Independent Valuation of Shares & Businesses

Section 247 provides that where a valuation of property, stocks, shares, debentures, securities, goodwill, net worth or liabilities is required under the Act, it must be made by a registered valuer registered for the asset class being valued.

For private companies it arises most often in:

• Preferential allotment, s.62(1)(c) read with Rule 13
• Sweat equity, s.54 read with Rule 8
• Schemes of arrangement, mergers and demergers, ss.230–232
• Acquisition of minority shareholding, s.236
• Non-cash transactions involving directors, s.192
• Declaration of solvency in a members' voluntary winding up, s.305

The appointment is made by the audit committee, or by the board where there is none. Under s.247(3), a valuer may not value assets in which the valuer has, or comes to have, a direct or indirect interest in the three years before appointment or the three years after the valuation.

Sources: Companies Act, 2013, s.247; Companies (Registered Valuers and Valuation) Rules, 2017.

In most funding rounds, yes. When an unlisted company issues shares or convertible securities to new investors on a preferential basis under section 62(1)(c), Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 requires the price to be determined on the basis of a registered valuer's report. The offer is usually made as a private placement under section 42.

• For convertible securities, the conversion price is fixed either upfront or close to conversion, on a valuer's report.
• Where a non-resident invests, the FEMA price floor under Rule 21 of the NDI Rules applies as well, on a separate fair value certificate.
• The Income-tax charge on share premium above fair value ("angel tax") was withdrawn from assessment year 2025-26, but the Companies Act and FEMA requirements remain.

The valuation date should sit close to the board and shareholder approvals, so that the report reflects the company as it stands when the round is priced.

Sources: Companies Act, 2013, ss.42 and 62; Companies (Share Capital and Debentures) Rules, 2014, Rule 13; FEMA (Non-debt Instruments) Rules, 2019.

Rule 8(3) of the Companies (Registered Valuers and Valuation) Rules, 2017 lists what the valuer must state in the report. A report missing any of these is open to challenge by the board, the auditor, the regulator or the Tribunal.

• Background information of the asset being valued
• Purpose of valuation and the appointing authority
• Identity of the valuer and any other experts involved
• Disclosure of any valuer interest or conflict
• Date of appointment, valuation date and date of report
• Inspections or investigations undertaken
• Nature and sources of information used or relied on
• Procedures adopted and valuation standards followed
• Restrictions on use of the report
• Major factors taken into account
• Conclusion
• Caveats, limitations and disclaimers, which may explain the limitations faced but may not be used to limit the valuer's responsibility

Where the valuer takes inputs from, or relies on a separate valuation by, another registered valuer for a different asset class, Rule 8(2) requires full disclosure of that valuer and the inputs. Responsibility for the resulting valuation stays with the valuer who signs the report.

Source: Companies (Registered Valuers and Valuation) Rules, 2017, Rule 8.

For an unlisted Indian company, equity instruments issued to a person resident outside India may not be priced below fair value. Fair value is worked out using an internationally accepted pricing methodology on an arm's length basis, and certified by a Chartered Accountant, a SEBI-registered merchant banker or a practising cost accountant.

• Resident to non-resident transfer: not less than fair value.
• Non-resident to resident transfer: not more than fair value.
• Listed companies follow the SEBI pricing guidelines instead.

The certificate is usually dated close to the issue or transfer and attached to the filing on the FIRMS portal. A stale valuation date is a common reason for queries from the authorised dealer bank.

Source: Foreign Exchange Management (Non-debt Instruments) Rules, 2019, Rule 21.

In a corporate insolvency resolution process, the resolution professional appoints two registered valuers for each asset class to determine the fair value and liquidation value of the corporate debtor's assets.

• Fair value is the estimated realisable value if the assets were exchanged on the insolvency commencement date between a willing buyer and a willing seller at arm's length, after proper marketing.
• Liquidation value is the estimated realisable value if the corporate debtor were liquidated on that date.

The average of the two estimates is taken. Where they differ significantly, a third valuer may be appointed. Shares, debentures, receivables, loans and investments fall within the Securities or Financial Assets class.

Source: IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regulations 27 and 35.

In a discounted cash flow valuation, the discount rate reflects the return investors need for the risk of the cash flows. For an Indian company valued in rupees, the cost of equity is usually built with the capital asset pricing model, adjusted where the evidence supports it.

• Risk-free rate: the yield on the 10-year Government of India bond, as published by the RBI, for rupee cash flows.
• Equity risk premium: commonly a mature-market premium plus a country risk premium for India. Prof. Aswath Damodaran of NYU Stern publishes both, updated each January, and they are widely used as a reference.
• Beta: an industry beta, unlevered and then relevered for the company's target debt-to-equity ratio, taken from published industry data or listed Indian comparables.
• Size and company-specific risk: an additional premium for small or unlisted companies, applied only where it can be justified and explained in the report.

Free cash flow to equity is discounted at the cost of equity; free cash flow to the firm at the weighted average cost of capital, using the post-tax cost of debt and a target capital structure. The currency of the discount rate must match the currency of the cash flows: rupee rates for Indian cash flows, and the relevant foreign currency for an overseas company.

Sources: ICAI Valuation Standard 103; RBI data on Government of India securities; Prof. Aswath Damodaran, NYU Stern, published datasets on equity risk premiums and industry betas.

The valuation date is the date on which the value applies. The report date is the date the report is signed. They often differ, and the report must state both.

Information available up to the valuation date is used to measure value. Later events are generally not reflected in the number, though significant ones may need disclosure. Projections must be those a market participant could reasonably have prepared as of the valuation date.

The statute often fixes the date: for a preferential allotment it is tied to the relevant date; for FEMA, close to the issue or transfer; under the IBC, the insolvency commencement date.

Source: ICAI Valuation Standards 2018.