Article explains Legislative requirements of valuation of Securities and Financial Assets in India under the Companies Act, 2013, The Income tax Act, 1961 and Foreign Exchange Management Act, 1999 and Regulations made there under.
The valuation profession has undergone a sea change in recent past especially after the introduction of concept of Registered Valuer (RV) under the Companies Act, 2013. The regulators are striving to provide more professional and organized approach to valuation profession in India which will match to International Standards and this is surely going to serve as long term value creation for the Indian economy as a whole.
The Ministry of Corporate Affairs had issued the Companies Registered Valuers and Valuation Rules 2017 (“the Rules”) on 18th October 2017. Rule 4 read with Annexure-IV of the said Rules prescribes eligibility qualification and experience for Registration as Registered Valuer (RV).
Securities or Financial Asset is one of the asset classes which are required to be valued by a RV under the Companies Act, 2013. The Insolvency and Bankruptcy Code, 2016 (IBC 2016) also mandates valuation by RV. The Income tax Act, 1961 and the Foreign Exchange Management Act, 1999 has its own valuation requirements as to who can perform the valuation and issue the valuation report. The varying requirements under the Companies Act, IT Act and FEMA have created challenge before the professionals of complying with the respective regulations for a single transaction.
The purpose of this article is to decipher major instances when valuation is required under these legislations and the authorized professional to carry out the valuation. Further, this article also covers a comparative analysis of valuation requirements under following specific instances which are commonly experienced by the business community:
> Preferential Allotment / Rights Issue of Shares to Residents
> Preferential Allotment / Rights Issue of Shares to Non-Residents
First of all, we shall see who is authorized to perform the valuation for different instances under the Companies Act, 2013, IBC 2016, the Income tax Act, 1961 and Foreign Exchange Management Act, 1999 and Regulations made thereunder as tabulated below:
| Regulation | Instances of Valuation Requirement |
| Companies Act 2013 and Insolvency Bankruptcy Code 2016 (IBC 2016) – Valuation Certificate to be issued by Registered Valuer (RV) | > Merger and Amalgamation
> Preferential allotment of shares > Private Placement of shares > Purchase of minority shareholding by majority shareholders > Buy back of Shares > Issue of convertible Instruments such as FCPS / FCDS on preferential basis / private placement basis > Acquisition of assets by a Company from a Director or a person connected with such director for consideration other than cash > Issue of Bonds/ Debentures > Acceptance of Deposits > Issue of Employee Stock Option Plans/ Sweat Equity shares > Issue of shares for Consideration other than cash > Valuation Requirement as per IND AS 113 (If opted for revaluation approach instead of cost approach) > Certain Related party transactions as covered u/s 46(2) of the IBC Code, 2016 > Valuation of assets for submission of report by the liquidator > Voluntary Liquidation of the Company |
| Income Tax Act, 1961 – – Valuation Certificate to be issued by Chartered Accountant / Merchant Banker | > Issue of shares by a Company other than a Company in which public are substantially interested
> Receipt of property without consideration or for consideration which is less than Fair Market Value (‘FMV’) > Transfer of shares other than quoted shares without consideration or for consideration which is less than FMV > Indirect transfer of shares > Issue of shares, transfer of intangibles etc. in Transfer Pricing. |
| Foreign Exchange Management Act, 1999 – Valuation Certificate to be issued by Chartered Accountant / Merchant Banker / CPA | > Fresh Issue or transfer of equity instruments of Indian Company (FDI)
> Subscription/ Acquisition of equity shares of Overseas Companies (ODI) > Swap of shares |
Now, we can see the valuation requirements for Preferential Allotment and Rights issue of Shares to Residents under Companies Act, IT Act and FEMA as tabulated hereunder:
| Regulation | Valuation Requirement |
| The Companies Act, 2013 | > Valuation is mandatorily required to be carried out by a RV
> No methodology prescribed |
| The Income Tax Act, 1961
|
> Valuation is required to be carried out as per Net Asset value (Book Value basis) or DCF Method or any other method to the satisfaction of AO.
> If valuation is as per DCF Method – Can signed only by a category I Merchant Banker > If valuation is as per NAV Method or any other method – Not specified who can sign the report |
| FEMA | > Not Applicable |
| Conclusion | > If valuation is as per DCF Method – Valuation is to be carried out by a RV who is also a SEBI Registered Category I Merchant Banker
> If valuation is as per NAV Method or any other method – Valuation can be carried out by a RV > The provisions of section 56(2)(x) read with Rule 11UA(1)(c)(b) has to be kept in mind from recipient perspective. > Ideal steps for tax neutral allotment in the hands of issuer and subscriber √ Step 1- Value as per section 56(2)(x) read with Rule 11UA(1)(c)(b) i.e. NAV method considering market value of jewellery, archeological collection, stamp duty value of land and building etc. √ Step 2- If one is adopting DCF method, ensure that value as per Step 1 is considered √ Step 3- If one is adopting NAV method, then adopt price as per step 1 and state that it falls within other method to the satisfaction of AO |
Finally, we can see the valuation requirements for Preferential Allotment and Rights issue of Shares to Non-Residents under Companies Act, IT Act and FEMA as tabulated hereunder:
| Regulation | Valuation Requirement |
| The Companies Act, 2013 | > Valuation is mandatorily required to be carried out by a RV
> No methodology prescribed |
| The Income Tax Act, 1961
|
> No specific methodology prescribed from issuers perspective
> From subscribers perspective, the value cannot be lower than FMV determined as per section 56(2)(x) read with Rule 11UA(1)(c)(b) i.e. Net Asset Value considering market value of jewellery, archeological collection and stamp duty value of land and building |
| FEMA | > Value of share cannot be less than value arrived at as per Internationally Accepted Pricing Methodology (IAPM). IT method can be considered as IAPM.
> Who can issue certificate – not specified. |
| Conclusion | > Valuation is to be carried out by a RV as per modified NAV method prescribed in Rule 11UA(1)(c)(b) |
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