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Requirement of Valuation under Regulatory Compliance: A Complete Guide

Requirement of Valuation under Regulatory Compliance: A Complete Guide

Various regulations mandate valuation to bring out a clear picture of a particular event or a transaction undertaken or to be undertaken. By incorporating the valuation provisions, especially after its introduction under the Section 247 of the Companies Act, 2013, attempts were made to give structure and formalize the practice of valuation. Here’s a complete guide of various laws that requires valuation compliance.

Requirement of Valuation under Companies Act, 2013

Valuation under Companies Act, 2013 is governed by Section 247 read with Companies (Registered Valuers and Valuation) Rules, 2017. It sets various guidelines for qualification, independence, and methodology of working as a registered valuer under the Companies Act 2013.

Section 247 permits only Registered Valuers to undertake valuation of any stock, share, debenture, security. Goodwill, asset, liability or net worth of the company as required under this act. The eligibility of being a registered valuer under the Companies Act 2013 is stated under the Companies (Registered Valuers and Valuation) Rules, 2017. The act requires a true, fair, and impartial valuation to be performed and prohibits the registered valuer from undertaking valuation of any asset in which he is interested, whether directly or indirectly, at any time whether during or after valuation.

As per Rule 16 of Companies (Registered Valuers and Valuation) Rules, 2017, a valuation is required to be performed as per the Central Government notified valuation standards. Until any standard is notified, the Registered Valuer shall perform the valuation according to:

  • Valuation standards of any valuation professional organization
  • Internationally accepted Valuation Methodology
  • Valuation Standards specified by SEBI, RBI, or any other regulatory body.

Requirement of Valuation under Foreign Exchange Management Act, 1999

Reserve Bank of India guidelines mandates valuation of shares under FEMA for the following transactions undertaken:

  • Transfer or acquisition of equity shares by an Indian company in an overseas company, triggering Overseas Direct Investment (ODI) valuations.
  • Issue or transfer of Indian company’s compulsory convertible instruments or equity shares between a resident company and non-resident company triggering Foreign Direct Investment (FDI) valuations.
  • While in ODI valuations, no methodology is prescribed, FDI adopts internationally accepted principles as the basis of valuation. This valuation can be performed only by Merchant Banker (CAT-1) registered with SEBI if the transaction is related to swapping shares or exceeds $5 Million. In all other cases, a Chartered Accountant or a Certified Public Accountant is authorized to conduct the valuation.
  • Apart from the above transactions, as per FEMA (Transfer or Issue of Security by a Person Resident Outside India Regulations, 2017 a person resident outside India can transfer his capital asset held in an Indian company by way of sale to a person resident in India and vice-versa. The guidelines require this transaction to take place at arm’s length price in accordance with the internationally accepted methodology. Discounted Cash Flow technique is primarily accepted as an internationally accepted methodology.

Requirement of Valuation under Income Tax Act, 1961

Valuation under Income tax act becomes necessary for determining Fair Market Value under various rules that include Rule 11U, Rule 11UA, Rule 11UAA, Rule 11UAB, Rule 11UAE, and Rule 11UB. This inculcates the valuation of various assets and securities to bring a clear picture for taxation of the transactions involving such assets and securities.

The methods used for Business valuation under this act are as follows:

  • Discounted Free Cash Flow method: This method of valuation is based upon the projected cash flows that a business or an asset can generate in the future. These cash flows are discounted to present value to determine the value of the business or asset.
  • Net Asset Value method: It uses the fair market value of an asset as a method of valuation. Various provisions are incorporated to determine the fair market value of different assets under the respective rules. The valuation can be done by any Registered Valuer under Income Tax Act.

Requirement of Valuation under Securities and Exchange Board of India Act, 1992

SEBI Act, 1992 mandates valuation report from a registered valuer under the following regulations

Sr. No.

Regulation

Regulation No.

Applicability

1

SEBI (Listing Obligations and Disclosure Requirements Regulations), 2015

87C(1)(ii)

Issuers with listed securities receipts on a recognized stock exchange.

2

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

158(6)(b)

Under the Debt restructuring scheme, the conversion price of debt shall be certified by 2 independent registered valuers.

163(3)

In case of preferential issue of specified securities for a consideration other than cash, the assets received against the issue of equity shares shall be done by a valuer.

165

In case of an issuer’s shares not trading frequently on a stock exchange, the valuation shall be done and a certificate shall be obtained from such valuer for submission to the stock exchange.

3

SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008

38G(1)(a)

Issuers with listed securities receipts on a recognised stock exchange.

4

SEBI (Appointment of Administrator and Procedure for refunding to Investors) Regulations, 2018

7(2)(b)

For valuation of the properties attached by the Recovery Officer

8(1)

For valuation before initiating the process of the sale of the properties attached

 

Requirement of Valuation under Insolvency and Bankruptcy Code, 2016

Following are the valuation requirements under the IBC, 2016

Sr. No.

Code / Regulation

Section / Regulation No.

Applicability

1

IBC, 2016

                                         

Section 46(2)

For avoiding undervalued transactions, adjudicating authority may require assessment of the value of the transaction by an expert.

2

IBC, 2016

Section 59(3)(b)(ii)

A valuation report from a registered valuer shall accompany the Declaration of Insolvency when the proposal of voluntary winding up is made.

3

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

Regulation 35

For determination of liquidation value corporate debtor and fair value of assets to be sold.

4

IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017

Regulation 34

Registered Valuer shall submit an estimate of liquidation value and fair value to the resolution professional.

 

Qualification and Methodology - Analysing the Contradictions

While all the statutes lay down their valuation requirements, they contradict each other in terms of the qualifications of a valuer and valuation standards and methodologies. Here’s a comparative analysis to bring out a clear picture:

Sr. No.

Law/Regulation

Competent Person to act as Valuer

Valuation Standard/ Methodology

1

Companies Act, 2013

Only Registered Valuer

  • Internationally Accepted Valuation Standards;
  • Valuation Standards Adopted by Any Registered Valuers Organization.

2

FEMA, 1999 & RBI Guidelines

Unlisted Equity: Chartered Accountant or SEBI Registered Merchant Banker

 

Listed Equity: Merchant Bankers

Any Internationally Accepted Pricing Methodology

3

Income Tax Act, 1961

Merchant Banker or Chartered Accountant

  • Discounted Cash Flow Method
  • Net Asset Value Method

4

SEBI Act, 1992 and Regulations

Merchant Banker

SEBI Guidelines

5

IBC, 2016

Only Registered Valuer

International Valuation Standard 2017

 

The above analysis shows a contradiction between all the statutes when it comes to qualification and methodology. This poses a major challenge to various corporates and stakeholders due to increased procedural compliance, especially when more than one statute becomes applicable to a single transaction like valuation of shares in case of a merger, issue of shares and securities or foreign investment, etc.

Bottom Line

These contradictions came to light especially after the introduction of IBC, 2016. Even though the current laws lack standardization, it can be anticipated that the gap will be fulfilled in the near future to streamline the valuer’s qualification (i.e., competent persons) and methodology requirements under different statutes to sort out the complexities.

In case of any assistance for valuation purposes, feel free to contact ASC Group.

 

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