The introduction of Section 247 into the Companies Act, 2013, and the subsequent Companies (Registered Valuers and Valuation) Rules, 2017, marked a significant change in the regulatory landscape for valuation in India. A valuation report by a Registered Valuer is mandatory when issuing shares through private placement (Section 42) or preferential allotment (Section 62(1)(c)) under the Companies Act, 2013. However, for a rights issue, there is no requirement for valuation under these sections.
Who is a Registered Valuer?
A Registered Valuer (RV) is a professional certified by the Insolvency and Bankruptcy Board of India (IBBI), authorized to conduct valuations related to shares, securities, tangible and intangible assets. RVs include Chartered Accountants, engineers, surveyors, and specialized valuation professionals who have undergone specific training and possess a valid Certificate of Practice (COP), the role is very important in determining fair market values under the Companies Act, FEMA, SEBI regulations, and Income Tax laws.
Key Factors for Valuation Reports:
● Clearly stating the objective of the valuation, such as mergers, acquisitions, or regulatory compliance.
● Specifying the date as of which the valuation is applicable.
● Defining the standard of value used, such as fair market value or intrinsic value.
● Detailing the valuation approaches (e.g., income, market, or cost approach) and specific methods applied.
● Outlining any assumptions made during the valuation process and potential limitations.
● Presenting the final estimated value based on the analysis.
● Providing information about the valuer’s qualifications, experience, and registration details
When is a Registered Valuer Required under the Companies Act 2013?
Under the Companies Act 2013, valuation by an RV is mandatory in the following cases:
● Issue of new shares (except rights issue if not on premium) under Section 62
● Merger, amalgamation, or restructuring (Sections 230-232)
● Acquisition of minority shareholding (Section 236)
● Allotment of shares for consideration other than cash
● Buyback of shares under Section 68
● Liquidation under the Insolvency and Bankruptcy Code (IBC), 2016
Apart from these, valuation reports are commonly used for:
● Rights issue of shares if issued other than FV.
● Capital reduction under Section 66
● Employee Stock Ownership Plan (ESOP)
● Corporate actions involving share value assessments
What is the Validity Period of Valuation?
● Under the Companies Act 2013: There is no specific validity period mentioned for valuation reports. However, the Registrar of Companies (ROC) typically requires valuation reports not older than 3 months from the date of investment.
● Under Income Tax Laws: May require valuation reports from a SEBI-registered Merchant Banker or a Chartered Accountant for specific transactions, with the report’s validity generally up to 90 days.
● Under FEMA: The valuation is valid for 90 days as per RBI Guidelines. AD Banks accept valuation reports that are not older than 90 days from the date of the transaction or investment.
● For ESOP Valuation: Must be current at the time of grant.
Is a Valuation Report Mandatory for a Rights Issue?
Under Section 62 of the Companies Act, 2013, a valuation report is not mandatory for a rights issue to existing shareholders. However, for regulatory transparency, companies may obtain a valuation report to establish fair pricing if not issuing on Face Value or Book Value.
Choosing the Mode of Further Issue of Shares: Private Placement vs. Rights Issue
When companies decide to raise capital, they typically choose between private placement and rights issues. Each mode has its benefits:
● Private Placement:
○ Requires extensive compliance, including board and shareholder approvals, offer letters, and acceptance procedures.
○ Suitable when issuing shares to multiple investors, including institutional investors and funds.
○ Valuation of shares is required before issuance.
● Rights Issue:
○ Faster and simpler since it involves only existing shareholders.
○ No valuation report is required under the Companies Act, 2013.
○ Shareholders have the option to renounce their rights to another party, including foreign investors.
Valuation Requirement in Rights Issue and Foreign Investor Participation
While the Companies Act, 2013 does not mandate valuation for a rights issue, valuation becomes necessary under the Foreign Exchange Management Act (FEMA), 1999, if the shares are renounced to a foreign investor.
● Income Tax Act:
○ Under Section 56(2)(viib), a valuation report is required when shares are issued above face value to resident investors.
○ However, if shares are renounced to non-residents, this provision does not apply.
● FEMA Regulations:
○ As per the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019, valuation is required if shares are transferred to a foreign investor.
○ The pricing should comply with RBI guidelines and cannot be lower than the price offered to Indian residents.
○ Valuation must be conducted using internationally accepted pricing methodology, certified by a Chartered Accountant or a SEBI-registered Merchant Banker.
For companies planning to raise capital, the preferred mode of share issuance depends on compliance requirements, investor participation, and valuation needs. While private placements require a valuation report, rights issues do not, unless renounced to non-resident investors. When shares are eventually allotted to non-residents, valuation under FEMA guidelines becomes necessary to ensure compliance with foreign investment regulations. Ensuring proper valuation through an authorized professional (Chartered Accountant or Merchant Banker) helps businesses meet regulatory standards and avoid future legal or financial complications and more Read Business. …
