Valuation of unquoted equity shares of investment companies, holding companies, etc. – Guidelines therefor
1. Reference is invited to the instructions contained in the Board’s Circular No. 2 (WT) of 1967, dated 31-10-1967 [printed here as Clarification 3] regarding valuation of unquoted equity shares of investment companies, holding companies and managing agency companies.
2. In partial modification of the above circular, the directions and instructions of the Board with regard to the valuation of unquoted equity shares of investment companies which have wholly-owned subsidiaries (i.e., investment companies having one or more companies which are itself 100 per cent subsidiaries), are as follows :
1. In arriving at the estimated price which a share of such company would fetch if sold in open market on the relevant valuation date, its “asset backing” must be carefully computed in accordance with well settled principles, in other words, the valuation should take into account the complete enterprise (consisting of the parent investment company and its wholly-owned subsidiary or subsidiaries) as if they were only one company. In arriving at such computation the reserves of the subsidiary company must necessarily be taken into account.
2. Applying the above principles :
(i) The value of a share of the parent investment company would have first to be determined on the basis that the parent investment company and its wholly-owned subsidiary or subsidiaries were in fact one single company. This should be done by assimilating and consolidating the balance sheets of the subsidiary companies with the balance sheet of the parent investment company. Care must be taken to ensure that in such assimilation and consolidation, the inter-company balances are correctly adjusted.
(ii) “Maintainable profits” would have to be aggregated in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries. The capitalised value should then be arrived at by applying a rate of yield of 9 per cent to the aggregated “maintainable profits”. The method of calculation of “maintainable profits” in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries should be in accordance with the Board’s Circular No. 2 (WT) of 1967, i.e., they should be determined separately in accordance with the said circular and then aggregated.
(iii) The average of the values arrived at under (i) and (ii) above would determine the price which the share of the parent investment company would fetch if sold in the open market on the relevant valuation date.
3. It is clarified that para 3 of Circular No. 2 (WT) of 1967 [Clarification 3] will not apply in cases of valuation of shares of a parent investment company which has a wholly-owned subsidiary.
4. The above instructions, which are to be read in partial modification of Circular No. 2 (WT) of 1967 are to be followed and implemented in all matters with immediate effect including pending proceedings.
Circular : No. 118 [F. No. 319/16/73-WT], dated 15-9-1973.
