Need of Valuation Report under FEMA Law

Need of Valuation Report under FEMA Law. The transfer or allotment of equity shares or any other capital instruments is regulated as per the Pricing/Valuation Guidelines mentioned above, Valuation Services must be taken. The transfer or allotment must be done at fair value, which should be determined using an internationally accepted pricing methodology. Internationally accepted pricing methodologies primarily imply the Discounted Cash Flow (DCF) methodology, for valuing unlisted companies considers the following factors:
- Future financial projections
- A well-researched discounting rate
- Macro and microeconomic risks
- Other industry norms
Moreover, other valuation methods can be applied by assigning appropriate weights to each method.
FDI Reporting Requirements: -
Documents for Form FC-GPR (Foreign Currency - Gross Provisional Return) SMF:

CS Certificate

Declaration by the Authorized Representative of the Indian Company/LLP

Pre- and post-shareholding pattern in the Indian company

Copy of government approval (if applicable)

High Court order on merger/demerger/amalgamation (if applicable)

RBI approval on refund amount (if applicable)

Valuation certificate

Approval letter (if non-compliant with guidelines)

RBI approvals for equity shares issued against payable funds to the foreign investor

FIRC/Debit statement

Know Your Customer (KYC)

Board Resolution

Note:

As per the RBI notification on "Foreign Investment in India - Reporting in Single Master Form" dated 7th June 2018, all foreign investment reporting is now done via the Single Master Form (SMF) filed online.

ARF and FC-GPR have been merged into a single revised FC-GPR (SMF). All new filings must be done in this form.

The valuation report should be certified by any of the below-given list of qualified valuers considering the threshold amount as under:
 
If the amount of investment <= USD 5.0 million or equivalent:

Chartered Accountant (CA) or

Certified Public Accountant (CPA) or

Category I merchant banker registered with the Securities and Exchange Board of India (SEBI) or Investment banker/merchant banker outside India registered with the appropriate regulatory authority in the host country or host jurisdiction or

Registered valuer as per the Companies Act, 2013 or corresponding valuer registered with the regulatory authority in the host country or host jurisdiction or

Practicing cost accountant

If the amount of investment > USD 5.0 million or equivalent:

(b) Points to be ensured in the valuation report:

Certificate should not be more than 90 days from the date of valuation & date of valuation certificate.

The report should mention that valuation is based on internationally accepted valuation methods & an arm’s length basis.

Certificate should be based on the last audited financial statements (not older than 18 months)

It should provide per share fair value under FEMA

The issue price/transfer price of equity shares shall not be more than the fair value arrived as per the valuation report

If prepared by CA, the UDIN must be mentioned. If by Merchant Banker, then the SEBI registration number should be mentioned.

A Valuation Report is not required in the case of the first remittance where the investment amount is towards the subscription to the Memorandum of Association (MOA) in case of Subsidiary or WOS Company Registration. Further, provided it is subscribed at face value and the investment amount is not over and above the initial capital stated in the incorporation document/MOA.

Learn more about RBI FEMA/ FDI Reporting: EMF SMF Filing, FC-TRS and FLA Return, FEMA/ RBI Compliance Checklist for Indian Companies with FDI
Source: RBI Notification No.FEMA. 48 /2002-RB
Consolidated FDI Policy Circular of 2020
Financial year-wise FDI Equity Inflow (From April 2000 to December 2023)
Source DPIIT
Key Trigger Dates for Valuation under FEMA

Inbound foreign investment in an unlisted entity

At the time of investment

Buyback of shares by an Indian entity from foreign shareholders

At the time of the buybackback

Conversion of CCP / CCD where the conversion terms were not predetermined

At the time of conversion

Share swap transactions involving foreign shareholders

Before approval of the swap transaction

Transfer of shares in unlisted Indian entities between a resident and non-resident or vice versa

At the time of the transaction

Investment in entities abroad / acquisition of shares/stake in entities abroad by a resident

At the time of the transaction

Transfer/disposal of shares/stake in foreign entities by a resident

At the time of the transaction

Valuation assignments can be categorized into pre-transaction and post-transaction valuations. Pre-transaction valuations, such as mergers, acquisitions, and equity issuances, occur before the transaction date to determine the value beforehand. On the other hand, post-transaction valuations, done after transactions for accounting, tax, or legal purposes, assess the value that has materialized. Different regulatory frameworks and purposes dictate when each type of valuation is conducted, ensuring compliance and informed decision-making.
Validity of Report under FEMA
Valuation reports for Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) transactions carry a validity period of 90 days, which means that the transaction, whether it involves inbound or outbound investment, must be finalized within this timeframe to ensure the accuracy and relevance of the valuation. Compliance like filing of FDI Reporting must be done within this timeframe is important to align with regulatory requirements and to maintain the integrity of the valuation process within the context of international investments. The valuation certificate should not be more than 90 days old as on the date of allotment of shares/Transfer of Shares the case may be. To read more about the process for filing at FIRMS Click here

The transfer or allotment of equity shares or any other capital instruments is regulated as per the Pricing/Valuation Guidelines mentioned above, Valuation Services must be taken. The transfer or allotment must be done at fair value, which should be determined using an internationally accepted pricing methodology. Internationally accepted pricing methodologies primarily imply the Discounted Cash Flow (DCF) methodology, for valuing unlisted companies considers the following factors:

- Future financial projections

- A well-researched discounting rate

- Macro and microeconomic risks

- Other industry norms

Moreover, other valuation methods can be applied by assigning appropriate weights to each method.

