CCI Out, DCF In: Will PE Deals Get Too Costly?

RELATED NEWS FDI stance on retail unchanged: Anand Sharma Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: What do you think the solution to this is because I don't think the RBI is going to do away with mandating of floor price?

Diwanji: I think you need to jumble up all the regulations, if you look at the FDI guidelines that came out of press notes, it basically says that every agreement effectively needs to be filed with the RBI. So once you file those agreements then the RBI or the dip etc, need to consider valuations in the light of those agreements assuming that those agreements are acceptable and because these agreements have been entered into by two mature individuals, the valuation should just be made sure that they are in line with those agreements in a way. What happens is that it is in agreement between a willing buyer and a willing seller and if you look at that holistically, you will find that this transaction would be fairly valued because otherwise the buyer or the seller will not agree.

So I think if the dip which gets these shareholder agreements with them makes sure that the ultimate valuations are in line with those agreements, I think it will prove a great point.

Secondly, we are under fair value fixation as far as the government is concerned because we have the income tax section 52 which also talks about fair valuing of domestic transactions and now we have fair valuation on the foreign transactions. So at the end fair value is like 'beauty lies in the eyes of the beholder'. The level of maturity needs to be developed with the regulator which will come if they start with making sure that the spirit of the agreements entered into are met with while doing the valuation and the conversions.

Q: This does put the discretion of determining whether the valuation is an acceptable one or not in the hands of the RBI and so like you pointed out there is no mandated discounting rate etc in this notification of any form. You could do an honest to goodness DCF valuation and yet have RBI pick holes in it. So that's the double jeopardy in this.

Miranda: Sure and as is said its early days, it's just come out, I do not think anyone yet filed something over there with the central bank so we do not know how they will react to it. So I think it's a bit of premature to get all excited but the fact is yes, it has come as a surprise, we are going to write to them through IVCA. The main point is we do not have uncertainty; if we are clear that this is what the process will be, this is how it will be done, if there is a valuation which is submitted and is signed off by a merchant banker or a chartered accountant will that be taken and therefore no other questions asked, then that's fine.

But if it is going to be a situation whether there is going to be analyse, analyse and reanalyze, then it's going to be a problem because it will hold up transactions and that creates uncertainty. So it's more to do with the process also which is important.