VALUATION OF CORPORATES – IMPORTANT DEVELOPMENTS CA SUJAL SHAH 15 MAY 2020
EVOLUTION OF VALUATION REGULATIONS 2010 Since 1992 2017 & 2018 FEMA - DCF for valuations in case of SEBI Act was introduced The MCA notified Companies issue / transfer of shares of Indian wherein Cos. were free to (Registered Valuers and company which was subsequently price their issues in Valuation) Rules, 2017 (‘Rules’) changed to internationally accepted consultation with the Merchant w.e.f. 18 Oct 2017 valuation methodology Bankers ICAI issues Valuation Standards Prior 1992 w.e.f. 01 Jul 2018 CCI Guidelines for issue of shares at premium 2020 1957-1989 The MCA notified Draft Wealth Tax Rules, 1957 Valuers Bill as on April 02, prescribed valuation of 2020 (Circulated for Public unquoted shares Comments) CA SUJAL SHAH 2
VALUATION CONCEPTS & PURPOSE CA SUJAL SHAH 3
VALUATION CONCEPTS Value - Price Not an Value varies Exact with science Situation Valuation More of an Subjective Art Date Specific CA SUJAL SHAH 4
PURPOSE OF VALUATION Business Financial Intangibles Regulatory Valuation Reporting Purchase Price Restructuring FEMA Purchase / Sale Allocation Private Equity/ Purchase / Sale of Income Tax Act Hypothecation Venture Capital shares / business Funds Litigation / Family Accounting for Financial SEBI Regulations Settlements purchase Instruments Ind AS reporting – Fund raising Companies Act Impairment Fair Value / Impairment CA SUJAL SHAH 5
TYPES OF ASSETS Others Securities or • Jewellery Intangible Land and Plant and • Archaeological Financial Collections Assets Building Machinery • Drawings Assets • Paintings • Sculptures CA SUJAL SHAH 6
PROCESS OF VALUATION CA SUJAL SHAH 7
STEPS IN VALUATION 1 2 3 4 Information Information Analysis Analysis Valuation Valuation Recommendation Recommendation Methodologies Methodologies •Obtaining information •Obtaining information •Data Analysis and review •Data Analysis and review •Assigning Weights •Assigning Weights •Business Understanding •Business Understanding •Discussion with the •Discussion with the •Recommendation •Recommendation •Selection of method •Selection of method Management Management •Reporting •Reporting •Conducting sensitivity •Conducting sensitivity •Obtaining Management •Obtaining Management analysis analysis Representation Letter Representation Letter CA SUJAL SHAH 8
SOURCES OF INFORMATION � Historical data such as audited results of the Company � Industry & Company overview � Financial projections � Management Discussion � Stock market quotations / announcements � Publicly available data on comparable companies � Market surveys, news paper reports � Representation by Management CA SUJAL SHAH 9
ANALYSIS OF THE COMPANY � Understanding of the Business � Industry Analysis � Existing policy/ legal framework � SWOT Analysis � Profitability Analysis � Financial Ratio Analysis � Analysis of Past Data and Projections Installed capacity • Revenue and Expenses ratio analysis • Capital expenditure – increasing capacities • Working capital requirements • Alternate scenarios / sensitivities • CA SUJAL SHAH 10
VALUATION APPROACHES CA SUJAL SHAH 11
VALUATION APPROACHES INCOME INCOME MARKET MARKET COST COST APPROACH APPROACH APPROACH APPROACH APPROACH APPROACH Market Price Method Net Assets Value Method Discounted Cash Flow Comparable Companies Method Multiple Method Replacement Value/ Comparable Transactions Realizable Value Method Multiple Method CA SUJAL SHAH 12
COMMON ADJUSTMENTS � Market value of the investments � Other non-operating surplus assets � Surplus cash � Contingent liabilities / assets � Loan Funds � Preference Share Capital � ESOPs / Warrants � Convertible Instruments � Tax Concessions CA SUJAL SHAH 13
VALUATON FOR MERGER / DEMERGER CA SUJAL SHAH 14
MERGER / DEMERGER – VALUATION ASPECTS � In case of mergers and demergers, a relative valuation needs to be carried out � Relative values are determined by using similar valuation approaches / methods; and • applying similar weightages to values arrived under each approach / method • � Use of different approach / methods may be appropriate in certain cases, such as: Merger of an investment holding company into technology company • o Investment holding company - asset approach o Technology company - market approach / income approach � Share exchange ratio for Merger – valuation of shares of Transferor Co and of Transferee Co � Share entitlement ratio for Demerger – valuation of Demerged Undertaking and of Resulting Co CA SUJAL SHAH 15
