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Pricing Guidelines Under

FEMA
Transfer or Issue of Security by a Person Resident
Outside India Regulations 2017
Pointers
• Types of Capital Instruments • Pricing guidelines
• What is Convertible Note • - frequent/infrequent
• Foreign investment in E-com business • PRO to PRO
• What is FDI and FPI • PRO to PRI
• Foreign Investment means • PRI to PRO/PRI
• Group Company • Downstream investment
• Prohibited Sectors • Strategic Downstream inv.
Foreign Investment- Definition
• ‘Foreign Investment’ means any investment made by a person
resident outside India on a repatriable basis in capital instruments of
an Indian company or to the capital of an LLP.

• A person resident outside India may hold foreign investment in


capital Instruments of an Indian Company either as Foreign Direct
Investment or as Foreign Portfolio Investment.
Capital Instruments- Definition
• ‘Capital Instruments’ means equity shares, debentures, preference
shares and share warrants issued by an Indian company;
• Explanations:
• Equity shares issued in accordance with the provisions of the Companies Act,
2013 shall include equity shares that have been partly paid.
• ‘Debentures’ means fully, compulsorily and mandatorily convertible
debentures.
• ‘Preference shares’ means fully, compulsorily and mandatorily convertible
preference shares.
• Share Warrants are those issued by an Indian Company in accordance with
the Regulations issued by the Securities and Exchange Board of India.
Capital Instruments- Notes
• Capital instruments can contain an optionality clause subject to a minimum lock-in
period of one year or as prescribed for the specific sector, whichever is higher, but
without any option or right to exit at an assured price.
• Partly paid shares that have been issued to a person resident outside India shall be
fully called-up within twelve months of such issue. Twenty five percent of the total
consideration amount (including share premium, if any), shall be received upfront.
• In case of share warrants at least twenty five percent of the consideration shall be
received upfront and the balance amount within eighteen months of issuance of
share warrants.
• Capital instruments shall include non-convertible/ optionally convertible/ partially
convertible preference shares issued as on and up to April 30, 2007 and optionally
convertible/ partially convertible debentures issued up to June 7, 2007 till their
original maturity.
Foreign Direct Investment (FDI)- Definition
• ‘Foreign Direct Investment’ (FDI) means investment through capital
instruments by a person resident outside India
• in an unlisted Indian company; or
• in 10 percent or more of the post issue paid-up equity capital on a fully
diluted basis of a listed Indian company;
• Fully diluted basis means the total number of shares that would be
outstanding if all possible sources of conversion are exercised.
• In case an existing investment by a person resident outside India in
capital instruments of a listed Indian company falls below 10 percent,
the investment shall continue to be treated as FDI.
Foreign Portfolio Investment (FPI)- Definition
• Foreign Portfolio Investment’ means any investment made by a
person resident outside India through capital instruments where such
investment is
• less than 10 percent of the post issue paid-up share capital on a fully diluted
basis of a listed Indian company or
• less than 10 percent of the paid up value of each series of capital instruments
of a listed Indian company;
• Explanation: The 10 percent limit for foreign portfolio investors shall
be applicable to each foreign portfolio investor or an investor group
as referred in SEBI (Foreign Portfolio Investors) Regulations, 2014.
Issue Price of Capital Instrument- Listed Company
• In the case of a listed Indian company or a company going through a
delisting process as per SEBI (Delisting of Equity Shares) Regulations,
2009, unless otherwise specified in these Regulations or the relevant
Schedules, the price of capital instruments issued to a person resident
outside India shall not be less than the price worked out in
accordance with the relevant Securities and Exchange Board of India
guidelines.
Pricing guidelines under SEBI Regulations
• Governed by SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF
CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009

• Unless otherwise provided, these regulations shall apply to the


following:
• a public issue;
• a rights issue, where the aggregate value of specified securities offered is fifty
lakh rupees or more;
• a preferential issue;
• an issue of bonus shares by a listed issuer;
• a qualified institutions placement by a listed issuer and
• an issue of Indian Depository Receipts.
PRICING IN PUBLIC ISSUE

• (1) An issuer may determine the price of specified securities in


consultation with the lead merchant banker or through the book
building process.

• (2) An issuer may determine the coupon rate and conversion price of
convertible debt instruments in consultation with the lead merchant
banker or through the book building process.

• (3) The issuer shall undertake the book building process in a manner
specified in Schedule XI to the ICDR.
Pricing in Right Issue
• The issue price shall be determined in consultation with the
designated stock exchange.

