Is valuation of the shares of a private company required if the company goes in for a rights issue

Is valuation of the shares of a private company required if the company goes in for a rights issue?

The provisions related to the valuation of shares under the Companies Act, 2013 are primarily contained in Section 62 of the Act. These provisions apply to all companies, whether private or public.

Section 62 deals with further issue of shares-

This section 62(1) can be divided into 3 major parts:

Sub section 1(a)- Rights issue and its provisions

Sub Section 1(b)- ESOPs

Sub section 1(c) - to persons other than the ones covered above.

For sub section 1(a), which for the purpose of absolute clarity- I call it a pure rights issue (i.e. only to existing shareholders)- Valuation Report is not required.

For Sub Section 1(b)- ESOPs- for this valuation report is mandatory. To know more about such an issue  book your FREE expert call 

Sub section 1(c) - to persons other than the ones covered above or over and above new persons, it may include the persons in a) and (b) above. This kind of issue is also known as a preferential issue. To know more about such an issue book your FREE expert call 

Requirement under Income tax Act, 1961

Under the Income Tax Act, 1961, Section 56 read with section 11UA, the Valuation Report from a Merchant Banker will be required in case of a pure Rights issue when

• the shares are issued at a price that is more than the Book value or fair market value (depending n it being listed or unlisted)
• In case of unlisted shares, the calculation has to be done on DCF method.

Requirement under FEMA, 1999

Valuation Report under FEMA for pure rights issue is not required.

Who can be a Registered Valuer?

Section 164(1) of the Companies Act, 2013 provides that where a person has been convicted of certain offences, including offences related to fraud, he shall not be eligible for appointment or reappointment as a valuer. This provision ensures that only qualified and trustworthy persons are appointed as registered valuers for the valuation of shares or assets of a company.

In addition to these provisions, the Companies (Registered Valuers and Valuation) Rules, 2017 provide detailed guidelines and procedures for the appointment and functioning of registered valuers, the manner of conducting valuation, and the format of the valuation report. The rules also prescribe the qualifications and experience required for registration as a valuer, the fee payable for valuation, and other related matters.

Overall, these provisions and rules ensure that the valuation of shares or assets of a company is conducted by qualified and independent professionals in a transparent and fair manner, and that the interests of all stakeholders, including shareholders, are protected.

Different types of Valuers

Merchant Bankers: Merchant bankers are registered with the Securities and Exchange Board of India (SEBI) and are primarily involved in managing public offerings, underwriting, and private placements of securities. They are also involved in valuing securities such as equity shares, debentures, and other securities.

IBBI Registered Valuers: The Insolvency and Bankruptcy Board of India (IBBI) is a regulatory body that regulates the profession of valuers in India. IBBI Registered Valuers are professionals who have been registered with the IBBI after passing the relevant valuation examination and meeting the required qualifications and experience. IBBI Registered Valuers are authorised to undertake valuation assignments in connection with insolvency and bankruptcy proceedings, as well as for other purposes such as mergers and acquisitions, dispute resolution, and taxation.

Registered Valuers under the Companies Act, 2013: The Companies Act, 2013 provides for the registration and regulation of valuers who are appointed by companies for various purposes, including valuation of assets, shares, and securities. Registered Valuers under the Companies Act, 2013 are professionals who have been registered with the Insolvency and Bankruptcy Board of India (IBBI) or any other recognized organisation, and who possess the prescribed qualifications and experience. The Companies Act, 2013 requires certain types of valuations, such as valuations for a rights issue, to be conducted only by Registered Valuers under the Act.

In summary, while merchant bankers are primarily involved in valuing securities for public offerings and private placements, IBBI Registered Valuers are involved in the valuation of assets for insolvency and bankruptcy proceedings, and Registered Valuers under the Companies Act are involved in the valuation of assets for various purposes under the Companies Act.

When does a Company need to furnish Merchant Banker’s Valuation Report:

Under the Companies Act, a merchant banker valuation report may be required for certain purposes, such as:

Initial Public Offerings (IPOs): A merchant banker valuation report is required for the initial public offerings of securities, which involves the sale of securities to the public for the first time.

Takeovers: A merchant banker valuation report may be required in the case of a takeover or acquisition of a company.

Buybacks: A merchant banker valuation report may be required for a buyback of shares, where a company buys back its own shares from its shareholders.

Delisting of Shares: A merchant banker valuation report may be required for the delisting of securities from a stock exchange.

