General Overview on requirement of “Valuation Of Companies/ Entity” Under Various Laws In India
1, When valuation is required
There is a role of valuation at each and every stage of life cycle of the Company/ Entity. For small private businesses which plan to expand the business, valuation plays a key role when they approach foreign investors, venture capitalist and/or private equity investors for more capital.
The share of a firm that a new investor will demand in exchange for a capital infusion in business will depend upon the value of the firm, which they estimate for the firm.
As the companies get larger and decide to go public, the price of share for public issue depends on the value of the firm, which may be in accordance with the law or regulations prevailing in the country.
Decisions on where to invest the funds raised, how much to borrow from banks and other institutions and how much to return to the owners will be, are affected by valuation.
Valuation of Company is required for statutory purposes as well. Broadly, the valuation of financial instruments is required under the following laws & regulations:
- The Income-tax Act, 1961
- The Companies Act, 2013
- FEMA Regulations
2, Who are the Professionals for Valuation
The concept of Registered Valuers was brought by section 247 of The Companies Act, 2013 to regulate the practice of Valuation in India and to standardize the valuation in line with International standards.
With effect from 1st February 2019, Companies Act, 2013 has brought in effect Valuations from Registered Valuers duly registered with Insolvency and Bankruptcy Board of India (IBBI).
It has been mandated by the Insolvency and Bankruptcy Board of India(IBBI) that every valuation required under the Insolvency and Bankruptcy Code, 2016 or any of the regulations made thereunder is required to be conducted by a ‘registered valuer’, that is, a valuer registered with the IBBI under the Companies (Registered Valuers and Valuation) Rules, 2017.
3, What was the requirement for such laws
The concept of Registered Valuers was brought by section 247 of The Companies Act, 2013 to regulate the practice of Valuation in India and to standardize the valuation in line with International standards.
The Valuation as a practice and as a profession is being regulated now to improve Corporate Governance and better transparency in the corporate sector which is imperative to infuse confidence amongst investors in Indian market and abroad.
The role of the valuation is that it provides both buyer and seller to start with negotiation
4, What is valuation
A Company or Assets has a value, only if its value is valued. Valuation is a process of determining worth of a Company or assets. We have to convert raw information into inputs and use these inputs in models.
Valuation is required in many context including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
Valuation of a business requires understanding and analysis of various complex factors and has a major impact on all type of businesses whether big or small.
5, What are the key areas where Valuation plays a important role
Major areas in which Valuation plays an important role are as follows:
- Valuation in Acquisition Analysis – where the value of the firm going to be taken over is analysed.
- Valuation in Corporate Finance – where business plans to expand, it plays a significant role while approaching foreign investors, venture capitalist and/or private equity investors for more capital.
- Valuation for Legal and Tax Purposes – it is done majorly for private business.
Author: CA Suchit Jhunjhunwala
FCA | DISA | Registered Valuer (Securities and Financial Assets)
+91 7204264816