DCF VALUATION

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AMAN (Querist)
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05 February 2011 IF CASH FLOWS ARE NEGATIVE THEN WE CANNOT CALCULATE VALUE OF SHARE AS PER DCF.BUT RBI HAS MANDATE IT.HOW CAN IT BE CALCULATED

CA Shailesh Kumar Bhagat

CA Shailesh Kumar Bhagat (Expert)
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06 February 2011 In that case value of share will be 0.

AMAN

AMAN (Querist)
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08 February 2011 THANKS FOR YOUR REPLY SIR,

I HAVE ONE MORE QUERRY IN THIS REGARD.
OUR COMPANY IS PURCHASING SHARE FROM NRI WHO IS ONE OF THE VENTURER.IS IT POSSIBLE TO TRANSFER SHARE AT ZERO VALUE.IF YES THEN HOW?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 It seems there are a few different aspects to address in your query regarding the valuation of shares in the context of negative cash flows and transferring shares at zero value, especially involving an NRI shareholder. Let's break down each part:

### Valuation of Shares in DCF Methodology

1. **Negative Cash Flows and DCF Valuation**:
- The Discounted Cash Flow (DCF) method is a common approach to valuing shares based on the present value of projected future cash flows. Negative cash flows can complicate this valuation because they suggest that the company is not generating sufficient cash to cover its expenses or investments.
- However, negative cash flows do not necessarily mean that shares cannot be valued using DCF. It depends on the specific circumstances, such as the reasons for the negative cash flows (e.g., temporary due to investment in growth) and projections for future positive cash flows.
- Valuation professionals may adjust projections, consider turnaround plans, or use alternative valuation methods alongside DCF to estimate the fair value of shares.

2. **RBI Mandate and NRI Share Transfer**:
- The Reserve Bank of India (RBI) has regulations governing the transfer of shares involving NRIs (Non-Resident Indians). These regulations include guidelines on pricing, documentation, and approvals required for such transfers.
- It is possible to transfer shares at a lower or nominal value, including zero value, under certain conditions and with proper justification. This typically requires compliance with RBI guidelines, including reporting and documentation requirements.

3. **Transferring Shares at Zero Value**:
- Shares can be transferred at zero value, but it must be supported by a valid rationale and compliance with applicable laws and regulations, including those prescribed by RBI.
- Steps typically involve:
- **Valuation Justification**: Providing a clear rationale for the zero or nominal value transfer, such as financial distress of the company or the shareholder’s intention to gift the shares.
- **RBI Compliance**: Obtaining necessary approvals and adhering to reporting requirements specified by RBI for NRI transactions.
- **Documentation**: Executing a valid agreement or deed reflecting the transfer, even if nominal in consideration.

### Practical Steps and Considerations

- **Consultation**: Engage with a qualified valuation expert and legal advisor familiar with RBI regulations to assess the feasibility of zero or nominal value share transfer in your specific case.
- **RBI Approval**: Prepare and submit required documents to RBI for approval, including justifications for the zero-value transfer.
- **Company’s Financial Health**: Clearly communicate the company's financial situation, including negative cash flows, in any applications or justifications to ensure transparency and compliance.

In summary, while negative cash flows can complicate traditional DCF valuation, it's possible to consider other factors and methods in conjunction with DCF. Regarding share transfers involving an NRI shareholder at zero value, ensure compliance with RBI regulations and seek professional advice to navigate the process effectively.