Valuation under different Acts i.e. the Companies Act, 2013, Income Tax Act, 1961 and Foreign Exchange Management Act, 1999
Till the introduction of the Companies Act, 2013 (Act 2013), the valuation of shares, assets, net worth of companies etc. was conducted by Chartered Accountants or as prescribed by other laws such as the Foreign Exchange Management Act, 1999 (FEMA) and the regulations made thereunder or the Income Tax Act, 1961 (IT Act).
Under Companies Act, 2013.
There was no provision in the earlier company law i.e. the Companies Act, 1956 for valuation or specified the persons who could conduct valuation of companies, shares etc. The concept of a “Registered Valuer” under Indian law was introduced for the first time vide Section 247 of Chapter XVII of the Act, 2013 for matters requiring valuation under the said act.
The Ministry of Corporate Affairs (“MCA”) has notified the provisions governing valuation by registered valuers [Section 247 of the Act, 2013] and the Companies (Registered Valuers and Valuation) Rules, 2017 (“Rules”), both to come into effect from 18th October, 2017.
Section 247 of the Act 2013 provides that-
“where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other asset or net worth of a company or its liabilities under the provisions of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner and on such terms and conditions as maybe prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company”.
The Rules provides the eligibility criteria which needs to be fulfilled for obtaining a certification for being a registered valuer and the manner in which the certification maybe obtained. The Rules also provide that the Insolvency and Bankruptcy Board of India (“IBBI”) established under the Insolvency and Bankruptcy Code, 2016 be the “Registering Authority” which will hold examinations and grant certifications of the designation of a “Registered Valuer”.
It is important to note that the extension for obtaining Valuation Reports from persons other than Registered Valuers has ended on 31st January 2019 under Companies Act 2013 as well as IBC 2016 & allied laws. Hence, all valuations under the Companies Act after January 31st 2019 must be conducted by a registered valuer registered with IBBI Only.
Under Income Tax Act, 1961.
The valuation rules are specified under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions under the IT Act which cover valuation options in case of various assets including equity shares and other securities.
There are two options for valuation of Fair Market Value (“FMV”) under rule 11UA:
a) NAV method: As per Rule 11UA, there is no specific requirement that which person will do the valuation. Therefore, any registered valuer can do the valuation for issue of shares on fair Market Value.
b)Discounted Free Cash Flow Method (DCF): It indicates the fair market value of a business based on the value of projected cash flows that the business is expected to generate in future. Rule 11UA(2)(b) deals with valuation as per DCF.
It is important to note that with effect from 24th May, 2018, right of Chartered Accountant is taken away and therefore only Merchant Banker is authorized to determine the FMV of such equity shares under DCF method.
Under FEMA & its Regulations.
As per RBI guidelines the fair value of equity shares, compulsory convertible capital instruments or any other capital instruments of an Indian Company, in case of allotment or transfer to or from Non-Resident must be carried out in accordance with any internationally accepted valuation methodologies. The valuation shall be duly certified by a Chartered Accountant or SEBI Registered Category I Merchant Banker, where the shares or the capital instrument are not listed on any recognized stock exchange in India.
Who can conduct the valuation under different Acts?
A. In case of FMV is based on DCF Method: –
a) Under Companies Act, 2013- By Registered Valuer
b) Under Income Tax Act, 1961- By Merchant Banker
c) Under FEMA- Chartered Accountant or SEBI registered Merchant Banker
B. In case of other than DCF Method: –
a) Under Companies Act, 2013- By Registered Valuer
b) Under Income Tax Act, 1961- By Any Registered Valuer
c) Under FEMA- Chartered Accountant or SEBI registered Merchant Banker
Remarks:
In case of DCF Method, valuation under Companies Act, 2013 and Income Tax Act, 1961 are to be done by different persons i.e. by Registered Valuer and by Merchant Banker respectively. Therefore, companies have to bear unnecessary costs for varied valuations for a single transaction. There is a need to align provisions of different laws so that there is uniformity in the valuation process and Companies do not suffer the extra cost or tax demands.
It is important to note that, in view of the above, Registered Valuers are supposed to carry out valuation as per International Valuation Standards and Methodologies including DCF Method.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.
Author Bio
Thank you so much for this article, this is very helpful. Also, It’s high time that govt should realise and align valuation requirements under all these acts. Merchant banking licenses are costly and so is their fees. Registered valuer adopts the same methodology for DCF valuation yet not recognised by Income tax. Ideally a report from IBBI registered valuer should serve all the purposes under all the acts