In India the price between a resident and a non-resident is not negotiable paper.

In most jurisdictions the price of a company's shares is what the buyer and the seller agree, and the regulator reads the agreement afterward for tax. In India, a transfer of an Indian company's shares between a resident and a non-resident is priced by the exchange-control regime's pricing guidelines: a non-resident buying from a resident, or subscribing for new shares, pays not less than a fair value certified under a recognised methodology by a person the regime recognises; a non-resident selling to a resident receives not more than it. The certificate is the price's floor on the way in and its ceiling on the way out, and the authorised dealer bank processes the remittance only against it. For a structure, the rule reaches three places. The entry: a foreign fund subscribing for shares in a resident-owned development company pays not less than the certified value, and a seed arrangement with a resident promoter at a negotiated discount is a transaction the rules do not permit in that form. The exit: a sale of the foreign holder's shares to a resident buyer cannot exceed the certified value, which caps what a resident acquirer may pay whatever the asset has become. And the joint venture: a developer's promote or a resident partner's equity, settled by a transfer of shares at a formula, is a transfer priced against the rule and not only against the formula. The price is not negotiable paper. It is a certificate, and the negotiation is about what the certificate will say.

This note sets out what the pricing guidelines are and why they exist, the methodology and the certifier, the three places the rule reaches, the entry and the seed arrangement, the exit to a resident and the ceiling, the joint venture's economics and the promote, the transfers the rule does not reach, the instruments drafted to the rule, the valuation discipline from entry to exit, the tax valuation beside the regime's, the bank's reading, the Gulf platform's reading, a comparison, a worked structure as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the pricing guidelines are

The regime's concern is that capital should not leave India through an undervalued sale by a non-resident to a resident, or enter through an overvalued subscription that shifts value to a resident, and its instrument is a price test on every transfer across the residence line. The guidelines fix the floor for a non-resident's acquisition and the ceiling for a non-resident's disposal at a fair value determined under an internationally accepted methodology, certified by a merchant banker or a chartered accountant the regime recognises, as at a date close to the transaction. The bank applies the test at the remittance, and a transaction outside the range is not processed. The guidelines are not tax; they are exchange control, and they apply whether or not any tax arises.

The methodology and the certifier

The methodology is any internationally accepted pricing methodology for valuing shares, applied on an arm's length basis, and in practice it is a discounted cash flow or a net asset basis for a development company, chosen and applied by the certifier. The certifier is a person the regime recognises, engaged by the company or the parties, and its certificate states the methodology, the inputs, the date and the value per share. The certifier's independence and its methodology are what the bank reads, and a certificate whose inputs are the parties' negotiated figures is a certificate the bank may question. The certifier is engaged early, with the company's accounts, its land, its consents and its programme as the inputs, so that the certificate's number is known before the negotiation.

Why the Gulf instinct fails in India

In the Gulf centres and states the price of shares is the parties' and the regulator's concern is the transfer's approval, the foreign ownership and the duty; a Gulf manager negotiates price as price. India's regime reads the price as a movement of value across its border and tests it, and a manager that arrives with a negotiated term sheet arrives with a number the certificate will replace. The instinct fails because it was never about India: the regime's concern is capital flight and value shifting, and the guidelines are the instrument, and a structure designed for the regime negotiates the bargain's substance into instruments the regime permits and leaves the share price to the certifier.

The certificate's date

The certificate is as at a date, and the regime permits it to be used for a period after its date. A transaction whose completion slips past the period needs a fresh certificate, and the fresh certificate's number may differ, because the company's facts moved. A structure whose completion depends on approvals with their own timetables obtains the certificate late enough to be valid at completion and early enough to inform the negotiation, and counsel reads the period. A certificate obtained for the negotiation and stale at completion is a certificate the bank returns.

The certifier's inputs

For a development company the certifier's inputs are the land at its registered value or its current valuation, the consents obtained and their effect, the programme's cash flows on the business plan, the comparable evidence, and the discount rate; and a discounted cash flow on a development business plan is a number that moves with the plan's assumptions. The certifier applies its own judgement to the plan's assumptions, and a plan written to produce a number is a plan the certifier discounts. The company's records, kept for the certifier, include the plan as the board approved it, the valuer's reports, the registry's figures and the accounts, and the certificate is built from them rather than from the transaction's needs.

The three places

The entry: the fund subscribes for shares, new or from a resident, at not less than the certified value. The exit: the fund sells to a resident at not more than it. The joint venture: every transfer of shares between the fund and a resident partner, at formation, on a promote's settlement, on a buy-out, on a default, is at the certified value's floor or ceiling as the direction requires. Each is a transaction the structure contemplated at design, and each is a certificate the structure obtains at the time.

