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.
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.
1. 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.
2. 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.
3. 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.
|
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) -
|
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.