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DIR-3 KYC form to be filed by September 30, 2021

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RBI to give booster shot to Covid-hit services, MSMEs

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The tax department has launch the much-awaited new portal 2.0

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MCA launches first phase of MCA21 V3.0 portal

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RBI announced to cut the key repo rate, at which it lends to banks, for a third straight time by 25 basis points to 5.75 percent.

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VALUATION OF SHARES – A Complete guide to valuation of Shares


  • By : Product Management Group
  • 03/06/2021

What is Share Valuation ?

Valuation of shares is the process of knowing the true value of the company.  Share valuation is done based on various quantitative techniques and the share value will vary depending on the market demand and supply.

The share price of listed companies which are traded publicly can be known easily. But w.r.t private companies whose shares are not publicly traded, valuation of shares is really important and challenging.

Shares Valuation methods :

The selection of method for share valuation depends upon the purpose of valuation, and using combining two or more methods will give more accurate results.

  • Income approach: This approach has two methods, (a) Discounted Cash Flow (DCF) DCF method uses the projection of future cash flows to determine the fair value and if this data is reasonably available, the DCF method can be used. (b)  Price Earning Capacity (PEC) method. PEC method uses historical earnings and if an entity is not in the business for a long time and just started its operations, then this method cannot be applied.

  • Asset Approach: If a company is a capital-intensive company and invested a large amount in capital assets or if the company has a large volume of capital work in progress then an asset-based approach can be used. This method is also applicable for valuing the shares during amalgamation, absorption, or liquidation of companies.

  • Market-driven: Based on demand and supply of shares, and most useful in case of listed company shares.

Various regulatory bodies have prescribed different valuation method and authorized/recognized different professionals for valuation of the company, and this leads to create confusion amongst all stakeholders, below given is a simple and is easy use table containing vital information about method/regulations and professionals authorized to do valuation

Regulations/ Corporate Action

Valuation by

Method

Remark

AS PER FEMA REGULATION (FDI)

ISSUE OF SHARES

Chartered Accountant or SEBI Registered Merchant Banker or Cost Accountant

Internationally accepted pricing methodology

Issue at a value higher than the FMV

 

 

 

 

Transfer of Shares FEMA

By Resident to Non Resident

Chartered Accountant or SEBI Registered Merchant Banker or Cost Accountant

Internationally accepted pricing methodology

Price should not be less then valuation price

 

 

 

 

Transfer of shares FEMA

By Non Resident to Resident

Chartered Accountant or SEBI Registered Merchant Banker or Cost Accountant

Internationally accepted pricing methodology

Price should not exceed valuation price

 

 

 

 

Companies Act 2013

Issue of Shares Section 62  (Further issue) if done by Special Resolution.

  1. Existing shareholders
  2. Employees under ESOP
  3. Any other person except mentioned above, if resolution by a special resolution, i.e Issue of shares on preferential basis

 

Registered Valuer with IBBI

w.e.f 31/1/2019

Internationally accepted pricing methodology

Right issue by Board meeting Valuation Report not needed

 

 

 

 

  • Section 230 Compromise or Make Arrangement
  • Section 232 Merger or Amalgamation
  • Purchase of minority shareholding
  • Liquidator – Section 258 Companies Act (NCLT) related cases
  • Submission of report by liquidator Section 281 of CA 2013
  • Declaration of insolvency in case of proposal  to wind up voluntarily

Registered Valuer with IBBI

w.e.f 31/1/2019

Internationally accepted pricing methodology

w.e.f 31st January 2019

 

 

 

 

Transfer of shares as per Income Tax act (Book value)

If shares are held as capital assets

Chartered Accountant or Assesses himself

As per formula given by Income tax department

 

 

 

 

 

Transfer of shares as per Income tax act

Discounted cash flow

If shares are held as capital assets

Effective 24.05.2018

Category I Merchant Banker

Discounted cash flow

  • If price is less then FMV then impact of tax on buyer and seller (Section 56(2)(x) and Section50CA
  • Needed in shares are held as capital assets

 

 

 

 

Transfer of Shares as per Income Tax if shares are held as stock in trade

NA

NA

NA

 

 

 

 

Transfer of shares as per Income tax to buyer as per section 56(2)

Any such shares received (by the buyer) under the following circumstances would be outside the ambit of section 56(2)(x) -

  1. from any relative; or
  2. on the occasion of the marriage of the individual; or
  3. under a will or by way of inheritance; or
  4. in contemplation of death of the payer or donor; or
  5. from any local authority; or
  6. from any trust or institution referred to in section 10(23C); or
  7. from any trust or institution registered under section 12AA; or
  8. by way of transaction not regarded as transfer under specific circumstances as stated under Section 47; or
  9. from an individual by a trust created solely for the benefit of relative of the individual.

 

NA

NA

NA

 

 

 

 

Issue of Shares as per Income Tax act (Issue of shares at a premium)

Effective 24.5.2018

Merchant Banker

Discounted cash flow method

Effective date 24.5.2018 (CBDT circular)

 

 

 

 

Issue of Shares as per Income Tax act (Issue of shares at a premium)

Book Value method

CA or at the option of Assessee

As per method prescribed by Income tax department

 

 

In a nutshell this post is an attempt to concisely give a insight into the this often complex subject on the different types of valuation methodology and what determines them.