The entry and the seed arrangement

A Gulf fund's Indian position often begins with a resident promoter who has the land or the project and wants the fund's capital, and the commercial arrangement is a subscription at a discount to reflect the fund's size, its early commitment or the promoter's need. The pricing rule does not permit a non-resident's subscription below the certified value, and the discount is not available in that form. The structure's answers are instruments drafted to the rule: the fund subscribes at the certified value and the promoter's economics are adjusted by a different class of shares, by a preference in distributions, by the promoter's contribution of assets at a value the certificate reflects, or by a premium on the promoter's own later subscription; each is read by counsel against the rule's tolerance, and the seed arrangement is redrafted from a discount into a structure.

The exit to a resident and the ceiling

At exit, a resident buyer, the promoter, a listed developer, an Indian fund, may pay the fund not more than the certified value for its shares, whatever the buyer would pay. The ceiling is the fund's exit price to any resident, and it is set by the certifier's methodology on the company's facts at the date, which for a completed development may be less than a strategic buyer's view of it. The fund's exit plan reads the ceiling: an exit to a non-resident, where the rule does not apply, is priced by negotiation; an exit to a resident is priced by the certificate; and the fund chooses the buyer with the rule in view. A fund that has negotiated a price with a resident above the certificate has negotiated a price the bank will not process, and the transaction is repriced or restructured.

The joint venture's economics and the promote

The resident developer beneath the fund earns a promote, a share of the project's gain above a hurdle, and the promote is commonly settled by a transfer of shares from the fund to the developer at a formula, or by the developer's subscription at a nominal price. Each is a transfer across the residence line priced by the rule: the fund's transfer to the developer is at not more than the certificate, and the developer's subscription is at not less than it, and a formula that produces a price outside the range produces a transfer the bank will not process. The promote is structured instead as a distribution preference in the company's articles, as a contractual payment the regime's rules on such payments permit, or as a class of shares whose rights deliver the economics without a transfer at a formula price. Counsel reads each against the rule, and the promote that looks like a formula in the centre is a share transfer at a certified value in India.

The transfers the rule does not reach

Transfers between two non-residents are outside the pricing guidelines, and a fund's sale of its shares to another foreign holder is priced by negotiation, subject to the lock-in, the reporting and the tax. Transfers between two residents are outside them too. Transfers by way of gift, by inheritance and under certain court-sanctioned arrangements have their own rules. A structure whose exit is to a non-resident buyer has chosen the route the rule does not reach, and a structure whose exit must be to a resident has a ceiling it reads at design.

The convertible and the rule

A compulsorily convertible instrument, a preference share or a debenture that must convert into equity, is treated by the regime as equity for the foreign investment rules, and its conversion price is read against the pricing guidelines at the time of issue or at conversion as the regime's current position requires, with the formula fixed upfront. The instrument is the usual form for a foreign investor that wants downside protection in an Indian development company, and its conversion formula is drafted to the rule so that the equity the fund receives at conversion is at not less than the certificate's floor at the date the regime reads. Counsel reads the current position on the date of pricing, because it has moved, and the instrument's terms follow it.

The instruments drafted to the rule

A premium on subscription, so that the fund's subscription is at the certified value and the promoter's economics are elsewhere. A class of shares with rights the articles fix, so that economics move by rights rather than by transfers. A put or a call at a formula that counsel has read against the rule's tolerance at the date of exercise, with the formula capped or floored at the certificate. A distribution preference in the articles. A contractual payment under the regime's rules on payments to residents. Each instrument is a way of delivering the commercial bargain within a regime that reads every share transfer against a certificate, and each is read by Indian counsel before it is signed.

The valuation discipline from entry to exit

The company is valued on a methodology the rule recognises, by a certifier the bank accepts, at each point the structure contemplates a transfer: the entry, each joint venture event, the exit. The discipline means the certificate's number is known before the negotiation rather than discovered after it, and the negotiation is conducted within the range the certificate allows. The certifier's inputs are the company's accounts, its land at its registered value, its consents, its programme's cash flows and the market's evidence, and a company whose records are kept for the certifier has a certificate on demand.

The tax valuation beside the regime's

India's tax law has its own valuation rules for share transfers: a transfer below the tax fair value taxes the buyer on the difference, a transfer above it taxes the seller, and the tax fair value's methodology differs from the regime's certificate in its inputs and its date. A transaction priced at the regime's certificate may be read by the tax authority against its own number, and the two valuations are obtained together so that the price satisfies both. The tax adviser and the certifier work from the same records, and the price is set within the range both permit.

