Module: | MODULE A: INTERNATIONAL BANKING
Q163: Consider the following statements regarding the pricing guidelines for the transfer of equity instruments:
Statement 1. When a domestic resident issues unlisted shares to a foreign investor, the price must not be less than the fair value determined by a legally registered valuer or chartered accountant.
Statement 2. When a foreign investor transfers existing shares of an unlisted domestic company to a resident, the resident is permitted to pay significantly more than the determined fair value to encourage the foreign exit.
Statement 3. For companies listed on a recognized stock exchange, the pricing of shares issued to foreign investors is governed by the prevailing regulations established by the national securities market regulator.
Which of the above statements is/are INCORRECT?
Statement 2. When a foreign investor transfers existing shares of an unlisted domestic company to a resident, the resident is permitted to pay significantly more than the determined fair value to encourage the foreign exit.
Statement 3. For companies listed on a recognized stock exchange, the pricing of shares issued to foreign investors is governed by the prevailing regulations established by the national securities market regulator.
Which of the above statements is/are INCORRECT?
✅ Correct Answer: B
The incorrect statement is Statement 2. Pricing guidelines establish the legal financial boundaries for valuing corporate shares during cross-border transactions.
Structurally, these rules exist to prevent the unwarranted flight of domestic capital and to ensure the country receives fair value for its corporate assets.
When a domestic company issues shares or a resident sells unlisted shares to a non-resident, the price charged cannot be less than the fair market value determined by an internationally accepted pricing methodology, certified by a registered chartered accountant.
Conversely, when a non-resident sells shares back to a domestic resident, the resident is strictly forbidden from paying a price that is greater than the certified fair value.
Therefore, Statement 2 is incorrect.
For listed companies, the valuation is transparently dictated by the daily trading rules set by the national securities regulator.
Historically, without strict pricing guidelines, domestic entities could easily transfer wealth out of the country by artificially overpaying foreign entities for shares, or foreign entities could acquire domestic assets at severe artificial discounts.
The causal reasoning for these asymmetric pricing floors and ceilings is entirely protective: to maximize the inward remittance of foreign exchange and strictly limit the outward drain of domestic wealth during capital account transactions.
Structurally, these rules exist to prevent the unwarranted flight of domestic capital and to ensure the country receives fair value for its corporate assets.
When a domestic company issues shares or a resident sells unlisted shares to a non-resident, the price charged cannot be less than the fair market value determined by an internationally accepted pricing methodology, certified by a registered chartered accountant.
Conversely, when a non-resident sells shares back to a domestic resident, the resident is strictly forbidden from paying a price that is greater than the certified fair value.
Therefore, Statement 2 is incorrect.
For listed companies, the valuation is transparently dictated by the daily trading rules set by the national securities regulator.
Historically, without strict pricing guidelines, domestic entities could easily transfer wealth out of the country by artificially overpaying foreign entities for shares, or foreign entities could acquire domestic assets at severe artificial discounts.
The causal reasoning for these asymmetric pricing floors and ceilings is entirely protective: to maximize the inward remittance of foreign exchange and strictly limit the outward drain of domestic wealth during capital account transactions.