Learn Everything about the Valuation Report Requirements in Detail

If you are a buyer, seller of the property or want to invest in a business as an investor then you must know about the process of valuation as a whole so let’s move on to further details of the valuation!

Introduction to Valuation

Valuation is a process of analytically determining the current or anticipated worth of an asset in a business. Valuation is defined under different rules and regulations of Indian laws. In today’s world of changing business and market dynamics, it becomes extremely difficult to prepare a valuation report with the help of an expert.

Be it acquisitions, mergers, selling purchasing or investing in the business a full-fledged valuation report plays a crucial role as we have rightly discussed the valuation report requirements under the different rules and regulations.

The Company Law aims to save the shareholders by preventing the organisation from issuing shares below the fair market value on the other hand the Securities and Exchange Board of India (SEBI) ensures that the investors are not offered a price exceeding the fair market value and the income tax authorities focuses on ensuring the fair valuation of the securities for combating any tax evasion.

What are the Benefits of Valuation?

• Creditors: The valuation allows the creditors to assess the potential of the organisation to repay their debts.

• Investor: An investor brings the necessary equity to be injected into the organisation and the valuation by an expect allows the investors the right amount of confidence.

• Regulators: Valuations performed by the registered valuers and the merchant bankers give an understanding that the necessary regulations have been complied with

• Informed Decisions: The help of a valuation report allows the higher-level management of the organisation to make informed decisions.

What are the Contents of a Valuation Report?

• Information of the Valuer: The main element of a valuation report is the details of the valuer including their name, registered number and contact details including the email address of the valuer.

• Engagement details of the Valuation: The next basic detail of the valuation report includes the name of the organisation for which the valuation report is being prepared, the intended parties who will be relying upon the valuation report and the reason behind carrying out the valuation report.

• Subject of the Valuation: The other important element of a valuation report is the description of the subject of the valuation which must clearly identify the asset, liability and business which is being valued, what are the relevant legal compliances related to the subject, a brief summary of the financial health of the subject and the tax implications related to the valuation.

• The information used to arrive at the Valuation: The information that has helped in arriving at the valuation includes the review of the past budgets, obtaining of the assumptions, analysis of the past results, obtaining confirmation that the budget is reasonable, the assessment and the reliability of the underlying data and lastly obtaining a clarification as to who will be responsible for providing the information.

• The Methodology of the Valuation: This part of the report primarily deals with the revealing of the primary approach used for the valuation, the date of the valuation, a clear and crisp explanation of the steps performed for the valuation, the principles used in arriving at the valuation, a detailed explanation of the chosen method of valuation and the reasoning behind it and lastly taking down the assessment of the scope, nature reliability of the data and the justification behind any assumptions.

• Adherence to the Rules: A confirmation is required to a provided in the report confirming the adherence to all the relevant rules, regulations and applicable guidelines

• Statement of Valuation: Lastly the date of the valuation and the signature and the location of the valuer are required to be provided towards the end of the valuation report.

What are the Valuation Models?

• Absolute Valuation Model: In this method of valuation an attempt to find the true value of the investment which is based on the fundamentals is made. The valuer is required to focus on the growth rate, cash flows and dividends for the single company. The valuation models that fall under this method are the residual income model, discounted cash flow model, asset-based model and dividend discount model (which has been discussed in detail).

• Relative Valuation Model: This model operates by comparing the companies in question to the other similar companies in the industry. This model involves calculating the ratios and multiples such as comparing the multiples of similar companies and the price-to-earnings multiple.

What are the types of Valuation Methods?

• Comparable Method: The comparable method consists of two methods such as comparable company analysis and comparable transaction analysis. The comparable company analysis looks at the organisations that belong to a similar industry while on the other hand, the comparable transaction analysis approach uses the transactions from the same industries.

• Discounted Cash Flow: In this method of valuation the analysts place a value on an investment or an asset by using the cash inflows and outflows generated by an asset and these cash flows are discounted into the current value by using the discount rate which is an estimate about the minimum rate of the return or the interest rates of returns assumed by the investors.