Under the Income Tax Act, a merchant banker valuation report may be required in the case of:

Transfer of Shares: A merchant banker valuation report is required for the transfer of unquoted shares between resident entities at fair market value, where the consideration exceeds Rs. 50,000.

Gift of Shares: A merchant banker valuation report is required for the gift of unquoted shares between resident entities at fair market value, where the consideration is less than the fair market value.

In summary, a merchant banker valuation report may be required under the Companies Act for purposes such as IPOs, takeovers, buybacks, and delisting of shares, while under the Income Tax Act, it may be required for the transfer or gift of unquoted shares between resident entities.

Valuation Report from Insolvency and Bankruptcy Board of India (IBBI) Registered Valuers:

Insolvency and Bankruptcy Board of India (IBBI) Registered Valuers are professionals who are authorised to undertake valuation assignments in connection with insolvency and bankruptcy proceedings, as well as for other purposes such as mergers and acquisitions, dispute resolution, and taxation. In this blog, we will discuss the legal sections and provisions under various Acts that are relevant to IBBI Registered Valuers.

Legal Sections and Provisions under the Companies Act, 2013:

Section 247 of the Companies Act, 2013 provides for the registration and regulation of valuers who are appointed by companies for various purposes, including valuation of assets, shares, and securities. The section defines a valuer as a person who is registered with the Insolvency and Bankruptcy Board of India (IBBI) or any other recognized organisation and possesses the prescribed qualifications and experience.

Section 62 of the Companies Act, 2013 requires the valuation of shares to be conducted by a registered valuer appointed by the company for the purpose of determining the price of shares for preferential issue. The section also requires the valuation report to be submitted to the stock exchanges where the shares are listed.

Section 192 of the Companies Act, 2013 requires the valuation of assets of a company to be conducted by a registered valuer appointed by the audit committee or the board of directors.

Legal Sections and Provisions under the Insolvency and Bankruptcy Code, 2016:

Section 247 of the Insolvency and Bankruptcy Code, 2016 provides for the registration and regulation of valuers who are appointed for the purpose of valuation under the Code. The section defines a valuer as a person who is registered with the IBBI or any other recognized organisation and possesses the prescribed qualifications and experience.

Section 25(2)(e) of the Insolvency and Bankruptcy Code, 2016 requires the resolution professional to appoint two registered valuers to determine the fair value and liquidation value of the assets of the corporate debtor.

Legal Sections and Provisions under the Income Tax Act, 1961:

Section 50CA of the Income Tax Act, 1961 provides that where the consideration for the transfer of an unquoted share is less than the fair market value of the share determined by a registered valuer, the fair market value shall be deemed to be the full value of consideration for the purpose of computing capital gains.

Section 56(2)(x) of the Income Tax Act, 1961 provides for the taxation of the excess consideration received for the issue of shares, if the consideration received is in excess of the fair market value of the shares determined by a registered valuer.

In conclusion, IBBI Registered Valuers are authorised to undertake valuation assignments in connection with insolvency and bankruptcy proceedings, as well as for other purposes such as mergers and acquisitions, dispute resolution, and taxation. The legal sections and provisions under the Companies Act, 2013, Insolvency and Bankruptcy Code, 2016, and Income Tax Act, 1961 provide for the registration and regulation of valuers and require the appointment of registered valuers for the purpose of valuation in various circumstances.

Registered Valuers under Companies Act, 2013

A valuation report from a registered valuer registered under Companies Act 2013 is required in various situations as mandated by the Act. Some of the situations where a valuation report is required from a registered valuer are:

1. Valuation of shares: As per Section 62(1)(c) of the Companies Act, 2013, a valuation report from a registered valuer is required for the issue of shares on a preferential basis.

2. Valuation of assets for merger and amalgamation: Section 232(2)(h) of the Companies Act, 2013 requires a valuation report from a registered valuer for the purpose of valuation of shares, property or assets of the companies involved in a merger or amalgamation.

3. Valuation of assets for winding up: Section 247(1) of the Companies Act, 2013 mandates that the assets and liabilities of a company that is being wound up must be valued by a registered valuer.

4. Valuation of assets for regulatory compliance: The Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI) and other regulatory authorities require valuation of various assets like securities, land, buildings, plant and machinery, intellectual property, etc. for regulatory compliance. In such cases, a registered valuer is required to provide the valuation report.

Overall, a valuation report from a registered valuer registered under Companies Act 2013 is required in various situations where an independent and unbiased estimate of the value of an asset or property is needed.