Valuation Certificate

When a valuation is required

• Issue of shares to a non-resident, or transfer of shares between a resident and a non-resident
• Issue of shares at a premium, to establish fair market value
• Preferential allotment, rights issue or private placement
• Employee stock option schemes
• Merger, demerger or scheme of arrangement
• Transfer of property or unquoted shares, for capital gains
• Net worth certification, where immovable property forms part of it
• Bank lending against property or business assets

Who may issue it

Valuations under the Companies Act must be carried out by a registered valuer holding registration with the Insolvency and Bankruptcy Board of India in the relevant asset class — securities and financial assets, land and building, or plant and machinery.

For the issue of shares to a non-resident under the foreign exchange rules, the valuation must come from a chartered accountant or a merchant banker applying an internationally accepted methodology. For certain income tax purposes under Section 56, a merchant banker is specifically required.

The methods

• Net asset value — assets less liabilities, suited to asset-heavy or holding entities
• Discounted cash flow — projected cash flows discounted to present value, suited to operating businesses
• Comparable companies — multiples derived from similar listed businesses
• Comparable transactions — multiples from actual deals in the sector
• Market approach for immovable property, using the ready reckoner and comparable sales

Why valuations get challenged

A discounted cash flow valuation rests on projections, and projections that are not supported by history or by a credible plan are the first thing an assessing officer attacks.

Where shares are issued at a premium well above the valuation the numbers support, the difference can be taxed as income under Section 56. The defence is a valuation whose assumptions are documented and defensible, not merely one that produces a convenient figure.

How we handle it

1. 1 Establishing the purpose We identify what the valuation is for, since that determines who may issue it and which methodology applies.
2. 2 Appointing the right valuer A registered valuer or merchant banker is engaged as the purpose requires, in the correct asset class.
3. 3 Information gathering Financials, projections and asset details are compiled, with the assumptions behind projections documented.
4. 4 Valuation analysis The appropriate method is applied and the reasons for selecting it recorded.
5. 5 Draft and discussion A draft is discussed so factual assumptions can be corrected before the report is finalised.
6. 6 Report issued The signed report is issued with the valuer’s registration number, for use in the transaction or filing.

Frequently asked questions