• Net Asset Value: As the name suggests this method calculates the net asset value of the company by deducting the liabilities from the total assets of the organisation.

• Profit earning capacity value: In this method, an estimate of the value of the asset based on the income which the organisation is expected to generate in the future is taken into consideration.

• Market Price Method: In this valuation method the prices of similar assets recently sold in the market for obtaining an estimate of the value of the subject asset are taken into consideration

• Liquidation Value: In this type of valuation method the estimates of the value of the asset which is based upon the cash that can be realized from selling it in the case of a forced sale.

• Weighted Average Method: In this method of valuation an estimation of the fair value of the portfolio of the assets is to be taken into consideration by valuing individually each of the assets, assigning a weight to these assets which is based on the importance within the portfolio and then lastly multiplying each of the asset value to its weight and summing all the products to obtain the overall value of the portfolio.

• Sums of the Parts Valuation SOTP: In this method of valuation the company with different business segments or subsidiaries is taken into consideration by identifying each of the segments or the subsidiary as a separate entry, valuing the subsidiary and each segment by using the appropriate methods and lastly adding the fair values of all the subsidiaries and segments for obtaining at the fair value of the company.

• Price of Recent Investment Method: In this method, the estimation of the fair value of the assets is obtained by making a reference to the price paid by an investor for a similar asset or the stake in the company.

What are the Limitations to Valuation?

• Complications with the Methods: All the methods of valuation have been discussed in thorough detail above and this is one of the biggest drawbacks of the different methods of valuation because some are easy and some are difficult to understand which makes it the biggest drawback of the valuation.

• Difficult to Apply One Method: No single method is best suitable for every situation as each stock and share is different and the industry to which it belongs is also different which makes it difficult to apply one valuation method. Therefore, it is an essential requirement to arrive at the true valuation by applying different valuation methods.

Who can Prepare a Valuation Report?

A valuation report is required under different regulations and there are two authorities that can prepare a valuation report under these different regulations and these are:

Valuation Report by a Registered Valuer

With the introduction of the Companies Act, 2013 a comprehensive legal framework has been established and the valuation under the Companies Act is required to be conducted by a registered valuer and this registered valuer found its place under the Insolvency and the Bankruptcy Board of India in accordance with the companies registered valuers and valuation rules, 2017 and the circumstances under which a registered valuer is required to be appointed are:

• Preferential Issue of the Shares: For the issue of the Preferential Shares under Section 62(1)(c) of the Companies Act, 2013 read in conjunction with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 the price of these preferential shares or other securities which are other to be issued for consideration or cash be determined on the basis of the valuation report prepared by the registered valuer though the explanation to Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 states that until a Registered Valuer is appointed the valuation report can be provided by an independent merchant banker registered with SEBI or a chartered accountant with an experience of at least 10 years.

• Issuance of the Sweat Equity Shares: The sweat equity shares are issued under Section 52 of the Companies Act and these sweat equity shares are issued to the directors and employees at a discount or for non-cash consideration a valuation report is essential for the intellectual property rights, value additions or the know- how for the issuance of the shares. Rule 8(6) rusher states that the further issue of the shares will be valued at the price determined by the registered valuer. 

• Corporate Restructuring: Corporate Restructuring refers to the process of change in the structuring of the organisation it can either be in the form of a merger, acquisition or the sold-off of the company. Section 230 of the Companies Act, 2013 states that a valuation report is required in the case of corporate debt restructuring in the case when a registered value assesses the value of the asset and shares of the company.

As per Section 230(2) C) of the Companies Act, 2013 in the case where a corporate restructuring is taking place and which is consented to by not less than seventy-five percent of the secured creditors in each scenario a valuation report prepared by a registered valuer which includes the shares, all the assets properties whether tangible or intangible, movable or immovable must be submitted to the Company Law Tribunal. 

Under Section 230(3) the same copy of the valuation report is essential to be sent to the member of the company, creditors or the class of the creditors.