• No issuer shall make a rights issue of equity shares unless it has made
reservation of equity shares of the same class in favour of the holders
of outstanding compulsorily convertible debt instruments ,if any, in
proportion to the convertible part thereof.
• The equity shares so reserved for the holders of fully or partially
compulsorily convertible debt instruments shall be issued at the time
of conversion of such convertible debt instruments on the same
terms at which the equity shares offered in the rights issue were
issued.
Pricing in Preferential Issue- Frequently traded shares

• frequently traded shares means shares of an issuer, in which the traded


turnover on any stock exchange during the twelve calendar months
preceding the relevant date, is at least ten per cent of the total number of
shares of such class of shares of the issuer.
• If the equity shares of the issuer have been listed on a recognised stock
exchange for a period of twenty six weeks or more as on the relevant date,
the equity shares shall be allotted at a price not less than higher of the
following:
• The average of the weekly high and low of the volume weighted average price of the
related equity shares quoted on the recognised stock exchange during the twenty six
weeks preceding the relevant date; or
• The average of the weekly high and low of the volume weighted average prices of
the related equity shares quoted on a recognised stock exchange during the two
weeks preceding the relevant date.
Pricing in Preferential Issue- Frequently traded shares
• If the equity shares of the issuer have been listed on a recognised
stock exchange for a period of less than twenty six weeks as on the
relevant date, the equity shares shall be allotted at a price not less
than the higher of the following:
• 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
• the average of the weekly high and low of the volume weighted average
prices of the related equity shares quoted on the recognised stock exchange
during the period shares have been listed preceding the relevant date; or
• the average of the weekly high and low of the volume weighted average
prices of the related equity shares quoted on a recognised stock exchange
during the two weeks preceding the relevant date.
Pricing in Preferential Issue- Infrequently traded shares
• The price determined by the issuer shall take into account valuation
parameters including book value, comparable trading multiples, and
such other parameters as are customary for valuation of shares of
such companies:
• Provided that the issuer shall submit a certificate to the stock
exchange where the equity shares of the issuer are listed stating that
the issuer is in compliance of this regulation, obtained from an
independent merchant banker or an independent chartered
accountant in practice having a minimum experience of ten years.
Pricing in Preferential Issue -exceptions
• The provisions of this Chapter shall not apply where the preferential
issue of equity shares is made:
• pursuant to conversion of loan or option attached to convertible debt
instruments in terms of sub-sections (3) and (4) of sections 81 of the
Companies Act, 1956 or sub-section(3) and (4) of section 62 of the
Companies Act, 2013, whichever applicable;
• pursuant to a scheme approved by a High Court under section 391 to
394 of the Companies Act, 1956 or a Tribunal under sections 230 to
234 of the Companies Act, 2013, whichever applicable.
Pricing in Preferential Issue -exception

• The provisions of ICDR shall not apply where the preferential issue of equity
shares is made to the consortium of banks and financial institutions pursuant to
conversion of their debt, as part of the strategic debt restructuring scheme in
accordance with the guidelines specified by the Reserve Bank of India, subject to
the following conditions:

• conversion price shall be determined in accordance with the guidelines specified by the
Reserve Bank of India for strategic debt restructuring scheme, which shall not be less than
the face value of the equity shares;

• conversion price shall be certified by two independent qualified valuers, and for this
purpose 'valuer' shall have the same meaning as assigned to it under clause (r) of sub
regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Sweat
Equity) Regulations, 2002;
Issue Price of Capital Instruments- Unlisted Company

• In case of an unlisted Indian Company, unless otherwise specified in


these Regulations or the relevant Schedules, the price of capital
instruments of an Indian company issued by such company to a
person resident outside India shall not be less than:

• the valuation of capital instruments done as per any internationally accepted


pricing methodology for valuation on an arm’s length basis
• duly certified by a Chartered Accountant or
• a Securities and Exchange Board of India registered Merchant Banker or
• a practicing Cost Accountant.
Internationally Accepted Pricing Methodology for Valuation

• Asset Based Approach


• Net Assets Value (NAV) Method.
• Price to Book (P/B) Multiple Method.
• Earning Based Approach
• Price Earnings Capitalisation Value (PECV) Method.
• Enterprise Value(EV)/ EBITDA Multiple - (CCM) Method.
• Discounted Cash Flow (DCF) Method.
• Market Based Approach
• Market Price Method.

