Business and financial valuation determine the economic value of a business, financial asset, or liability. It is an essential tool in various legal, regulatory, and commercial contexts in India and helps stakeholders make informed decisions and assess the fair value of assets or liabilities.
In this post, we will explore the regulations and requirements governing business and financial valuation in India and the types of valuation methods used in the country. We will also discuss the impact of Indian case laws on valuation practices in the country.
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Regulations Governing Business and Financial Valuation in India
In India, business and financial valuation is governed by various laws and regulations, including the Companies Act, 2013, the Income Tax Act, 1961, Securities and Exchange Board of India (SEBI) guidelines, Reserve Bank of India (RBI) guidelines, and Indian Accounting Standards (Ind AS). Let’s take a closer look at each of these regulations:
- Companies Act, 2013: The Companies Act, 2013 requires the valuation of shares in cases of buyback or merger. Valuation is also required for the issue of sweat equity or employee stock options.
- Income Tax Act, 1961: The Income Tax Act of 1961 requires the valuation of assets to determine capital gains tax. Valuation of unlisted shares is also required for the determination of their fair market value.
- SEBI guidelines: SEBI guidelines require the valuation of listed companies for compliance with listing requirements.
- RBI guidelines: RBI guidelines require the valuation of assets to determine the loan-to-value ratio.
- Ind AS: Ind AS requires the valuation of assets and liabilities for financial reporting purposes.
- Insolvency and Bankruptcy Code, 2016: The Insolvency and Bankruptcy Code, 2016, requires the valuation of assets and liabilities to determine a resolution plan in insolvency cases.
- Asset Reconstruction Companies (ARCs): ARCs require the valuation of assets for acquisition or reconstruction.
Types of Business and Financial Valuation Methods Used in India
There are several methods used for business and financial valuation in India, including:
- Comparable company analysis: This method involves comparing the subject company with similar companies in the same industry to determine its value. The subject company’s value is determined by analysing comparable companies’ financial performance, growth prospects, and risk profiles and adjusting for any differences between the subject company and the comparable companies.
- Comparable transaction analysis: This method involves comparing the subject company with similar companies recently sold to determine its value. The subject company’s value is determined by analysing the financial and strategic characteristics of comparable companies and the terms of their sale and adjusting for any differences between the subject company and the comparable companies.
- Discounted cash flow analysis: This method involves projecting the future cash flows of the subject company and discounting them to present value to determine its value. The subject company’s value is determined by forecasting its future cash flows, estimating the required rate of return of the investor, and discounting the cash flows to present value using the required rate of return.
- Asset-based valuation: This method involves valuing the subject company’s assets individually and summing them to determine their value. The subject company’s value is determined by valuing its tangible assets (such as property, plant, and equipment) and intangible assets (such as patents, trademarks, and copyrights) separately and summing them to obtain the total value of the company.
Indian Case Laws Pertaining to Valuation
There have been several key case laws related to business and financial valuation in India. Some notable examples include:
- In the case of CIT vs Ballarpur Industries Ltd., the Supreme Court of India ruled that the net asset value method was the most appropriate method for valuing company shares. This case established the importance of considering the net asset value of a company, rather than just its market price, when valuing its shares.
- In the case of CIT vs Reliance Industries Ltd., the Supreme Court of India ruled that the comparable company method was the most appropriate for valuing company shares. This case highlighted the importance of considering comparable companies’ financial and strategic characteristics when valuing the subject company.
- In the case of ICICI Bank vs Satyam Computer Services Ltd., the Bombay High Court ruled that the discounted cash flow method was the most appropriate method for valuing the shares of Satyam Computer Services. The court considered the future growth prospects of the company and the risks associated with its business when determining the value of its shares.
- In the case of Tata Sons Ltd. vs Mistry Family, the National Company Law Appellate Tribunal (NCLAT) ruled that the fair market value of the shares of Tata Sons was determined by the comparable company method. The NCLAT considered the financial performance and growth prospects of comparable companies in the same industry when determining the value of Tata Sons’ shares.
- In the case of DLF Ltd. vs the Securities and Exchange Board of India (SEBI), the Securities Appellate Tribunal (SAT) ruled that the net asset value method was the most appropriate method for valuing the shares of DLF Ltd. The SAT considered the net asset value of the company, as well as its future growth prospects when determining the value of its shares.
These case studies demonstrate the importance of considering various factors, including a company’s financial performance and growth prospects, the risks associated with its business, and the values of comparable companies when valuing a business or financial asset. They also illustrate the importance of choosing the appropriate valuation method for different situations.
These and other case laws have significantly impacted valuation practices in India. It is important for valuers to be aware of these case laws and to consider their implications when valuing a business or financial asset.
Conclusion
Business and financial valuation is essential in various legal, regulatory, and commercial contexts in India. The regulations and requirements governing valuation in the country are determined by various laws and guidelines, including the Companies Act of 2013, the Income Tax Act of 1961, SEBI guidelines, RBI guidelines, and Ind AS. Several methods are used for business and financial valuation in India, including comparable company analysis, transaction analysis, discounted cash flow analysis, and asset-based valuation. Case laws have also played a significant role in shaping valuation practices in India. It is important to choose the appropriate valuation method and consider relevant case laws for different situations in the country.
The author is a Chartered Accountant and has an MBA from IIM Indore. He is a partner at Hardik Parikh Associates LLP.
Author Bio
Per LATEST media report, –
“As per the Ministry of Corporate Affairs (MCA), there are neither uniform standards for valuation of Assets of the Companies under IBC nor proper regulatory system for valuation professionals….”
Does this not stoutly refute/liquidate – can MCA afford to go wrong, (?!) – the averments made in the opening para. of this write-up so also the categorical assumptions made all through?!?
Look back and go through the earlier write-ups on this website itself for getting a grip of what’s what or is not ?!