India:
CBDT notifies Valuation Rules for unquoted equity shares and CCPS issued by Indian unlisted companies
29 September 2023
Economic Laws Practice
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Vide Notification No. 81/2023 dated September 25, 2023, the
Central Board of Direct Taxes (CBDT) has notified
amendment to Rule 11UA of the Income-tax Rule, 1962
(Notified Rule) for the purpose of Section 56(2)
(viib) of the Income-tax Act, 1961 (the Act).
- Section 56(2) (viib) of the Act provides that in case an
unlisted company receives any consideration for the issue of
unquoted equity shares from any resident or non-resident exceeding
the fair market value (FMV) of the shares, then such excess amount
is taxable in the hands of such unlisted company (commonly known as
Angel Tax).
- Earlier, the said provisions were applicable in case of shares
issued to residents only. Finance Act 2023 extended the scope of
applicability for shares issued to non-residents.
- In May 2023, CBDT vide Notification no. 29/2023 notified class
of persons to whom Section 56(2)(viib) does not apply and further
issued draft rules for public consultation.
- Key amendments:
- Notified Rule recognise 5 new valuation methodologies to
include globally accepted methodology for nonresidents.
- Such Rule also provides for mechanism for calculating FMV of
compulsorily convertible preference shares
(CCPS).
- Safe harbour for unquoted equity shares and CCPS is available
in cases where issue price does not exceed 10% of the FMV
determined as per the Rules. Such Safe harbour is not applicable in
cases where valuation corresponding to 'Eligible
Transactions' (i.e., issue of shares 'by VC
Undertaking' OR 'to Notified entity') has been
adopted.
- Notified Rule is applicable for transactions undertaken after
September 25, 2023 (i.e., the date of notification).
Summary - Valuation Rules for determining value of unquoted
equity share
Methodologies |
Applicability
to investor |
Erstwhile
Rule |
As per
Notification 81/2023 |
Adjusted Net Asset Value Method
(A–L) × [PV/PE] |
Resident and Nonresident |
- No certification mandatory
- Valuation date is the date of receipt of property/
consideration.
|
- No change in valuation methodology
- Valuation date is the date of receipt of property/
consideration.
|
Discounted Cash Flow Method |
Resident and Nonresident |
- Certified by Merchant Banker
- Valuation date is the date of receipt of property/
consideration
|
- No change in valuation methodology
- Option to deem valuation date as date of valuation report,
where such report was issued within 90 days prior to the
transaction.
|
Comparable Company Multiple
Method |
Non-resident only - |
- |
- Certified by Merchant Banker
- Option to deem valuation date as date of valuation report,
where such report was issued within 90 days prior to the
transaction.
|
Probability Weighted Expected Return
Method |
Option Pricing Method |
Milestone Analysis Method |
Price Matching option |
Shares issued by VC Undertaking within 90
days before or after issue of shares to VC Fund, VC company or
Specified Fund. |
Resident and Non-resident |
- |
- FMV is the aggregate consideration received from a VC fund, VC
Company or Specified fund.
|
Shares issued by a company within 90 days
before or after issue of shares to a notified entities as per
Notification 29/2023 |
Resident and Non-resident |
- |
- FMV is the aggregate consideration that is received from the
notified entity.
|
Summary - Valuation Rules for determining value of CCPS
Particulars |
Valuation
Methodology |
Resident |
Option to determine FMV of CCPS as per:
- DCF method or Price matching method (as indicated above);
OR
- Based on value of unquoted equity share determined as per
aforementioned
|
Non-resident |
Option to determine FMV of CCPS as per:
- DCF method, Comparable Company Multiple Method, Probability
Weighted Expected Return Method, Option Pricing Method, Milestone
Analysis Method, Replacement Cost Methods or Price matching method
(as indicated above); OR
- Based on value of unquoted equity share determined as per
aforementioned Rules.
|
ELP Comments |
- Mechanism for valuation of CCPS has now been prescribed.
This aspect was not a part of the draft Rules issued for public
consultation. While the Rules prescribe valuation methodology for
CCPS, no valuation methodology has been prescribed for issue of
OCPS and RPS. Given the absence of valuation methodology for
OCPS/RPS, the issue regarding applicability of Section 56(2)(viib)
to OCPS/RPS and relevant valuation methodology, still remains
ambiguous.
- While the valuation date in case of Adjusted Net Asset
Value method remains unchanged, flexibility has been extended by
allowing use of valuation report issued 90 days prior to the date
of transaction in case of Merchant Banker valuation.
- Benefit of Price Matching has been extended in case of
share issue transaction undertaken before or after 90 days of
'Eligible Transactions'. Practically, such benefit would be
availed only in specific scenarios like share issue succeeding a VC
investment/notified investment OR investments which involve other
parties are making investments along with VCC, VCF, specified or
notified entities. It would be impractical to avail such benefit in
case of share issue where visibility of future Eligible Transaction
may not exist.
- Extending safe harbour to Angel Tax is a welcome move and
appears to be in line with the safe harbour extended to immovable
property transactions.
- In case of joint investments by resident and non-resident,
it may not be practically feasible to adopt 5 new valuation methods
as doing so would lead to multiple valuations.
|
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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