Raising funds is a crucial milestone for any startup. But before investors open their chequebooks, they’ll need to understand your company’s value. This is where valuation reports come in. They provide an official assessment of your startup’s worth, giving investors confidence in their decision.
However, navigating the world of valuation reports in India can be confusing. There are different reports for different purposes, and the requirements can vary depending on your fundraising activity. This blog post will be your one-stop guide to understanding the various valuation reports startups need in India.
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Types of Valuation Reports
In India, startups may encounter three main types of valuation reports:
- Registered Valuer Report – RV Report (Companies Act 2013): This report is mandatory when issuing equity or preference shares through private placement. A registered valuer accredited by the Insolvency and Bankruptcy Board of India (IBBI) prepares it. The report typically costs around Rs. 25,000 onwards and takes 4-5 business days to complete.
- Merchant Banker Valuation Report – MB Report (Income Tax Act): This report becomes necessary if you’re issuing shares at a premium or using the Discounted Cash Flow (DCF) method for valuation for tax purposes. A SEBI-registered merchant banker creates this report. The cost starts at Rs. 65,000, and the turnaround time is around 8 days.
- Chartered Accountant Report (FCGPR Filing): When raising funds from foreign investors, you might need a report for FEMA compliance and FCGPR filing, especially if valuing shares based on book value. A Chartered Accountant (CA) prepares this report. The cost may vary depending on the CA’s fees.
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Our team of Registered Valuers specializes in conducting accurate and reliable valuations, ensuring compliance with regulatory requirements and providing valuable insights for informed decision-making. Request a Registered Valuer Report to maximize the potential of your assets.
Valuation Reports Under the Companies Act, 2013
The Companies Act mandates valuation reports in specific scenarios for private companies seeking investment. Here’s a breakdown:
When a Valuation Report is Required:
- Private Placement: If a company issues equity shares, preference shares, or compulsorily convertible debentures (CCDs) to new investors through private placement, a valuation report is mandatory.
When a Valuation Report is Not Required:
- Rights Issue to Existing Shareholders: Companies don’t need a valuation report when issuing equity shares to existing shareholders through a rights issue process.
- Fund Raising Through Convertible Notes: Valuation reports aren’t necessary when companies raise funds through convertible notes.
Who Can Issue the Valuation Report?
Only a registered valuer accredited by the Insolvency and Bankruptcy Board of India (IBBI) can prepare the valuation report under the Companies Act.
Cost and Timeframe for Obtaining the Report:
The cost for a registered valuer’s report typically starts from Rs. 25,000, and the turnaround time can be as quick as 4 business days.
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Information Needed for a Registered Valuer’s Report (Companies Act 2013)
To prepare a valuation report under the Companies Act 2013, a registered valuer will typically require the following information from your startup:
Business Fundamentals:
- Detailed Business Model Description: A clear explanation of how your startup generates revenue and creates value for its customers.
- Major Business Model Risks: Identification of the key factors that could potentially hinder your startup’s success.
Financial Data:
- Past Audited Financials (2 Years): Audited financial statements for the past two financial years to establish a historical performance baseline.
- Financial Statements Till Date: Unaudited financial statements up to the most recent date to capture your current financial position.
- Five-Year Financial Projections: Forecasted income statements, balance sheets, and cash flow statements for the next five years, providing a roadmap for future growth.
- Projection Assumptions Justification: Clear explanations for the key assumptions made while creating the financial projections (e.g., sales growth rate, working capital requirements, capital expenditures).
Investment and Market Context:
- Prior Investment Details (if applicable): Information about any previous investments received by your startup, including the valuation used during those investments.
- Competitive Landscape: Identification of your major competitors, both listed and unlisted, to understand the competitive environment.
- Comparable Company Funding Details (if available): Details of recent funding rounds raised by companies similar to yours, providing a market benchmark for valuation.
Legal Agreement:
- Term Sheet: The term sheet outlining the key terms and conditions of the proposed investment deal.
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Our experienced team of Merchant Bankers offers expert valuation services tailored to your specific needs, whether for mergers, acquisitions, or capital market transactions. Request a Merchant Banker Valuation Report to make informed decisions and optimize outcomes.
