Valuation for overseas direct investment (ODI)

Sending capital abroad is a regulatory event as much as a business decision, and the valuation is the document that justifies the price. When an Indian company acquires equity in an overseas entity, the price paid needs defensible support, both for the Authorised Dealer (AD) bank and for the RBI.

When ODI Valuation Is Triggered

Overseas Direct Investment valuations are triggered when an Indian company acquires or transfers equity shares in an overseas company. In practice, the valuation matters most when buying into an existing foreign entity, or when making follow-on investments. For a brand-new JV or WOS, a valuation report is generally not required, though the AD bank may ask for one for subsequent investments or for investment in an existing foreign entity.

Who Is Allowed to Value It

The qualifications of the valuer depend on the size and structure of the deal. Under the framework described in most sources:

• Where the investment in an existing foreign company exceeds USD 5 million, or is made by way of a share swap, the valuation must come from a SEBI-registered Category I Merchant Banker, or an investment or merchant banker registered with the appropriate authority in the host country.
• In all other cases, a Chartered Accountant or Certified Public Accountant can do it.

The share swap rule is worth noting. Acquisitions paid for by issuing the Indian party's own shares must always be valued by a Category I Merchant Banker or an appropriately registered foreign banker. Note that the thresholds come from sources describing the earlier framework, and the Overseas Investment Rules and Regulations of 2022 have since replaced it. Confirm the current limit and the valuer eligibility with your AD bank before engaging anyone.

Which Valuation Method to Use

There is some flexibility here. No specific methodology has been prescribed for ODI valuations. The standard expectation is that the fair value is worked out under an internationally accepted pricing methodology on an arm's length basis. In practice, valuers choose among:

• Discounted Cash Flow (DCF), which suits businesses with forecastable earnings
• Market multiples, using comparable listed companies or precedent transactions
• Net Asset Value, which suits asset-heavy or holding structures

The right choice depends on the target's stage, sector, and data availability. A single method rarely tells the full story, so valuers usually cross-check two or more.

What Makes Cross-Border Valuation Harder

Valuing a foreign target adds complications that a domestic valuation doesn't face:

• Country risk. The discount rate has to reflect the political, economic, and currency risk of the host country, not just the business risk.
• Currency. Cash flows should be projected in a consistent currency, and the discount rate must match it. Mixing local currency cash flows with a USD discount rate quietly distorts the answer.
• Accounting differences. The target's financials may follow different standards from Ind AS, so adjustments are often needed before comparing it with peers.
• Comparable availability. Reliable comparables may be thin in smaller or emerging markets, which pushes more weight onto DCF.
• Information quality. Due diligence data from overseas targets can be incomplete, and valuers should flag where assumptions rest on limited evidence.

What the Valuation Report Should Contain

Since the report may be reviewed by the AD bank, it should be audit-ready. A strong one clearly states the valuation date, the basis of value, the methodology and why it was chosen, the key assumptions, the sources of market data, and a reconciliation if multiple methods were used. A report that simply states a number, without showing the reasoning, invites questions.

Common Mistakes to Avoid

• Using a stale valuation date far from the actual remittance
• Applying a domestic discount rate to a foreign target
• Choosing a valuer who doesn't meet the eligibility criteria for the deal size
• Ignoring the swap-of-shares requirement for a Merchant Banker
• Presenting aggressive projections without evidence

ODI valuation does two jobs at once. It supports the commercial price you are paying, and it satisfies the regulatory expectation that overseas investments are made at fair value. The cleaner the method, the stronger the documentation, and the better matched the valuer is to the deal, the smoother the AD bank review tends to go. With the rules revised in 2022, always verify the current thresholds before you commit to a structure.