What is Valuation?
International Valuation Standard Council has defined Valuation as “ the process of determining the “Economic Worth” of an Asset or Company under certain assumptions and limiting conditions and subject to the data available on the valuation date.
What is the need of Valuation?
There are a range of reasons that business owners require a valuation. These include;
a. Commencing a sale process,
b. Resolving shareholder disputes,
c. For business planning & future decision-making,
d. Determining tax obligations,
e. For litigation purposes(including divorce)
f. To access external sources of funding
Category of Valuer, Appointment , Eligibility & Experience
Category of Valuer:
The Valuer under Companies Act have been broadly divided into two categories:
A. Financial Valuer
B. Technical Valuer
Who will appoint the Valuer:
The Registered valuer to be appointed by Audit Committee or in their absence by the Board of Directors.
Eligibility & Experience
A. For Financial Valuer
i. Qualification: CA/CMA/CS in whole time practice.
ii. A Merchant banker registered with SEBI and which has in employment under it CA/CMA/CS for carrying out(Signing) the Valuation report.
iii. Experience: 5 years continuous post qualification experience
B. For Technical Valuer
i. Qualification: Member of the institute of Engineers or Member of the Institute of Architect in whole time practice.
ii. A Merchant banker registered with SEBI and which has in employment under it member of the institute of Engineers or Member of the Institute of Architect
iii. Experience: 5 years continuous post qualification experience
Note: A Merchant banker registered with SEBI or firm or LLP having in employment under it CA/CMA/CS and Engineers having above technical qualification can undertake both assignments for carrying out(Signing) the Valuation report
Scope/Area of Valuation
Financial Valuer:
Stocks, Shares, Debenture, Securities, Goodwill, Corporate debt restructuring, Winding up/ liquidation, Compromise & arrangement.
Technical Valuer:
Valuation of movable & immovable Property.
Responsibilities of Valuer:
a. Valuer to make impartial, true & fair valuation
b. Not undertake valuation of enterprise, if directly or indirectly associated with it in any capacity
c. Exercise due diligence
d. Valuation to be done as per rules.
Note:
"In case the valuer has been involved in valuing any part of the subject matter of valuation in the past, the past valuation report(s) should be attached and referred to herein. In case a different basis has been adopted for valuation (than adopted in the past), the valuer should justify the reason for such differences"
Factor to be considered
Valuer to consider following points while undertaking Valuation-
• Nature of the Business and the History of the Enterprise from its inception
• Economic outlook in general and outlook of the specific industry in particular
• Book Value of the stock and the Financial condition of the business
• Earning Capacity of the company
• Dividend-Paying Capacity of the company.
• Goodwill or other Intangible value
• Sales of the stock and the Size of the block of stock to be valued
• Market prices of stock of corporations engaged in the same or a similar line of business
• Contingent Liabilities or substantial legal issues, within India and Abroad, impacting business
• Nature of Instrument proposed to be issued, and nature of transaction contemplated by parties
Methods of Valuation:
Registered Valuer shall make valuation of any asset in accordance with any one or more of the following methods-
a. Net Asset Value Method (NAV)
b. Market Price Method
c. Yield Method / PECV Method
d. Discounted Cash Flow Method (DCF)
e. Comparable Companies Multiples Method (CCM)
f. Comparable Transaction Multiples Method (CTM)
g. Price of Recent Investment Method (PORI)
h. Sum of the parts Valuation Method (SOTP)
i. Liquidation Value
j. Weighted Average Method
k. Any other method accepted or notified by RBI, SEBI or Income Tax Authorities
i. Any other method that valuer may deem fit provided adequate justification for use of suh method (and not any of the above methods) is provided
Important: Before adopting methods, decide Valuation Approach-
• Asset Approach
• Income Approach
• Market Approach
Note: Registered Valuer shall make valuation of any asset as on the Valuation date and in accordance with applicable standards, if any stipulated for this purpose.
Content of Valuation Report
The Valuation report shall contain information as contained in Form 17.3 ( Registered Valuers (Forms) )
(1) Description of valuation engagement
(a) Name of the client:
(b) Other intended users:
(c) Purpose for valuation:
(2) Description of business/ asset / liability being valued
(a) Nature of business or asset / liability
(b) Legal background
(c) Financial aspects
(d) Tax matters
(3) Description of the information underlying the valuation
(a) Analysis of past results
(b) Budgets, with underlying assumptions
(c) Availability and quality of underlying data
(d) Review of budgets for plausibility
(e) Statement of responsibility for information received
(4) Description of specific valuation of assets used in the business:
(a) Basis or bases of value
(b) Valuation Date
(c) Description of the procedures carried out
(d) Principles used in the valuation
(e) The valuation method used and reasoning
(f) Nature, scope and quality of underlying data and /td>
(g) The extent of estimates and assumptions together with considerations underlying them
Statutory requirement under Companies Act.
Section 62 (1) (c) – For Valuing further Issue of Shares
Section 192 (2) – For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors
Section 230 (2) (c) (v) – For Valuing Shares, Property and Assets of the company under a Scheme of Corporate Debt Restructuring
Section 230 (3) and 232 (2) (d) – For Valuation including Share swap ratio under a Scheme of Compromise/Arrangement, a copy of Valuation Report by Expert, if any shall be accompanied
Section 232 (3) (h) - Where under a Scheme of Compromise/Arrangement the transferor company is a listed company and the transferee company is an unlisted company, for exit opportunity to the shareholders of transferor company, valuation may be required to be made by the Tribunal
Section 236 (2) – For Valuing Equity Shares held by Minority Shareholders
Section 260 (2) (c) – For preparing Valuation report in respect of Shares and Assets to arrive at the Reserve Price or Lease rent or Share Exchange Ratio for Company Administrator
Section 281 (1) (a) – For Valuing Assets for submission of report by Company Liquidator
Section 305 (2) (d) – For report on the Assets of the company for preparation of declaration of solvency under voluntary winding up
Section 319 (3) (b) – For Valuing the interest of any dissenting member of the transferor company who did not vote in favour of the special resolution, as may be required by the Company Liquidator
Section 325 (1) (b) – For valuation of annuities and future and contingent liabilities in winding up of insolvent company
Courses on Valuation:
The following institutes are providing courses on Valuation:
1. The Institute of Companies Secretaries of India : For its members or Final pass candidates
2. The Institute of Chartered Accountants of India : For its members or Final pass candidates
3. The Institute of Cost Accountants of India : For its members or Final pass candidates
4. The Institution of Valuers (IOV), India
5. The Indian Institution of Valuer , Pune
By: CA S K Mishra
CAclubindia
