Introduction:
All the Indian companies which have received FDI (foreign direct investment) and/or made overseas investment in the previous year(s) including the current year, means, who holds foreign Assets or Liabilities in their Balance Sheets are required to file Return on Foreign Liabilities Assets with Reserve Bank of India. The return shall be submitted on or before 15th July, every year.
The Return is filled under A.P. (DIR Series) Circular No. 45 dated March 15, 2011 and submitted to the Department of Statistics and Information Management, RBI, Mumbai. Previously, the return was submitted via email in excel format, now the RBI has introduced, FOREIGN LIABILITIES AND ASSETS INFORMATION REPORTING (FLAIR) SYSTEM, whereby the Indian company is required to file FLA return online only.
Non-filing of the return before the due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA.
Determining the market price/valuation of Equity investment while filing FLA Return is a very important aspect. The RBI has set different guidelines for listed and unlisted companies to determine the market price of the equity investment.
For listed entities, the closing share price for the end-March of the previous reporting period and the current reporting period should be used for valuation and in case of unlisted companies, the market value of equity shares should be calculated using OFBV method.
The purpose of this article is to help and understand the concept of OFBV method and how to calculate the market value of equity investment using OFBV Method.
What is the Full-Form of OFBV?
OFBV stands for Own Fund Based Valuation.
What is OFBV method?
It is a method used for the valuation of the market price of Equity shares of unlisted entities. While filing FLA return with RBI if the Indian entity/Overseas entity is unlisted, then OFBV method is used to calculate Market value of equity capital held by Non- resident in your company (liabilities) and Market value of equity capital held by you in the overseas company (DIE) (assets).
How to calculate OFBV in case of FDI (Foreign Direct Investment)?
Investments made in India by foreign companies is reported under Section III of FLA Return. So, if the company has received equity investment by non-resident foreign investors whether individual or company, under the FDI scheme, the same shall be reported under Section III.
An unlisted Indian Company, which has received foreign investment under FDI scheme in the previous year(s) or has outstanding investment, should use OFBV method for determining the market value of shares. The formula is as under:
= (Net worth of the company) * (% non-resident equity holding)
Where, Net worth of the company
= (Paid-up Equity & Participating Preference share capital of company + Reserves & Surplus - Accumulated losses)
For example, The total capital of the Indian company is Rs. 100,000 consisting of 10,000 Equity shares of Rs. 10 each. Equity capital held by a foreign company is Rs. 70,000 consisting of 7000 Equity shares of Rs. 10 each. Reserves and Surplus amount to Rs. 200,000 and there are no accumulated losses. In this case, market value under OFBV method is calculated as follows:
Total Capital held by a foreign company = Rs. 70,000
Capital in Percentage = 70%
Equity investment by a foreign entity under OFBV Rs. 210,000 (300000*70%)
Key points: while calculating OFBV under Section III it is important to note that
- Reporting under FLA Return is for the previous financial year and latest financial year.
- You are calculating the market value of equity shares held by a non-resident in your company.
- Net worth here means, the net worth of Indian company.
- The investment should be reported in Rs. lakhs.
- In the case of listed companies, the equity should be valued using the share price on the closing date of the reference period.
How to calculate OFBV in case of ODI (Overseas Direct Investment)?
In FLA Return the overseas company is identified as DIE - Direct Investment Enterprise under Section IV. Therefore, if your company has made an equity investment in an overseas company, then reporting shall be done under Section IV.
An Indian company which has made an investment in equity shares of an overseas company and that overseas company is unlisted, then Own Fund of Book Value (OFBV) Method should be used for valuation of equity investment. The formula is as under:
= (Net worth of the DIE) * (% of equity held by you) Where,
Net worth of the DIE = (Paid-up Equity & Participating Preference share capital of company +Reserves & Surplus - Accumulated losses)
For Example, the DIE is located in Switzerland and is unlisted. The currency of Switzerland is Swiss Franc -CHF. The Indian company is holding 100% capital of DIE.
Value of equity investment under OFBV is 30,000 CHF(30,000*100%)
As the figure mentioned above-representing the Value of equity investment under OFBV is in CHF, and you need to convert it in Indian Rupees. To convert, apply the exchange rate as at end-March Previous FY and end-March Latest FY. In the above example, let’s assume as on 31.03.2020 the exchange rate is 1 CHF = Rs. 78.3153.
Therefore, multiply the value of equity investment in CHF with the exchange rate, to get the INR value of Equity Investment under OFBV method
= 30,000*78.3153 = 2349459.
Key points: while calculating OFBV under Section IV it is important to note that,
- Reporting under FLA Return is for the previous financial year and latest financial year.
- You are calculating the market value of equity shares held by you in a foreign entity.
- Net worth here means, the net worth in Direct Investment Enterprise.
- The Indian company has made an investment in overseas company, The figures in financial statements of DIE are available in the currency of that country where such DIE is located. Therefore the figures shall be converted into Indian Rupees, wherever applicable, by applying the exchange rate as at end-March Previous FY and end-March Latest FY.
- The direct investment abroad should be reported in Rs. lakhs.
- In the case the DIE is a listed entity, Equity should be valued using the share price on the closing date of the reference period.
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