RBI Valuation Methodology
In order to make the valuation of shares in line with global business valuation practices and maximize forex earnings for Indian Residents, RBI had recently introduced revised valuation guidelines in case of allotment or transfer of equity shares/ compulsory convertible instruments by Indian Resident to Non Resident and vice-versa.
Now for all unlisted companies having Foreign Direct Investment (FDI), RBI has prescribed mandatory valuation of shares strictly through Discounted Free Cash Flow (DFCF) method only, a prominent method based on Income Approach of valuation which is entirely based on the “Future Cash Earning Capacity” of any business and thus often lead to optimum value scenario (from exchange control perspective). Before DFCF method was prescribed, the basis of valuation for RBI transactions was Controller of Capital Issues (CCI) guidelines which determined a conservative valuation by considering the average of Net Asset Value (‘NAV’) the company’s Profit Earning Capacity Value (‘PECV’), which was arrived at based on its past financial performance.This valuation article is covering different situations envisaged under RBI Law for both FDI as well as Overseas Direct Investment (ODI) transactions and some valuation methodologies are also suggested based on our practical experience and global valuation principles.
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