Unlisted cos global deals to cost more

At one stroke,the cost of takeovers involving unlisted Indian companies and foreign partners has gone up substantially. The Reserve Bank of India has asked all unlisted companies to shift to a market-based valuation for such share transactions from the existing book value method. The change in valuation method will raise the cost of these deals. From now,any unlisted company offering shares to a foreign company or individual will have to price them according to the comparable market price. The phrase used by RBI here is discounted free cash flow method. The move,which will be radical for the companies in question,has the merit of aligning them with listed companies.

At one stroke,the cost of takeovers involving unlisted Indian companies and foreign partners has gone up substantially. The Reserve Bank of India RBI has asked all unlisted companies to shift to a market-based valuation for such share transactions from the existing book value method. The change in valuation method will raise the cost of these deals.

From now,any unlisted company offering shares to a foreign company or individual will have to price them according to the comparable market price. The phrase used by RBI here is discounted free cash flow method. The move,which will be radical for the companies in question,has the merit of aligning them with listed companies. Now there will be very little reason for unlisted companies to remain out of the stock exchanges,something which will be cheered by all investors in stock markets.

The RBI notification has amended the regulations on Transfer or Issue of Security by a Person Resident Outside India, issued in 2000. It says the share transaction will be either at the Sebi-determined price as applicable for listed companies or through the discounted free cash flow method for unlisted companies. The valuation will be conducted by a Sebi-registered Class-I merchant banker,says the RBI notification.

Under the Foreign Exchange Management Act,the RBI is the rule making authority; hence the new guideline has originated from the bank instead of

Discounted free cash flow method broadly entails adding up the projected cash inflow for the firm,say for the next 10 years,and assessing their present value. It gives a more rounded picture of the firm based on its earnings now,instead of the value of its shares assessed at historical value.

Up till now,shares of an unlisted company issued to persons outside India were priced at book value. This is in accordance with the system prevalent when Sebis precursor Controller of Capital Issues had the authority to decide on pricing shares. Since Sebi has the authority to mandate pricing only for listed companies,the unlisted ones were at a price advantage when they offered equity abroad.

The RBI has,however,given an escape clause as the third option. The option says when the issue of shares is on a preferential allotment basis,the price will be as per the guidelines laid down by the Reserve Bank from time to time.

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Since preferential allotment as defined by Sebi rules can cover just about anybody,some of the companies are hopeful they can escape the rigour of the discounted free cash flow method.

But sources close to the developments said this is not an oversight; instead,the RBI is expected to issue further notifications soon to ensure that the corridor is not misused.

According to R Sridhar,associate director,PricewaterhouseCoopers,it is expected that RBI will soon be aligning the valuation rules for transfer of shares in this option also,so that there is no avenue for dichotomy in the application of rules.