• Other factors :
• Control premium,
• Minority discount
• Judicial pronouncements
Issue price of convertible capital instruments
• in case of convertible capital instruments, the price/ conversion
formula of the instrument should be determined upfront at the time
of issue of the instrument.
• The price at the time of conversion should not in any case be lower
than the fair value worked out, at the time of issuance of such
instruments, in accordance with these Regulations.
Acquisition through a rights issue or a bonus issue
• A person resident outside India and having investment in an Indian
company may make investment in capital instruments (other than share
warrants) issued by such company as a rights issue or a bonus issue
provided that:
• The offer made by the Indian company is in compliance with the provisions of the
Companies Act, 2013;
• Such issue shall not result in a breach of the sectoral cap applicable to the company;
• Such investment made through rights issue or bonus issue shall be subject to the
conditions as are applicable at the time of such issue.
• In case of a listed Indian company, the rights issue to persons resident
outside India shall be at a price determined by the company;
• In case of an unlisted Indian company, the rights issue to persons resident
outside India shall not be at a price less than the price offered to persons
resident in India.
Transfer of capital instruments of an Indian listed company by a
resident to a person resident outside India
• the price of capital instruments of an Indian company transferred from
a person resident in India to a person resident outside India shall not
be less than:
• the price worked out in accordance with the relevant Securities and Exchange
Board of India guidelines in case of a listed Indian company;

• the price at which a preferential allotment of shares can be made under the
Securities and Exchange Board of India Guidelines, as applicable, in case of a
listed Indian company or in case of a company going through a delisting process
as per the Securities and Exchange Board of India (Delisting of Equity Shares)
regulations, 2009;
Transfer of capital instruments of an Indian unlisted company
by a resident to a person resident outside India
• the price of capital instruments of an Indian company transferred
from a person resident in India to a person resident outside India
shall not be less than:
• the valuation of capital instruments done as per any internationally accepted
pricing methodology for valuation on an arm’s length basis duly certified by
• a Chartered Accountant or
• a Securities and Exchange Board of India registered Merchant Banker or
• a practicing Cost Accountant.
Valuation of Capital instrument for transfer by a person
resident outside India to a resident- listed company
• transferred by a person resident outside India to a person resident in
India shall not exceed:

• the price worked out in accordance with the relevant Securities and Exchange
Board of India guidelines in case of a listed Indian company;

• the price at which a preferential allotment of shares can be made under the
Securities and Exchange Board of India Guidelines, as applicable, in case of a
listed Indian company or in case of a company going through a delisting
process as per the Securities and Exchange Board of India (Delisting of Equity
Shares) regulations, 2009;
Valuation of Capital instrument for transfer by a person
resident outside India to a resident- Unlisted company
• transferred by a person resident outside India to a person resident in
India shall not exceed:

• the valuation of capital instruments done as per any internationally accepted


pricing methodology for valuation on an arm’s length basis duly certified by
• a Chartered Accountant or
• a Securities and Exchange Board of India registered Merchant Banker or
• a practicing Cost Accountant.
Valuation in case of swap of Capital instruments

• in case of swap of capital instruments, subject to the condition that


irrespective of the amount, valuation involved in the swap arrangement will
have to be made by a Merchant Banker registered with Securities and
Exchange Board of India or an Investment Banker outside India registered
with the appropriate regulatory authority in the host country.
Valuation of Capital instrument for transfer by a person
resident outside India to a resident- Conditions
• The guiding principle would be that the person resident outside India is not
guaranteed any assured exit price at the time of making such investment/
agreement and shall exit at the price prevailing at the time of exit.
• where shares in an Indian company are issued to a person resident outside
India in compliance with the provisions of the Companies Act, 2013, by way
of subscription to Memorandum of Association, such investments shall be
made at face value subject to entry route and sectoral caps.
• These pricing guidelines shall not be applicable for investment in capital
instruments by a person resident outside India on non-repatriation basis.
Direct Investment outside India
• “Direct investment outside India” means:
• investment by way of contribution to the capital or
• subscription to the Memorandum of Association of a foreign entity or
• by way of purchase of existing shares of a foreign entity either
• by market purchase or
• private placement or
• through stock exchange,
• but does not include portfolio investment.
Valuation of shares of the foreign company

• For the purposes of investment, by way of remittance from India, in


an existing company outside India, the valuation of shares of the
company outside India shall be made:
• where the investment is more than USD 5 million, by
• a Category I Merchant Banker Registered with Securities and Exchange Board of India
(SEBI), or
• an Investment Banker/Merchant Banker outside India registered with the appropriate
regulatory authority in the host country.