VALUATION REPORT AND DOCUMENTATION CA SUJAL SHAH 16
CONTENTS OF REPORT AS PER THE COMPANIES (REGISTERED VALUERS AND VALUATION) RULES, 2017 Identity of the valuer Background Purpose of valuation Disclosure of valuer and any other experts information of the and appointing interest or conflict, if involved in the asset being valued authority any valuation Procedures adopted in Procedures adopted in Date of appointment, Date of appointment, Inspections and/or Inspections and/or Nature and sources of Nature and sources of carrying out the carrying out the valuation date and date valuation date and date investigations investigations the information used the information used valuation and valuation valuation and valuation of report of report undertaken undertaken or relied upon or relied upon standards followed standards followed Major factors that were Major factors that were Restrictions on use of Restrictions on use of Caveats, limitations and Caveats, limitations and Conclusion Conclusion taken into account taken into account the report, if any the report, if any disclaimers disclaimers during the valuation during the valuation CA SUJAL SHAH 17
DOCUMENTATION � Following documents/information/analyses to be documented: • engagement letter • data obtained during the course of valuation • valuation workings • copies of relevant circulars, extracts of legal provisions • bases, approaches and methods used • assumptions, a change in which, may materially affect the value • copy of the signed valuation report issued • management/client representation letter CA SUJAL SHAH 18
VALUATION – COMPANIES ACT 2013 & RULES CA SUJAL SHAH 19
REGISTERED VALUER � Section 247 of the Companies Act, 2013 (‘Act’) provides: Valuation of property, stocks, shares, debentures, securities, goodwill or other assets / liabilities / • networth of a company under the Act To be done by a Registered Valuer (RV) • Appointed by Audit Committee or in its absence the Board of Directors of that company • � Further, as per Section 247(2) of the Act, RV shall make an impartial , true and fair valuation of assets; • exercise due diligence while performing the functions as valuer; • make the valuation in accordance with such rules as may be prescribed; and • not undertake valuation of any assets in which he has a direct or indirect interest or becomes so • interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him. CA SUJAL SHAH 20
REGISTERED VALUER RULES On 18 Oct 2017, MCA notified the Companies (Registered Valuers and Valuation) Rules, 2017 Registered Registered IBBI Valuer Valuer Organization (‘RV’) (‘RVO’) Authority to administer & Organisation to regulate and Individual, Firm, LLP or perform the functions under impart training to the Company these Rules RegisteredValuers Member of a RVO Registered with IBBI CA SUJAL SHAH 21
TO BE A REGISTERED VALUER Obtain Educational Qualifications and Experience Pass Valuation Examination Satisfy other specified Eligibility Criteria CA SUJAL SHAH 22
EDUCATIONAL QUALIFICATIONS AND EXPERIENCE To be a RV, an individual must have the following educational qualifications and experience: 5 years Bachelors’ degree experience In addition, one should also complete educational course conducted by RVO Post-graduate 3 years degree/diploma experience Membership of a professional 3 years institute established experience by an Act of Parliament CA SUJAL SHAH 23
OTHER ELIGIBILITY CRITERIA - INDIVIDUALS Not convicted for an offence punishable with Not a minor and not of Valuer member of a RVO unsound mind imprisonment for a term > 6 months Recommendation by RVO Not convicted for offence Resident in India of which he is a member involving moral turpitude Not been levied a penalty Passed VE within 3 years Fit and proper person under section 271J of before making application Income tax Act Not an undischarged Possesses requisite bankrupt; educational qualification Not applied to be and experience adjudicated as a bankrupt 24 CA SUJAL SHAH
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