comply with the above conditions to qualify as FDI compliant.

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