After overhauling the Companies Act in 2013, the Ministry of Corporate Affairs of India introduced Clause 247 into the Act in late 2017, introducing the requirement for a Registered Valuer (RV) for all valuations to be carried out under the Companies Act 2013. This was accompanied by the Companies (Registered Valuers And Valuation) Rules, 2017 that set out the regulations for RVs more clearly.
Who is a Registered Valuer?
A Registered Valuer is a valuation professional who can value shares, securities, intangible assets or tangible assets. Registered Valuers may be Chartered Accountants (e.g. in the case of equity valuations), engineers and surveyors (in the case of property or tangible assets) or specialised valuation professionals. Becoming a Registered Valuer involves a certain amount of training, more than 3 or 5 years' valuation experience and having a valid, ongoing certificate of practice (COP) to practise as a RV.
The RV qualification is granted and monitored by the Insolvency and Bankruptcy Board of India (IBBI) in coordination with Registered Valuer Organisations, so a Registered Valuer must be able to provide a valid COP and registration number.
When is a Registered Valuer required?
Under the provisions of the Companies Act, a Registered Valuer's report on valuation of equity shares is mandatory in the following situations:
- Issue of new shares to shareholders under Section 62 except in case of a rights issue
- Merger, amalgamation or restructuring under Section 230-232, requiring a valuation of assets or shares, or requiring a swap ratio to be calculated for a share swap on merger of two companies
- Acquisition of minority shareholding under Section 236 by existing shareholders who hold over 90% of the company's shares
- Allotment of shares for consideration other than cash and issue of sweat equity
- Buyback of shares from some or all shareholders under Section 68
- Liquidation of a company under the Insolvency and Bankruptcy Code, 2016
A Registered Valuer's report on valuation of equity shares is also recommended or considered "good to have" in the following situations:
- Rights issue to existing shareholders under Section 62
- Capital reduction of a company under Section 66
- Any other corporate actions that involve a value being assigned to equity shares or securities
What are the common overlaps of valuation requirements under various statutes?
We see an overlap of valuation requirements from multiple statutes in most cases now, often unnoticed by clients who may only be aware of one or two.
This is because, for many companies, the transactions listed above are covered not just by the Companies Act but also by FEMA (Foreign Exchange Management Act, 1999), Income Tax Act 1961, SEBI guidelines and/or international tax requirements. Multiple factors determine the applicability of these statutes, including nature of company, type of buyer and seller, resident status of buyer/seller, and type of transaction.
For example, a fresh issue of shares by a private limited company to an overseas shareholder triggers valuation requirements under Companies Act, FEMA and Income Tax. A fresh issue to a domestic shareholder triggers valuation requirements under Companies Act and Income Tax, and also creates additional requirements for the shareholder under Income Tax.
FEMA laws disallow purchase/sale/issue of shares to/from a non-resident entity if the transaction takes place above/below a certain price, determined by a valuer. Income tax laws also have provisions that tax a buyer or seller of shares for paying too low/too high a price. Further, while most laws allow 'fair value' as a basis of valuation (which usually means an income or market approach based valuation), specific Income Tax provisions require a net-worth based valuation, resulting in much lower values and greater possibility of the buyer/seller being taxed.
FEMA laws require a Chartered Accountant or a CA firm to carry out valuations. Income Tax laws require CAs or merchant bankers (depending on the clause), as would SEBI guidelines. International tax requirements would usually be satisfied with a CA report. While it is expected that in future, all of these will be expanded to allow Registered Valuers, that change has not taken place yet.
How do we deal with overlaps in valuation requirements?
Considering the valuation requirements triggered by various laws, it is important to:
- Cover all valuation requirements correctly and in a timely manner, e.g. if a transaction takes place on 31st December 2020, all valuation reports should be completed in the next 1-2 months.
- Create a single set of management forecasts that can be used for all valuation requirements to ensure consistency.
- Have fair values within a close range for the respective purposes as at a certain date. Some of these reports may become part of public records and it would definitely trigger tax assessments or FEMA action if there are two reports for the same valuation date, with very divergent values.
- Ensure that a report prepared for tax purposes is not submitted anywhere else, and so on. This is because there are often statute-specific approaches or parameters which are included in reports, making them inappropriate for other purposes.
For most companies, the ideal solution is to appoint a CA who is also a Registered Valuer with sufficient experience in covering all types of valuation, who would therefore be able to cover multiple requirements in a consistent manner with no danger of diverging values being presented.
Companies often enter into mergers, acquisitions, share issues or other capital transactions without considering all the valuation requirements. It is important to consult a CA at the stage of transaction planning, if possible, to get a complete view of what statutes will become applicable and whether a Registered Valuer is required. This will minimise unpleasant surprises (such as change in values, increase in taxes payable, disallowance of a transaction, etc.) later on in the transaction flow.
Asit Mehta & Associates is a CA firm with a dedicated Registered Valuer partner.
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.