Cross border Valuations Sudha Bhushan

1. CROSS BORDER VALUATIONS
CONSIDERATION NEXT
CA. SUDHA G. BHUSHAN

2. AGENDA OF DISCUSSION
INDIAN REGULATORY FRAMEWORK W.R.T CROSS BORDER VALUATIONS
CROSS BORDER VALUATIONS : SPECIAL CONSIDERATIONS AND ADJUSTMENTS

3. INDIAN REGULATORY FRAMEWORK W.R.T CROSS BORDER
VALUATIONS

4. REGULATORY FRAMEWORK IN INDIA
CCI Guidelines Discounted cash FLow
Internationally accepted
pricing methodology
Progression
CA. Sudha G. Bhushan || 9769033172 || Sudha@taxpertpro.com

5. PRICING GUIDELINES

6. PRICING GUIDELINES
74
Company going
through delisting
process
•as per SEBI
(Delisting of
Equity Shares)
Regulations,
2009.
Swap of equity
instruments
•valuation by SEBI
registered
Merchant Banker;
or
•Investment
Banker outside
India
Shares by way of
subscription to
MOA
•at face value
•subject to entry
route & sectoral
caps.
Share warrants
•pricing and
price/conversion
formula shall be
determined
upfront.
CCPS / CCDs
• Issue Price /
Formula to be
specified upfront
at time of issue
• Price @
Conversion
Date > FMV @
Issue Date
Pricing guidelines not applicable for investment in equity instruments by PROI on non-repatriation basis.
6CA. Sudha G. Bhushan || 9769033172 || Sudha@taxpertpro.com

7. EXAMPLE
 X limited a company in India issued CCD to Y limited, a company in USA.
 It was issued in June 2019 and
 The fair value was INR 200 at the date of issuance.
 The conversion is due in May 2020.
 Due to Covid 19 situation the fair value in May 2020 is INR 100 at the time of conversion.
➢ Since the floor price being price at time of issue of CCD that is INR 200, the Investor will have to accept the shares at
a higher fair value being INR 200 cannot be issued the shares at INR 100
7

8. 73
8
Deferred Consideration
• Rule 9(6) of NDI rules
• Not to exceed 25% of the total
consideration
• Not exceeding 18 months from the date of
transfer agreement
• Can be settled through escrow account or
Indemnity
Indemnity
• 25% of the consideration
• Seller can indemnify
• Only if total consideration has been paid
• Not exceeding 18 months
CA. Sudha G. Bhushan

9. Cross border mergers

10. Cross border mergers

11. CROSS BORDER VALUATIONS : SPECIAL CONSIDERATIONS
AND ADJUSTMENTS

12.  Apart from few considerations, the methods for domestic valuation or
international transaction remains same.

13. CROSS BORDER VALUATION CONSIDERATIONS
Cost of capital
Earned vs. remitted income
Tax rates
Choice of currency
Treatment of country risk

14. THE APPROPRIATE COST OF CAPITAL
❖ In the international setting, it’s not obvious which country’s equity market premium should be
used in the evaluation, that of the acquiring firm (home country) or that of the target firm (
foreign country).
❖ There are more dimensions of risk for which financial market participants require a premium.
❖ The focal point of the discussion is then the method by which the various dimensions of risk
are incorporated in the cost of equity that we seek.

15. THE APPROPRIATE COST OF CAPITAL
❖ It may be expedient (and probably accurate) to assume that the investors are indigenous to
the home country in which the parent firm is headquartered.
❖ This means that you can use the home country benchmarked cost of capital (adjusted, of
course, for the risk characteristics of the project vis-a-vis the home country).
CA. Sudha G. Bhushan || 9769033172 || Sudha@taxpertpro.com

16. TREATMENT OF COUNTRY RISK
 Country Risk Premium (CRP) is the additional return or premium demanded by investors to compensate
them for the higher risk associated with investing in a foreign country, compared with investing in the
domestic market. Overseas investment opportunities are accompanied by higher risk because of the
plethora of geopolitical and macroeconomic risk factors that need to be considered. These increased
risks make investors wary of investing in foreign countries and as a result, they demand a risk premium
for investing in them. The country risk premium is generally higher for developing markets than for
developed nations.

17. TREATMENT OF COUNTRY RISK
In this approach, country risk is
directly reflected in the projected
cash flows and probability
assessments of each scenario. While
the scenario approach may be more
specific to the situation, it can be not
only time consuming and costly to
estimate the appropriate scenarios
(and the probabilities associated
with them), but also difficult, if not
impossible to derive.
Alternative
1 –
Scenario
analysis: In this approach, country risk is
reflected in the cost of equity and
debt capital and in the weighted
average cost of capital (WACC).
Alternative
2 – Country
Risk
Premium:

18. METHOD
(a) Incorporate
foreign currency
inflation rates;
(b) Use the
appropriate
marginal tax rate;
and
(c) Include the
terminal value.
Forecast foreign currency free cash flows

19. METHOD A
Determine foreign
currency discount rates,
using project-specific
capital structure and the
project specific ß;
Calculate the PV in the
foreign currency;
Convert to home
currency PV using the
spot exchange rate.

20. METHOD B
Forecast exchange
rates and convert FCF
into home currency;
Determine home
currency discount rates
using project-specific
capital structure and
project specific ß;
Calculate the PV in the
home currency.

21. METHOD CONTD..
Method 1
• Perform the valuation in the Investee Country currency, discount
the projected cash flows with a discount rate denominated in the
Investee Country currency (i.e., developed using inputs
denominated in the Investee Country currency), and convert the
resulting value conclusion into the Investor Country8 currency
(e.g., CAD, USD, EUR) at the spot exchange rate.
Method 2
• Convert cash flows at a forecasted exchange rate into the Investor
Country currency (e.g., CAD, USD, EUR) and discount the projected
cash flows with an Investor Country discount rate (i.e., developed
using inputs denominated in the Investor Country currency). In this
case, the forecasted exchange rate already includes the risk
associated with exchange rate fluctuations.

22. CHOICE OF CURRENCY
 It can be either the home or the foreign currency in determining cash flows.
 Foreign currency cash flows should be discounted at the foreign currency discount rate
 The home currency cash flows at the home currency discount rate.
CA. Sudha G. Bhushan || 9769033172 || Sudha@taxpertpro.com

23. EARNED VERSUS REMITTED INCOME
 It is preferable to use earned cash flows, whether or not those cash flows are actually remitted to the
parent.
 The idea is that, the cash flow, even if retained in the subsidiary, ultimately belongs to the firm’s
shareholders.

24. TAXES
 Different countries have different tax rates, requirements for timing of tax payments, and tax treaties with
the home country.

25. Ultimately, Domestic valuation or Cross border Valuations
Value lies in the eyes of Buyer !!
CA. Sudha G. Bhushan || 9769033172 || Sudha@taxpertpro.com

26. CA. SUDHA G. BHUSHAN*
SUDHA@TAXPERTPRO.COM
9769033172
CA. Sudha G. Bhushan is a Chartered Accountant, Company Secretary, An Insolvency Resolution Professional,
A Registered Valuer and An Independent director registered with MCA. She specializes in Cross Border
Transactions