Rights issue renunciation: FinMin raises the pricing bar for non-residents

The pricing regime for non-residents acquiring shares out of Rights Issue renunciation by resident investors just got stringent. The Finance Ministry has now stipulated that price adopted should not be less than the internationally accepted pricing methodology for valuation in the case of unlisted companies.

Prior to this, in the case of unlisted companies, the government allowed non resident investors to acquire shares after Rights renunciation at a price not less than the one offered to resident investors under a Rights Issue.

In the case of listed companies, the Finance Ministry has through amendments to the FEMA (non-debt instruments) Rules stipulated that non-residents cannot buy shares after Renunciation in a Rights Issue at a price lower than the one determined under SEBI guidelines.

This is a departure to the prior existing regime when non-residents would have to acquire such renunciation shares at the price determined by the company, say experts.

Revathy Muralidharan, Partner, IndusLaw, a law firm, said: “According to the latest FEMA rules change, where a non-resident is looking to acquire equity instruments of an Indian company through a rights issue, which are renounced in its favour by a resident, then such a non-resident can acquire it only in compliance with the pricing guidelines. The earlier regime stated that the non-resident could acquire the share under a rights issue at a price which is not less than the price offered to the residents. With this latest government move, it becomes expressly clear that pricing guidelines will be applicable even for a rights issue through a renunciation”.

Atul Pandey, Partner, Khaitan & Co LLP, said that the latest FEMA Rule change now clarifies that in a scenario where an existing shareholder has renounced his right to purchase shares of a company in favour of a non-resident, such non resident is now permitted to acquire any equity instrument (other than share warrants) subject to the pricing guidelines (specified under FEMA Rules), under Rights Issue.

“Government has clarified that non-residents acquiring renounced shares cannot take the benefit of free pricing regime applicable to Rights Issue,” he said

Under Indian company law, a company can make a ‘Rights’ issuance to its existing shareholders and any existing shareholder may renounce his right towards any other shareholder (including a non -resident).

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