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Business Valuation means determination of the “Economic Worth” of a Company based on its financial model, macro-environment and supported with reasons,  evidences and assumptions. While valuing businesses, a variety of business valuation methods typically categorized into three valuation approaches are considered and Premium & Discounts are applied based on standard & premise of valuation to arrive at the Business Valuation for different purposes.

The need

Corporate valuations is the main step towards corporate finance activity (which includes capital raising, M&A) and towards meeting regulatory/accounting requirements or for management purposes. The integration of the world economies has created both opportunities as well as challenges for businesses which has caused uncertainty across global markets and raising the importance of independent valuations all over the world. Justifying the value of businesses has grown more complex and challenging as it has been accepted that valuation is not an exact science and depends upon a number of factors like purpose, stage, financials, industry, management, promoters strengths and management assumptions etc.

For so long, valuation has been debated in India as an art or a science .  The substantial part of the litigation in Mergers & Acquisitions (M&A) takes place on the issue of valuation as main part of valuation exercise involves, elements of subjectivity that often gets challenged. More so, in India, there are not much regulatory prescribed standards for business valuation, specifically for unlisted and private companies. So in most of the cases the valuation lacks the uniformity. Further, absence of any stringent course of action and non regulation under any statute also leads to loose ends in valuation exercise.

Institute of Chartered Accountants of India (ICAI) has recommended Business Valuation Practice Standards (BVPS) which aims at establishing uniform principles, practices and procedures for valuers performing valuation services in India.

The introduction of concept of Registered Valuer in the Companies Act, 2013 could now set the Indian valuation standards for standardizing the use of valuation practices in India, leading to uniformity, transparency, credibility and better governance.

Valuation is an art based on the professional experience of the valuer rather than a perfect science based on empirical studies, and verified formulae. There is no requirement for a valuation specialist to be a member of a particular organisation (like ICAI for audit services in India). So, there is no governing organisation of valuation practices. Though Internationally,  business valuations are broadly guided by various standards like: Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA), The Canadian Institute of Chartered Business Valuators (CICBV), Revenue Ruling 59-60 (USA), ICAI Valuation Standard (recommendatory) , however keeping in view the growing relevance and importance and reliability of valuation in business and investment decisions as well as in regulatory compliance processes , the development of practice of valuation as a discipline and profession based on pre-defined standards , has become a necessity in the present context because of volatile financial markets, globalisation, and standardisation of framework of accounting and financial reporting through International financial reporting standards (IFRS).


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May 2024