|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
November 18, 2011 Liberalization of Restriction on Transfer of Shares Inter se Residents and Non-Residents The Reserve Bank of India (“RBI”) in continuance with its measure of liberalization of policies and procedures governing foreign direct investment (“FDI”) in India has, vide A.P. (DIR Series) Circular No. 43 dated November 4, 2011 (“Circular”), relaxed the requirement of RBI approval for transfer of shares inter-se residents and non-residents. Background Previously, under Regulation 10(A)(c) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000 (“FDI Regulations”), transfer of shares from a resident to a non-resident required the prior approval of RBI if:
Similarly, prior approval of the RBI was required in case of transfer of shares from non-residents to residents in case of non-conformity with the pricing guidelines. The Change I. No RBI approval required for transfer of shares if pricing guidelines under FDI policy are not met with Prior to the introduction of the Circular, any transfer of shares of a listed company (i) from a resident to a non-resident could not be done below the price at which a preferential allotment of shares could be made under the SEBI guidelines1 (“Preferential Allotment Price”); and (ii) from a non-resident to a resident could not be done above the Preferential Allotment Price. The Circular, however, now provides the leeway to transfer shares inter se residents and non-residents irrespective of the Preferential Allotment Price, so long as the following three conditions are met with:
Analysis and implications · Pricing: Allowing the transfer of shares to be subjected to only one set of pricing norm as prescribed by the SEBI is indeed a welcome change and is likely to allay the complexity that both residents and non-residents faced due to two set of pricing norms being applicable – one being the RBI prescribed Preferential Allotment Price, while the other being the respective SEBI prescribed pricing norms.
For instance, prior to the notification, if a non-resident tendered his shares to a resident in pursuance of an open offer under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Regulations”), prior RBI approval was required to receive a price higher than the Preferential Allotment Price, even if the open offer price was much higher than the Preferential Allotment Price, wherein shares are tendered by non-residents. · Ambiguity: While the leeway in respect of pricing is indeed commendable, the Circular is ambiguous to the extent of indicating situations where the Preferential Allotment Price may not be complied with. Though the Circular provides that transfer of shares, not in conformity with the Preferential Allotment Price will not require RBI approval, if the pricing of the transfer is compliant with the “specific/explicit, extant and relevant SEBI regulations / guidelines”, RBI has left room for ambiguity by prescribing an indicative list comprising of “IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back.” Ambiguity arises on the inclusion of the term “exit” which is too loose and vague to be interpreted and it remains to be seen which SEBI regulation was intended to be applicable to such transfer. II. No RBI approval required for transfer of shares where FIPB approval is obtained The Circular provides that the transfer of shares from a resident to a non-resident, where the transfer requires the prior FIPB approval would not require the prior approval of RBI provided:
Prior to the issue of the Circular, any transfer of shares that required prior approval of the FIPB was also required RBI approval. This requirement of an additional RBI approval (in addition to FIPB approval) has now been done away with so long as pricing guidelines and documentation requirements for the transfer of shares as stipulated by the RBI have been complied with. Analysis and implications Typically, though RBI approval was forthcoming in cases where FIPB approval had been granted, there was no assurance that RBI approval would indeed be granted. Also, sometimes the process of RBI approval was initiated after FIPB approval was received to lend more credence to the RBI application, which led to further delays as RBI approval could take 8 – 10 weeks to come through. That regulatory uncertainty and attendant delays have now been allayed. III. No RBI approval required where the shares of a financial services company are transferred Prior to the issue of the Circular any transfer of shares of a financial services company from a resident to a non-resident required prior approval of the Foreign Exchange Department of the Reserve Bank of India (“FED”). The requirement to procure such an approval has been done away by the Circular if:
Analysis and implications
IV. Where the Takeover Regulations are applicable Prior to the issue of the Circular, any transfer of shares from a resident to a non-resident where the Takeover Regulations were applicable required prior approval of the RBI. Such approval requirement has now been done away with if the transfer of shares is in adherence with the pricing guidelines and documentation requirements as specified by the RBI. Analysis and implications Since the pricing guidelines as prescribed by the RBI in respect of transfer of shares of a listed company now under the Circular refers to the specific/explicit pricing norms prescribed under SEBI regulations, therefore if the transfer of shares from a resident to a non-resident where the Takeover Regulations are applicable, is compliant with the SEBI open offer price, prior RBI approval would not be required. Conclusion The liberalization brought about by the Circular is indeed commendable and indicates regulatory sensitivity to foreign direct investment and the inclination to simplify the regulations. RBI’s approach to obviate compliance with RBI pricing norms where SEBI pricing norms are complied with, not only reduces the hassles of multiple regulatory compliances in case of transfer of shares to and from non-residents, but also, more importantly, avoids conflict in pricing prescribed by RBI and SEBI respectively. This, in addition to the removal of an additional RBI approval for transactions falling under approval route or triggering Takeover Regulations, will indeed comfort foreign investors and encourage investor sentiment. Lastly, the move to relax the requirement of RBI approval for transfer of shares of financial company indicates the RBI’s intent to move towards deregulation, however, there are still few ambiguities in this regard, which if clarified, would certainly help smoothen out the creases.
________________ (1) Provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares. Regulation 76 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009: (1) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of six months or more as on the relevant date, the equity shares shall be allotted at a price not less than higher of the following: (a) The average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the six months preceding the relevant date; or (b) The average of the weekly high and low of the closing prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date. (2) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than six months as on the relevant date, the equity shares shall be allotted at a price not less than the higher of the following: (a) the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, pursuant to which the equity shares of the issuer were listed, as the case may be; or (b) the average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the period shares have been listed preceding the relevant date; or (c) the average of the weekly high and low of the closing prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date. (3) Where the price of the equity shares is determined in terms of sub-regulation (2), such price shall be recomputed by the issuer on completion of six months from the date of listing on a recognised stock exchange with reference to the average of the weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during these six months and if such recomputed price is higher than the price paid on allotment, the difference shall be paid by the allottees to the issuer.
- Ashish Kabra, Deepak Jodhani, Ruchir Sinha & Nishchal Joshipura You can direct your queries or comments to the authors
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
