Valuation Services

Mergers and Acquisitions in the corporate sector of India are increasing significantly day by day. Irrespective of the purpose for which a merger or acquisition takes place, their main aim is to help entities expand their size and value in the market. After a merger or acquisition takes place, the value of the entities involved equals the sum of their independent values. However, it often happens that mergers and acquisitions tend to have a negative impact on the entities involved due to incorrect estimation of entity value. Though there are precise approaches and methodologies to estimate the value of an entity but when they are put to practical use it becomes a complex process. During mergers and acquisitions, the intended purpose of the valuation is identified so that the calculated value matches with the required purpose. Few instances where the valuation is done based on the purpose are:

• Corporate Restructuring;
• Calculating the consideration for the sale of business or acquisition;
•  Calculating Share Exchange Ratio
• Liquidation of the company;
• Calculating the consideration for sale or purchase of equity stake;
• During family separation, there is a need to calculate the value of assets and businesses owned by such a family;
• The portfolio value of investments is calculated by the virtue of Private Equity Funds or Venture Funds;
• Purchase or sale of intangible assets such as rights, patents, trademarks, copyrights, brands, etc;.
• For the purpose of getting listed on the Stock Exchange, calculating the fair value of the shares is required;
• Calculating the fair value of shares for providing Employee Stock Ownership Plan following the Employee Stock Ownership Plan guidelines.

Startup valuation is simply the process of quantifying the worth of a Company, aka its valuation. It is the value of a startup business taking into account the market forces of the industry and sector in which that business belongs. A startup valuation may account for factors like your teams expertise, product, assets, business model, total addressable market, competitor performance, market opportunity, goodwill, and more. If you have actual revenues, you’re able to use concrete economic numbers as a starting point.

It’s important to estimate the value of a startup because of the uncertainty and risks that may affect its growth. Using the startup valuation, possible investors can calculate the potential return on their investment and decide whether to fund the business. So, If you are trying to raise capital for your startup company, or you’re thinking of putting money into one it’s important to determine the company’s worth.

Pre-Money Valuation: A pre-money valuation is the value of a company before it receives outside investment. Potential investors often conduct research and come up with calculations of what they think the company is worth. The company may reject that figure and wait for a higher pre-money valuation from a different party

Post-Money Valuation: A post-money valuation is the value of a company after it receives investment. Whether a valuation figure refers to pre- or post-money makes a difference in the number of shares an investor will own in a company.

Business valuation under IBC, 2016 estimates the fair and liquidation value by-.

• Two registered valuers are appointed by the resolution professional. The registered valuer estimates the fair and liquidation value in accordance with the internationally accepted valuation standards. They estimate the fixed and liquidation values after physical verification of the inventory and the fixed assets of the corporate debtor.
• If the resolution professional finds the two estimates of the value significantly different, then he may appoint another registered valuer who will submit an estimate of the value computed similarly.
• Finally, the average of two estimates will be considered as the fair value and liquidation value.

The International Valuation Standards 2017 defines the fair value “as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The International Valuation Standards define liquidation value as the "amount that would be realized when an asset or group of assets are sold on a piecemeal basis. Liquidation Value should consider the costs of getting the assets into saleable condition as well as those of the disposal activity. Liquidation Value can be determined under different premises of value:

An orderly transaction with a typical marketing period.
A forced transaction with a shortened marketing period.
A valuer must disclose which premise of value is assumed.”

Section 247 states that in case of valuation is required to be made in respect of shares, stocks, debentures, properties, goodwill, securities, or any other asset under any of the provisions of this Act, then it shall be done by a registered valuer. Such Registered valuer under the Companies Act shall be a member of a recognized organization and shall be appointed by the audit committee or Board of Directors, as the case may be.

