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Valuation Report Requirements in India

Valuation Services is a nuanced and unique exercise for every transaction, requiring significant effort, involvement, application of mind, and thoughtful consideration for each assignment. Valuers rely on guiding principles to navigate the complexities of valuation, recognizing that the ‘value’ of a business or asset is an estimate arrived at through appropriate business valuation procedures and professional judgment. 

This value depends on various factors, including the investor, the structure, the marketplace, and the chosen approach. Here, we explore the three primary approaches to valuation approaches:-

1. Market Approach

  • Definition: This approach relies on market evidence, considering what third parties have paid for comparable assets.
  • Key Consideration: It involves analyzing recent transactions of similar assets to estimate the value of the asset in question.
  • Application: The market approach is particularly useful when there are ample comparable transactions in the marketplace, providing a benchmark for valuation.

2. Income Approach

  • Definition: This approach is based on the present value of future earnings expected from the asset.
  • Key Consideration: It involves forecasting the future income generated by the asset and discounting it to its present value using an appropriate discount rate.
  • Application: The income approach is ideal for valuing assets that generate consistent and predictable income streams, such as businesses or investment properties.

3. Cost Approach

  • Definition: This approach considers the costs associated with developing or acquiring a new asset that has similar use as the existing one.
  • Key Consideration: It involves estimating the cost to recreate the asset, taking into account the cost of materials, labor, and other expenses necessary to produce an equivalent asset.
  • Application: The cost approach is often used for valuing specialized or unique assets where comparable market transactions or reliable income projections are not readily available.

Valuation of Capital Instruments

Valuation of capital instruments, particularly during transactions involving the issue or transfer of shares, is governed by specific guidelines to ensure transparency, fairness, and compliance with regulatory standards. The Valuation varies based on the nature of the transaction and the type of company involved. We can discuss these, including special dispensations for startups and distinctions between listed and unlisted companies.

Special Dispensation for Startups

Startups may benefit from special dispensations when it comes to the valuation of their capital instruments. These dispensations are designed to support the growth and development of startups by providing more flexibility in valuation methodologies.

Types of Transactions & Valuation Services 

  1. Issue of Shares by Indian Company / Transfer of Shares from Resident to Non-Resident
    • Listed Company:
      • The price of equity instruments should not be less than the price calculated according to the SEBI (Securities and Exchange Board of India) guidelines.
    • Unlisted Company:
      • The price of equity instruments should not be less than the fair value determined using any internationally accepted pricing methodology on an arm’s length basis.
      • The valuation must be duly certified by a Chartered Accountant (CA) or a Merchant Banker registered with SEBI, or a practicing Cost Accountant.
  2. Transfer of Shares from Non-Resident to Resident
    • Listed Company:
      • The price of equity instruments should not exceed the price calculated in accordance with the relevant SEBI guidelines.
    • Unlisted Company:
      • The price of equity instruments should not exceed the fair value determined using any internationally accepted pricing methodology on an arm’s length basis.
      • The valuation must be duly certified by a Chartered Accountant (CA) or a Merchant Banker registered with SEBI, or a practicing Cost Accountant.

For rights issues and for Initial MOA, valuation certificate is not required. A declaration (plain paper) may be attached that the rights issue to person’s resident outside India is not at a price less than the price offered to persons resident in India and in case of Incorporation issue done at FV. By complying to these guidelines, companies and investors can ensure that the valuation of capital instruments is conducted fairly and in compliance with regulatory standards. Compliance Calendar LLP offers expert assistance in company law advisory Valuation Services having a team of CA/Merchant Bankers and Registered Valuers, ensuring accurate and compliant valuations for all types of transactions involving capital instruments.

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