RBI Has Withdrawn All FDI Pricing Guidelines

Mr. Chander Sawhney
Vice President
RBI in its monetary policy dated 1st April 2014 as regards Foreign Direct Investment (FDI), has decided to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares and accordingly, such transactions will henceforth be based on acceptable market practices. Operating guidelines will be notified separately.

The operating guidelines until a few years back were based on pricing details as arrived at by erstwhile CCI guidelines which was based on historical financials, that was later changed to future based Discounted Free Cash Flow (DFCF) method in 2010. However, since then there has been controversy regarding the issue of ‘call’ and ‘put’ options and for such options, the exit pricing was recently linked to return on equity.

The new rules would see an attempt to provide more flexibility to investors involved in the deal and focused towards commercial aspect of transactions. It is interesting to see how new rules would be framed. In our view, valuation approach and method should be kept open to suit the market, company and transaction.

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