• in all other cases, by a Chartered Accountant or a Certified Public Accountant.


Valuation of shares of the foreign company acquired through swap

• For the purposes of investment, by acquisition of shares of an existing


company outside India, where the consideration is to be paid fully or
partly by issue of the Indian party’s shares, the valuation of shares of
the company outside India shall in all cases, be carried out by
• a Category I Merchant Banker registered with the Securities and Exchange
Board of India (SEBI) or
• an Investment Banker/Merchant Banker outside India registered with the
appropriate regulatory authority in the host country.
Valuation of shares of the foreign company acquired against ADRs/GDRs

• An Indian Party may acquire shares of a foreign company, engaged in


bonafide business activity, in exchange of ADRs/GDRs issued to the
latter in accordance with the scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (through Depository Receipt
Mechanism) Scheme, 1993, the valuation of the shares of the foreign
company is made:
• as per the recommendations of the Investment Banker if the shares are not
listed on any stock exchange; or
• based on the current market capitalization of the foreign company arrived at
on the basis of monthly average price on any stock exchange abroad for the
three months preceding the month in which the acquisition is committed and
over and above, the premium, if any, as recommended by the Investment
Banker in its due diligence report in other cases.
Acquisition of shares of foreign company through Approval Route

• for the purpose of investment by way of remittance from India, in an


existing company outside India, shall be accompanied, by the
valuation of shares of the company outside India, made-

• where the investment is more than USD 5 (five) million, by a Category I


Merchant Banker registered with SEBI or an Investment Banker/Merchant
Banker registered with the appropriate regulatory authority in the host
country; and

• in all other cases, by a Chartered Accountant or a Certified Public Accountant.
Acquisition of shares of foreign company through Approval Route

• for the purposes of investment by acquisition of shares of an existing


company outside India where the consideration is to be paid fully or
partly by issue of the Indian party’s shares, shall be accompanied by
the valuation carried out by a Category I Merchant Banker registered
with the SEBI or an Investment Banker/Merchant Banker registered
with the appropriate regulatory authority in the host country.
Transfer by way of sale of shares of a JV/WOS outside India

• An Indian party may transfer by way of sale to another Indian party


who complies with the provisions of Regulation 6 above, or to a
person resident outside India, any share or security held by him in a
Joint Venture or Wholly Owned Subsidiary outside India Provided
that
• The sale does not result in any write-off of the investment made;
• the sale is effected through a stock exchange where the shares of the
overseas Joint Venture or Wholly Owned Subsidiary are listed;
• if the shares are not listed on the stock exchange, and the shares are
disinvested by a private arrangement, the share price is not less than the
value certified by a Chartered Accountant /Certified Public Accountant as the
fair value of the shares based on the latest audited financial statements of the
Joint Venture or Wholly Owned Subsidiary.
Transfer by way of Sale of Shares involving Write -off

• Where the transfer by way of sale of shares or security by any Indian


party listed on any stock exchange in India, is for a price less than the
amount invested in the share or the security transferred, -

• where the difference between the said value and the sale price does not
exceed the percentage approved by the Reserve Bank, from time to time, of
the Indian party's actual export realisation of the previous year, the Indian
party may write-off to the extent of the difference, the capital invested in the
overseas JV/WOS;
• where such difference is more than the percentage approved by the Reserve
Bank, from time to time, of the Indian party's actual export realisation of the
previous year, the Indian party shall apply to the Reserve Bank for permission
to write -off the capital invested, which permission may be granted subject to
such conditions as the Reserve Bank considers appropriate.
Valuations in Banking
Regulations
Basics
• Prudential Norms for NPA Classification
• Prudential Norms for Investments Classification
• Valuation norms for Investments, Pref. & Equity Shares
Valuation in Banking Regulations- scope
• Investment portfolio- in terms of Prudential Norms for Classification,
Valuation and Operation of Investment Portfolio by Banks issued by
RBI.

• Sale of stressed assets- in terms of framework governing sale of such


assets by banks to SCs/RCs/other banks/Non Banking Financial
Companies /Financial Institutions etc. issued by RBI.
Investment Policy by banks
• Banks should frame Internal Investment Policy Guidelines and obtain
the Board’s approval.