Situations Requiring Valuation Under the Companies Act 2013

Following are the situations that require a Registered valuer under the Companies Act, 2013:
1)  Further Issue of Shares – Section 62(1)(c)
If a company proposes to issue further share capital, then the price of such further issue shall be determined by the registered valuer. Further, where the shares are issued by a company on a preferential basis for cash or for consideration other than cash, then such shares shall be offered only if the price of such shares is determined by a registered valuer.
2)  Valuation of Assets – Section 177(4)(vi)
In case the valuation of assets is required under this act, then it shall be done by a registered valuer only.
3)  Valuation of Assets that are Acquired for Consideration Other than Cash – Section 192(2)
If a director of a company or its subsidiary or associate company acquires any asset from the company for consideration other than cash, then the value of such assets shall be determined by a registered valuer.
4)  Valuation of Shares and Property in Compromise and Arrangement
In case of a compromise or arrangement entered between the company and the shareholders or the creditors, the valuation report of the shares, securities, assets, or properties, tangible or intangible, movable or immovable shall be made by a registered valuer. The valuation report shall be shared with the creditors and shareholders. 
5)  Merger and Amalgamation
In case the company is entering into a merger or amalgamation transaction, then the valuation report of the shares, securities, assets, or properties, tangible or intangible, movable or immovable shall be obtained from a registered valuer. The Registered valuer under the Companies Act, 2013 shall also provide the swap ratio report. Further, in case a dissenting member of the transferor company wants to exit the company by transfer of his shares, then he may require the liquidator of the company to purchase his interest at a price determined by the Registered valuer under the companies act.
6)  Liquidation of Company
In case a company is in the process of winding up, then a valuation report from the registered valuer shall be submitted to the such liquidator to determine the value of the assets and liabilities. In case of voluntary winding up of the company, the declaration of insolvency provided by the directors shall be accompanied by a valuation report issued by a Registered valuer under the companies act, 2013.
In nutshell, the valuations under the Companies Act, 2013 shall be done by a Registered Valuer irrespective of the situation requiring a valuation.

As per RBI guidelines the fair value of equity shares, compulsory convertible capital instruments or any other capital instruments of an Indian Company, in case of allotment or transfer to or from Non-Resident must be carried out in accordance with any internationally accepted valuation methodologies. The valuation shall be duly certified by a Chartered Accountant or SEBI Registered Category I Merchant Banker, where the shares or the capital instrument are not listed on any recognized stock exchange in India.

The valuation rules are specified under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions under the IT Act which cover valuation options in case of various assets including equity shares and other securities. There are two options for valuation of Fair Market Value (“FMV”) under rule 11UA: a) NAV method: As per Rule 11UA, there is no specific requirement that which person will do the valuation. Therefore, any registered valuer can do the valuation for issue of shares on fair Market Value. b) Discounted Free Cash Flow Method (DCF): It indicates the fair market value of a business based on the value of projected cash flows that the business is expected to generate in future. Rule 11UA(2)(b) deals with valuation as per DCF.

Valuation of shares and securities u/s 56(2)(viib) (Applicable to company issuing shares and securities)

As per Section 56(2)(viib), where a private company receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value (FMV) of the shares shall be chargeable to income tax under income from other sources.

FMV as on the valuation date (VD) for issuance of shares shall be the value — as may be determined in accordance with Rule 11UA(2) of Income Tax Rules, 1962; or or as may be substantiated by the company to the satisfaction of the Assessing Officer, whichever is higher.

Valuation of shares and securities u/s 56(2)(x)(Applicable to recipient of shares and securities)

As per section 56(2)(x)(c) where a person receives any property other than immovable property without consideration or for a consideration less than fair market value of such property by an amount exceeding Rs. 50,000, the difference between fair market value of property and consideration paid, shall be taxable in hands of recipient as income from other source.

It may be note that in case of transfer of unquoted shares by a person at value lesser than fair market value as defined in above rule 11UA (1)(c)(b) and 11UA (1)(c)(c), the fair market value as defined in these rules shall be considered as sale consideration for such transaction. Refer Section 50CA of Income tax act read with Rule 11UAA.

Valuations under the Reserve Bank of India Act, 1934 triggers in two scenarios:

• Issue or transfer of equity shares or compulsory convertible instruments of an Indian company is taking place between a resident company and a non-resident company, Foreign Direct Investment valuations get attracted. 
  
  
• When an Indian company acquires or transfers, equity shares in an overseas company Overseas Direct Investment valuations get triggered.

For share transactions, ODI and FDI valuations are required to be performed.

A fairness opinion is required in M&A Transactions to give an independent objective and financial analysis, as to the fairness of Share exchange ratio / Share entitlement ratio in case of a merger/ amalgamation or purchase consideration payable in case of an acquisition. Fairness opinion is either mandated under regulatory provisions or is undertaken as a good corporate governance practice.

In case of Listed Companies, the Fairness Opinion is required on the valuation of assets/equity shares of the listed as well as the unlisted company by the valuers from an independent merchant banker under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

We can provide independent fairness opinion to the Board of Directors / Management of the companies in connection with their proposed transaction.