For promoters, mergers and demergers are often conceived as strategic tools to unlock value, segregate diverse business verticals, attract new investment, or achieve operational efficiencies. However, an aspect that is frequently underestimated is the central role of valuation in such restructuring exercises. Valuation in a merger or demerger is not merely a supporting document; it constitutes the very foundation on which the proposed scheme is structured and assessed. In 2025, amid heightened scrutiny from adjudicating authorities, shareholders, tax authorities, auditors, and investors, any weakness or lack of rigour in the valuation process has the potential to undermine—even derail—an otherwise well-intentioned restructuring.
1. Valuation Is Not About Justifying a Pre-Decided Swap Ratio
One of the most common mistakes of promoters is treating valuation as a tool to justify a swap ratio already decided internally.
In reality:
- Valuation must determine the swap ratio
- Not the other way around
Courts and regulators increasingly examine whether:
- the methodology was chosen objectively
- assumptions were reasonable
- valuation was independent
A valuation that looks “tailor-made” often invites objections and litigation.
2. Minority Shareholders Scrutinise Valuation Closely
Promoters often underestimate the role of minority shareholders.
In mergers/demergers:
- minority shareholders rely almost entirely on valuation
- any perception of unfairness leads to objections before NCLT
- valuation becomes the focal point of legal challenge
A defensible valuation protects promoters from allegations of oppression or unfair treatment.
3. One Valuation Does NOT Fit All Laws
Promoters are often surprised to learn that valuation expectations differ across laws:
- Companies Act → fairness and reasonableness
- Income Tax Act → FMV and anti-abuse rules
- IBC (if stressed) → value maximisation
- SEBI (listed entities) → investor protection and transparency
Using a single, generic valuation report without legal alignment can create compliance issues later.
4. Overvaluation Creates Future Problems
Promoters often push for higher valuation to:
- retain control
- reduce dilution
- improve optics
But overvaluation can result in:
- post-merger underperformance
- impairment losses
- future down-rounds
- auditor qualifications
- investor exits
A sustainable valuation is always better than an aggressive one.
5. Demergers Require Deeper Valuation Logic Than Mergers
In demergers, valuation must answer complex questions:
- how value is split between resulting entities
- allocation of shared costs and assets
- impact on profitability of each entity
- standalone vs group synergies
Promoters often underestimate this complexity—leading to disputes and regulatory pushback.
6. Valuation Directly Impacts Tax Outcomes
Valuation influences:
- capital gains tax
- carry-forward of losses
- stamp duty implications
- tax neutrality conditions
An improperly structured valuation can destroy the very tax benefits promoters seek through restructuring.
7. Documentation Matters More Than the Final Number
In these years, authorities focus less on the number and more on:
- assumptions
- workings
- peer benchmarks
- sensitivity analysis
- disclosures
A valuation that cannot be explained is often treated as unreliable.
8. What Promoters Should Do Differently
Promoters should:
✔ involve valuers early in transaction planning
✔ align valuation with transaction objectives
✔ consider downside scenarios
✔ ensure independence and documentation
✔ prepare for regulatory and shareholder scrutiny
Valuation should be treated as a strategic input, not a compliance afterthought.
Conclusion: Valuation Can Make or Break a Restructuring
In mergers and demergers, valuation determines:
- fairness
- credibility
- regulatory approval
- investor confidence
Promoters who respect valuation as a governance and strategy tool achieve smoother restructurings. These promotors don’t often face delays, litigation, and long-term value erosion.
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Author Note: The author is a Registered Valuer (Securities & Financial Assets), Chartered Accountant and Insolvency Professional, advising on valuation for mergers, demergers, restructuring, and insolvency-related transactions. For related queries, you may reach out at: [email protected] | Phone No: +91 99108 59116