• Purchase of the Shares of the Minority Shareholders: Under Section 236(1) of the Companies Act, 2013 if the shareholders become ninety or more percent of the issued share capital of the company due to any share exchange, conversion or amalgamation can also purchase the remaining share from the minority shareholder and here is the requirement fora valuation report comes into picture because a valuation report is required for determining the price to be offered to the minority shareholders for purchasing their shares.

• Winding up of the Company: Under Section 281 a liquidator of the company is required to submit a valuation report within 60 days of passing the order to the company law tribunal.

• Valuation report by a Merchant Banker: As per SEBI (Merchant Bankers) Regulations, 1992 Merchant Banker is a person who is engaged in business issue management by either providing corporate advisory services in relation to the issue of management or making preparations for buying, selling or subscribing to the securities of the company. A merchant banker can also issue a valuation report under the provisions of the FEMA Regulations and the Income Tax Act 1961.

Under the Income Tax Act, a merchant banker’s valuation report is required for the company that is transferring their existing shares, issuing new shares or in the case of secondary transactions of the unquoted shares. Also, under Rule 11UA of the Income Tax Act a valuation report from a SEBI-registered merchant banker is required for the calculation of the capital gains on the unquoted equity shares.

What are the Steps Involved in the Process of Valuation?

• Purpose of the Valuation: The first step in the drafting of a valuation report is drawing the purpose for drafting the report.

• Obtaining Information from the Company: The important information for preparing the report is required to be obtained from the company.

• Drawing Financial Analysis: As the next step in the procedure the financial analysis is required to be drawn up and any adjustments are required to be made at this stage.

• Learning about the Industry: After making all the necessary adjustments the next step in the process of drafting a valuation report is to learn more about the industry to which the organisation belongs and to also understand the market trends.

• Forecasting the Performance of the Company: After analysing the market conditions the future prospects of the company are required to be drawn up

• Application of the Valuation Methodology: As we have rightly discussed about the fact that no single valuation method can derive the results therefore it is pertinent to apply the appropriate valuation methodology for preparing the valuation report.

• Reporting: Lastly the report is required to be drawn up by either the merchant banker or the registered valuer.

What are the types of the Valuation Reports?

• Investment Value: In this type of the Valuation Report the potential profits from the ownership are considered.

• Liquidation Value: In this type of the Valuation Report the findings are based upon the fact as to what buyers will pay for the assets in the condition of the forced sales. 

• Solvency Opinion: In this type of the Valuation Report the report is based on determining whether the company has the sufficient assets to fulfill their liabilities. 

• Fair Market Value: This type of the Valuation Report is based on upon the fact as to what buyers will pay for the assets in the open market conditions. 

Conclusion

The concept of the registered valuer was introduced in the year 2017 and the passage of time and the introduction of the new rules and regulations in the company’s regime have made it obligatory for companies to submit a valuation report either by a merchant banker or a registered valuer under certain circumstances

Frequently Asked Questions on Valuation Report Requirements

Q 1. What is required in a valuation report?

Ans 1. The main requirement of a valuation report is the market conditions.

Q2. What should be in a valuation report?

Ans 2. A valuation report that must include the type of the property and its details and the market conditions

Q 3. Why is a valuation report required?

Ans 3. A valuation report prepared by the merchant banker is required for the purpose of income tax.

Q 4. Who prepares valuation report?

Ans 4. A merchant banker and a registered valuer usually prepare a valuation report.

Q 5. What are valuation rules?

Ans 5. Valuation rules have been drafted for arriving at the taxable value of the transactions amongst related or district persons.

Q 6. What is a full valuation report?

Ans 6. A valuation report is a comprehensive document that provides the expert determination of the market value of the property.

Q 7. Is valuation report valid for 90 days?

Ans 7. Yes, absolutely valuation report is valid for 90 days.

Q 8. What is the purpose of a valuation report?

Ans 8. The purpose of a valuation report is to provide an expert opinion related to the value of the business or the asset.

Q 9. Who can issue a valuation certificate?

Ans 9. It is the registered valuers who can issue a valuation certificate

Q 10. What is the 11 UA valuation report?

Ans 10. This need prescribes the method of calculating the fair market value of the unquoted equity shares.