The bank's reading

The authorised dealer bank processes the inward remittance for a subscription and the outward remittance for a sale only against the certificate, the reporting and the tax clearance, and it reads the certificate's date, its methodology, its certifier's standing and its number against the transaction's price. A certificate older than the regime permits, or by a person the bank does not recognise, or on a methodology the bank questions, is a certificate the bank returns. The bank is the rule's enforcer and its reading is the transaction's condition.

The Gulf platform's reading

A Gulf platform's Indian exposure is usually bought from a resident and sold to one, and the developer beneath it is usually resident too. Every economic term in the joint venture that moves shares between the two sides is a term the pricing rule reads, and the platform's Gulf instinct, that the price is what the parties agree, is replaced in India by the certificate's range. The platform's India page carries the rule at each contemplated transfer, the instruments drafted to it, and the valuation discipline that keeps the certificate current.

By transaction · by direction	Who transfers to whom	The rule's effect	The structure's instrument
Entry subscription	Resident company issues to the fund	Floor at the certificate	Subscribe at the certificate; the promoter's economics by class or preference
Entry purchase from a promoter	Resident sells to the fund	Floor at the certificate	The same
Exit to a resident	The fund sells to a resident	Ceiling at the certificate	Read at design; or exit to a non-resident
Exit to a non-resident	The fund sells to a non-resident	No pricing rule	Negotiation, subject to lock-in, reporting and tax
Promote by share transfer	The fund transfers to the developer	Ceiling at the certificate	A preference, a payment or a class instead
Developer's subscription for a promote	The developer subscribes	Floor at the certificate	The same
Buy-out on deadlock	Either to the other	Floor or ceiling by direction	A formula capped and floored at the certificate

A structure, as a type

A Gulf fund enters an Indian development company owned by a resident promoter. The commercial bargain is a discounted entry for the fund's commitment and a promote for the promoter above a hurdle. Counsel redrafts: the fund subscribes at the certified value, on a certificate obtained on the company's records before the negotiation; the promoter's economics are a class of shares with a distribution preference above the hurdle in the articles, and no transfer at a formula. The joint venture agreement's buy-out on deadlock is a formula capped and floored at the certificate at the date of exercise. The company's records are kept for the certifier and a certificate is obtained at each event. At exit the fund chooses between a non-resident buyer at a negotiated price and the promoter at the certificate's ceiling, with the tax fair value obtained alongside, and sells to the non-resident. The bank reads the certificate at each remittance and processes each on the day.

The structure paper's page

The structure paper's India page carries the pricing rule: the transfers contemplated, the instruments per transfer, the certifier's engagement and the records it needs, the certificate's period and the completion's timing, the tax valuation's procedure, the exit routes and their pricing, and the joint venture's economics drafted without formula transfers. The page is written before the term sheet with the promoter, and it is the page the promoter's counsel is shown when the discount becomes a class.

The second programme's reading

A manager's second Indian programme is raised on the first's record of transfers: whether each was within the range, whether any remittance was refused, whether the promoter's economics were delivered by instrument, whether the exit route was chosen with the rule in view. A first programme whose transfers all cleared is a programme whose promoters and holders join the second; one whose seed subscription was repriced at the bank is a programme whose promoters tell the next promoter what to expect. The rule is the regime's, and the manager's record of drafting to it is its standing with the residents it needs.

Four cases, as types

A fund agrees a seed subscription at a discount to the promoter's own entry price. The certifier's number is above the agreed price, the bank refuses the inward remittance at the agreed price, and the fund subscribes at the certificate with the promoter's economics unaddressed, because the structure was a discount and not an instrument.

A joint venture settles the developer's promote by a transfer of the fund's shares at a formula. The formula produces a price below the certificate's ceiling for the fund's sale, which is permitted, and the developer's receipt is read by the tax authority against the tax fair value, which taxes the developer on the difference; the promote's economics are consumed by the tax.

A fund negotiates its exit with the promoter at a price reflecting the project's completion and a strategic premium. The certificate's ceiling is lower, the bank will not process the excess, and the fund sells at the ceiling or finds a non-resident buyer a year later.

A fund obtains the certificate before each negotiation, drafts each instrument to the rule, keeps the company's records for the certifier, obtains the tax valuation alongside, and chooses its exit route with the rule in view. Every transfer was within the range, and every remittance was processed.

What each party holds

The fund holds the valuation discipline, the instruments drafted to the rule and the choice of exit route.