• Investment Policy has to be in line with the Prudential Norms for


Classification, Valuation and Operation of Investment Portfolio by
Banks issued by RBI.

• The investment policy guidelines should be implemented to ensure


that operations in securities are conducted in accordance with sound
and acceptable business practices.
Investment Portfolio of a Bank
• SLR Securities -RBI fixes statutory liquidity ratio from time to time – currently
it is at 19.5%. Banks to required to maintain 19.5% of Net Demand and Time
Liabilities (NDTL) which is to be maintained on daily basis by investment in
• cash (other than CRR),
• unencumbered prescribed Central and State Government securities,
• Treasury bills, and
• Government Guaranteed Bonds.
• These securities are approved securities for SLR purposes under section 24 of
the Banking Regulation Act, 1949, and Indian Trust Act, 1882 and are issued
under Public Debt Act, 1944.
• Non-SLR securities- Investments in Corporate/PSU/FI bonds, Commercial
Papers, Certificate of Deposits, debt mutual funds and other fixed income
securities.
Classification of the Investment Portfolio of a Bank
• The entire investment portfolio of the banks (including SLR securities and
non-SLR securities) are to be classified under three categories viz.

• The securities acquired by the banks with the intention to hold them up to maturity
will be classified under ‘Held to Maturity (HTM)’.
• The securities acquired by the banks with the intention to trade by taking advantage
of the short-term price/interest rate movements will be classified under ‘Held for
Trading (HFT)’.
• The securities which do not fall within the above two categories will be classified
under ‘Available for Sale (AFS)’.

• The bank should decide the category of the investment at the time of
acquisition and the decision should be recorded on the investment
proposal.
Valuation - HTM
• Investments classified under HTM need not be marked to market and
will be carried at acquisition cost, unless it is more than the face
value, in which case the premium should be amortised over the
period remaining to maturity.

• Banks to recognise any diminution, other than temporary, in the value


of their investments in subsidiaries/ joint ventures, which are
included under HTM and provide therefor. Such diminution should be
determined and provided for each investment individually.
Valuation - HFT

• The individual scrips in the ‘Held for Trading’ category will be marked
to market at monthly or at more frequent intervals and provided for.

• Consequently, the book value of the individual securities in this


category would also not undergo any change after marking to market.
Valuation- AFS
• The individual scrips in the Available for Sale category will be marked
to market at quarterly or at more frequent intervals.
• Domestic Securities under this category shall be valued scrip-wise and
depreciation/ appreciation shall be aggregated for each classification.
• Foreign investments under this category shall be valued scrip-wise
and depreciation/ appreciation shall be aggregated for five
classifications viz.
• Government securities,
• Shares,
• Debentures & Bonds,
• Subsidiaries and/or joint ventures abroad and
• Other investments (to be specified)).
Valuation of Investment-Market Value

• The ‘market value’ for the purpose of periodical valuation of


investments included in the AFS and HFT categories would be
• the market price of the scrip as available from the trades/ quotes on the stock
exchanges,
• SGL account transactions,
• price list of RBI,
• prices declared by Primary Dealers Association of India (PDAI) jointly with the
Fixed Income Money Market and Derivatives Association of India (FIMMDA)
periodically.
Unquoted SLR securities-Central Government Securities

• Banks should value the unquoted Central Government securities on


the basis of the prices/ YTM rates put out by the PDAI/ FIMMDA at
periodical intervals.
• Treasury Bills should be valued at carrying cost.
Unquoted SLR securities- State Government Securities

• State Government securities will be valued applying the Yield to


Maturity (YTM) method by marking it up by 25 basis points above the
yields of the Central Government Securities of equivalent maturity
put out by PDAI/ FIMMDA periodically.
Unquoted SLR securities-Other Approved Securities

• Other approved securities will be valued applying the YTM method by


marking it up by 25 basis points above the yields of the Central
Government Securities of equivalent maturity put out by PDAI/
FIMMDA periodically
Unquoted Non-SLR securities- Debentures/ Bonds
• All debentures/ bonds should be valued on the YTM basis. Such debentures/
bonds may be of different companies having different ratings.
• These will be valued with appropriate mark-up over the YTM rates for Central
Government Securities as put out by PDAI/ FIMMDA periodically.
• The mark-up will be graded according to the ratings assigned to the debentures/
bonds by the rating agencies subject to the following: -
• The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points
above the rate applicable to a Government of India loan of equivalent maturity.
• The rate used for the YTM for unrated debentures/ bonds should not be less than the rate
applicable to rated debentures/ bonds of equivalent maturity. The mark-up for the unrated
debentures/ bonds should appropriately reflect the credit risk borne by the bank.
• Where the debentures/ bonds are quoted and there have been transactions
within 15 days prior to the valuation date, the value adopted should not be
higher than the rate at which the transaction is recorded on the stock exchange.
Zero coupon bonds (ZCBs)