FDI Reporting Requirements: -

Documents for Form FC-GPR (Foreign Currency - Gross Provisional Return) SMF:

CS Certificate
Declaration by the Authorized Representative of the Indian Company/LLP
Pre- and post-shareholding pattern in the Indian company
Copy of government approval (if applicable)
High Court order on merger/demerger/amalgamation (if applicable)
RBI approval on refund amount (if applicable)
Valuation certificate
Approval letter (if non-compliant with guidelines)
RBI approvals for equity shares issued against payable funds to the foreign investor
FIRC/Debit statement
Know Your Customer (KYC)
Board Resolution

Note:

As per the RBI notification on "Foreign Investment in India - Reporting in Single Master Form" dated 7th June 2018, all foreign investment reporting is now done via the Single Master Form (SMF) filed online.
ARF and FC-GPR have been merged into a single revised FC-GPR (SMF). All new filings must be done in this form.

The valuation report should be certified by any of the below-given list of qualified valuers considering the threshold amount as under:

If the amount of investment <= USD 5.0 million or equivalent:

Chartered Accountant (CA) or
Certified Public Accountant (CPA) or
Category I merchant banker registered with the Securities and Exchange Board of India (SEBI) or Investment banker/merchant banker outside India registered with the appropriate regulatory authority in the host country or host jurisdiction or
Registered valuer as per the Companies Act, 2013 or corresponding valuer registered with the regulatory authority in the host country or host jurisdiction or
Practicing cost accountant

If the amount of investment > USD 5.0 million or equivalent:

Category I merchant banker registered with the Securities and Exchange Board of India (SEBI) or Investment banker/merchant banker outside India registered with the appropriate regulatory authority in the host country or host jurisdiction.

(b) Points to be ensured in the valuation report:

Certificate should not be more than 90 days from the date of valuation & date of valuation certificate.

The report should mention that valuation is based on internationally accepted valuation methods & an arm’s length basis.
Certificate should be based on the last audited financial statements (not older than 18 months)
It should provide per share fair value under FEMA
The issue price/transfer price of equity shares shall not be more than the fair value arrived as per the valuation report
If prepared by CA, the UDIN must be mentioned. If by Merchant Banker, then the SEBI registration number should be mentioned.

A Valuation Report is not required in the case of the first remittance where the investment amount is towards the subscription to the Memorandum of Association (MOA) in case of Subsidiary or WOS Company Registration. Further, provided it is subscribed at face value and the investment amount is not over and above the initial capital stated in the incorporation document/MOA.

Learn more about RBI FEMA/ FDI Reporting: EMF SMF Filing, FC-TRS and FLA Return, FEMA/ RBI Compliance Checklist for Indian Companies with FDI

Source: RBI Notification No.FEMA. 48 /2002-RB

Consolidated FDI Policy Circular of 2020

Financial year-wise FDI Equity Inflow (From April 2000 to December 2023)

Source DPIIT

Key Trigger Dates for Valuation under FEMA

1	Inbound foreign investment in an unlisted entity	At the time of investment
2	Buyback of shares by an Indian entity from foreign shareholders	At the time of the buybackback
3	Conversion of CCP / CCD where the conversion terms were not predetermined	At the time of conversion
4	Share swap transactions involving foreign shareholders	Before approval of the swap transaction
5	Transfer of shares in unlisted Indian entities between a resident and non-resident or vice versa	At the time of the transaction
6	Investment in entities abroad / acquisition of shares/stake in entities abroad by a resident	At the time of the transaction
7	Transfer/disposal of shares/stake in foreign entities by a resident	At the time of the transaction

Validity of Report under FEMA

Valuation reports for Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) transactions carry a validity period of 90 days, which means that the transaction, whether it involves inbound or outbound investment, must be finalized within this timeframe to ensure the accuracy and relevance of the valuation. Compliance like filing of FDI Reporting must be done within this timeframe is important to align with regulatory requirements and to maintain the integrity of the valuation process within the context of international investments. The valuation certificate should not be more than 90 days old as on the date of allotment of shares/Transfer of Shares the case may be. To read more about the process for filing at FIRMS Click here