The resident promoter or developer holds its economics by class, preference or payment rather than by transfer at a formula.

The certifier holds the methodology, the inputs and the certificate at each event.

Indian counsel holds the rule's reading of each instrument and the tax adviser holds the tax valuation beside it.

The authorised dealer bank holds the test at each remittance.

The company holds its records for the certifier.

Where it surfaces

It surfaces at the seed term sheet, in the discount. It surfaces at the certifier's first number, which is not the agreed price. It surfaces at the promote's settlement clause, in the formula. It surfaces at the deadlock buy-out. It surfaces at the exit negotiation with the promoter. It surfaces at the bank, at each remittance. And it surfaces at the tax authority, when the tax fair value differs from the certificate.

The cost of getting it wrong

A discount the rule does not permit costs the fund the promoter's economics unaddressed and a subscription at the certificate it did not plan. A promote by formula costs the transfer's refusal or the developer's tax. An exit negotiated above the ceiling costs the excess or the year to find a non-resident. A stale certificate costs the completion. The cost of the discipline is a certifier engaged early, records kept for it, instruments drafted by counsel, and a tax valuation alongside, and the cost is paid at design rather than at the bank's counter.

The committee's reading

The committee reads each Indian transaction across the residence line for the certificate before the price, the instrument's drafting to the rule, the tax valuation alongside, the certificate's date against the completion, and the exit route's choice. It reads the joint venture's economics for any transfer at a formula. And it reads the company's records annually for the certifier's readiness. A committee that reads the certificate first reads the negotiation as the range it is.

A timeline, as a type

At design the transfers across the line are listed and the instruments drafted. In month one the certifier is engaged and the company's records are organised for it. In month three the certificate is obtained and the fund subscribes at it, with the promoter's economics in a preferred class. In year two the developer's promote accrues under the articles' preference and no shares move. In year four a deadlock arises and the buy-out formula, capped and floored at a fresh certificate, resolves it with the fund buying the promoter's shares at the floor. In year six the fund exits to a non-resident buyer at a negotiated price, the certificate obtained anyway for the tax valuation and the reporting, and the bank processes the remittance on the day. Every transfer across the line was within the range.

The sequence

1. Every contemplated transfer across the residence line is listed at design: entry, joint venture events, exit.
2. The certifier is engaged and the company's records are kept for it, so that a certificate is on demand.
3. The commercial bargain is drafted into instruments the rule permits: classes, preferences, payments, capped formulas.
4. The certificate is obtained before each negotiation and the tax valuation alongside.
5. The exit route is chosen with the rule in view: a non-resident buyer by negotiation, or a resident at the ceiling.
6. Each remittance is presented to the bank with the certificate, the reporting and the tax clearance.

Questions a manager asks

How close to the certificate must the price be. At or above it on the way in, at or below on the way out; the guidelines state the test and counsel reads the current form.

Can the certificate be chosen to suit. The methodology is the certifier's within the regime's recognition, and a certificate whose inputs are the parties' figures is one the bank questions; the discipline is the company's records.

Does the rule apply to a sale of the fund's own units abroad. No; the fund's units are not Indian shares, and a change in the fund's holders is outside the guidelines, subject to India's indirect transfer tax rules, which the tax adviser reads.

What about a non-resident Indian on a non-repatriation basis. Its capital is domestic under the regime and transfers between it and residents are outside the pricing guidelines; its position is its own and the structure records it.

Is a deadlock buy-out at a formula possible. With the formula capped and floored at the certificate at the date of exercise, so that the rule's range governs whatever the formula says.

How often is a certificate needed. At each transfer across the line, as at a date the regime permits; the discipline keeps the records so that one can be obtained within weeks.

Terms used

Pricing guidelines: the exchange-control rules fixing the floor and the ceiling for share transfers between residents and non-residents at a certified fair value.

Certificate: the valuation by a recognised certifier on a recognised methodology at a date, which the bank reads.

Floor and ceiling: the minimum a non-resident pays and the maximum it receives across the residence line.

Instrument drafted to the rule: a class, a preference, a payment or a capped formula that delivers economics without a transfer at a price outside the range.

Tax fair value: the tax law's own valuation for share transfers, obtained alongside the certificate.

Non-resident to non-resident transfer: a transfer outside the pricing guidelines, priced by negotiation.

What to read

India's pricing guidelines for share issues and transfers between residents and non-residents; the recognised methodologies and certifiers; the tax law's valuation rules for share transfers; the reporting requirements; the joint venture's articles and agreement as drafted to the rule. On this site, the development structures, lexicon and Gulf non-resident rooms.