• ZCBs should be shown in the books at carrying cost, i.e., acquisition


cost plus discount accrued at the rate prevailing at the time of
acquisition, which may be marked to market with reference to the
market value.
• In the absence of market value, the ZCBs may be marked to market
with reference to the present value of the ZCB.
Preference Shares

• The valuation of preference shares should be on YTM basis. The


preference shares will be issued by companies with different ratings.
These will be valued with appropriate mark-up over the YTM rates for
Central Government Securities put out by the PDAI/FIMMDA
periodically.
Equity Shares

• The equity shares in the bank's portfolio should be marked to market


preferably on a daily basis, but at least on a weekly basis.
• Equity shares for which current quotations are not available or where
the shares are not quoted on the stock exchanges, should be valued
at break-up value (without considering ‘revaluation reserves’, if any)
which is to be ascertained from the company’s latest balance sheet
(which should not be more than one year prior to the date of
valuation).
• In case the latest balance sheet is not available the shares are to be
valued at Re.1 per company.
Mutual Funds Units (MF Units)
• Investment in quoted MF Units should be valued as per Stock
Exchange quotations. Investment in un-quoted MF Units is to be
valued on the basis of the latest re-purchase price declared by the MF
in respect of each particular Scheme.
• In case of funds with a lock-in period, where repurchase price/
market quote is not available, Units could be valued at Net Asset
Value (NAV). If NAV is not available, then these could be valued at
cost, till the end of the lock- in period.
• Wherever the re-purchase price is not available, the Units could be
valued at the NAV of the respective scheme.
Commercial Paper

• Commercial paper should be valued at the carrying cost.


Investment in securities issued by Securitisation Company (SC) /
Reconstruction Company (RC)
• When banks invest in the SRs / Pass-Through Certificates (PTCs)
issued by SCs / RCs, in respect of the financial assets sold by them to
the SCs / RCs, the sale shall be recognised in books of the banks at the
lower of:
• the redemption value of the SRs /PTCs, and
• the Net Book Value (NBV) (i.e. Book value less provisions held), of the
financial asset.
Sale of Stressed Assets by
Banks
Key pointers
• When two valuation reports will be required by Bank for sale of stressed
Assets?
• Who bears cost of valuation? – CG,SG, Securitisation Co., Bank
• Discount rate used by Bank for internal valuation should not be less than?
• First right of refusal?
Sale of Stressed Assets by Banks
• Framework governing sale of such assets by banks to SCs/RCs/other banks/Non
Banking Financial Companies /Financial Institutions etc. guidelines issued by RBI on
September 1,2016.

• The board of banks shall lay down detailed policies and guidelines on sale of their
stressed assets to Securitisation Companies (SCs)/Reconstruction Companies (RCs).
The policy, inter alia, shall cover the following aspects:
• Financial assets to be sold;

• Norms and procedure for sale of such financial assets;

• Valuation procedure to be followed to ensure that the realisable value of financial assets is
reasonably estimated;

• Delegation of powers of various functionaries for taking decision on the sale of the financial
assets; etc.
Policy on Valuation
• Banks should have clear policies with regard to valuation of assets
proposed to be sold.
• In particular it must be clearly specified as to in which cases internal
valuation would be accepted and where external valuation would be
needed.
• However, in case of exposures beyond Rs.50 crore, banks shall obtain
two external valuation reports
Policy on Valuation
• The discount rate used by banks in the valuation exercise shall be spelt out in
the policy. This may be either cost of equity or average cost of funds or
opportunity cost or some other relevant rate, subject to a floor of the
contracted interest rate and penalty, if any.

• The cost of valuation exercise shall be borne by the bank, to ensure that the
bank's interests are protected.
Debt Aggregation – First right of refusal

• A bank offering stressed assets for sale shall offer the first right of
refusal to a SC/RC which has already acquired the highest and at the
same time a significant share (~25-30%) of the asset, for acquiring the
asset by matching the highest bid.
• This requires the process of price discovery via auction to be done
first.
Thank You.