Merchant Banker Valuation Report
The involvement of a merchant banker for valuation reports comes into play under the Income Tax Act, not the Companies Act. Here’s a breakdown:
When a Merchant Banker Valuation is Required:
- Issuing Shares at a Premium: If a company issues equity shares, preference shares, or compulsorily convertible debentures (CCDs) at a price higher than their face value (premium), a merchant banker valuation report becomes necessary.
When a Merchant Banker Valuation is Not Required:
- Issuing Shares at Net Asset Value (NAV): Companies don’t need a merchant banker valuation when issuing equity shares to existing shareholders or others at their Net Asset Value (NAV), essentially the book value per share.
- Fundraising Through Convertible Notes: Similar to the Companies Act, valuation reports from merchant bankers aren’t required to raise funds through convertible notes.
Who Can Issue the Valuation Report?
Only a SEBI-registered merchant banker can prepare a valuation report under the Income Tax Act.
Cost and Timeframe for Obtaining the Report:
The cost for a merchant banker’s report typically starts from Rs. 65,000, and the turnaround time can be around 8 business days. This is generally more expensive and time-consuming compared to a registered valuer’s report.
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Key Difference Between Registered Valuer Report and Merchant Banker Valuation Report
| Feature | Registered Valuer Report | Merchant Banker Valuation Report |
| Governing Act | Companies Act 2013 | Income Tax Act |
| Prepared By | IBBI-registered valuer | SEBI-registered merchant banker |
| When Required | Private placement of equity, preference shares, or CCDs | Issuing shares at a premium or using DCF for tax purposes |
| Purpose | Fair value for private placement | Fair market value for tax implications |
| Cost (Starting) | Rs. 25,000 | Rs. 65,000 |
| Timeframe (Approx.) | 4-5 business days | 8 business days |
People Also Read: Gain insight into the pivotal role and processes behind registered valuers by checking out our detailed analysis of Registered Valuer (RV) Report in India
Choosing the Right Report for Your Needs
The type of report you need depends on your specific fundraising activity. Here’s a simplified breakdown:
| Fundraising Scenario | Required Report | Reason | Details |
| Private Placement | Valuation Report by a Registered Valuer (IBBI) | Companies Act 2013, Section 42 | Mandatory for issuing equity shares, preference shares, or compulsorily convertible debentures (CCDs). Details of valuer and report included in offer letter. |
| Rights Issue | No Report Required | Companies Act 2013 | No valuation report needed when issuing equity shares to existing shareholders. |
| Convertible Notes | No Report Required | Companies Act & Income Tax Act | Valuation reports not required for raising funds through convertible notes. |
| Issuing Shares at a Premium | Merchant Banker Valuation Report (if using DCF method) | Income Tax Act, Section 11UA | Required for income tax purposes if shares issued at a premium (above face value) and valuation uses Discounted Cash Flow (DCF). |
| Issuing Shares at Net Asset Value (NAV) | No Report Required | Income Tax Act | No merchant banker valuation needed if shares issued at NAV. |
| Foreign Investors & FCGPR Filing | Merchant Banker Valuation Report OR Chartered Accountant Report | Foreign Exchange Management Act (FEMA) & FCGPR Filing | Required for compliance if issuing shares to foreign investors or transferring shares from Indian residents to non-residents. Report prepared by SEBI-registered merchant banker (complex valuation) or Chartered Accountant (book value). |
Additional Considerations
- Startups registered under the Startup India scheme with investments exceeding Rs. 25 lakhs from a single investor might have specific report requirements.
- The total cost for both reports (registered valuer and merchant banker) for private placement can be around Rs. 1.5 lakh.
- Reports for CCD and CCPS conversions typically cost around Rs. 40,000.
- Preparing a valuation report requires detailed information about your startup, including your business model, historical and projected financial statements, competitor analysis, and details of any previous funding rounds.
People Also Read: Why are Merchant Banker Valuation Reports Important?
Our team of Merchant Bankers leverages industry expertise and market insights to provide accurate valuations that optimize deal outcomes and support your strategic objectives. Request a Merchant Banker Valuation Report to unlock value and achieve your transaction goals.
Conclusion
Understanding valuation reports can feel overwhelming for startups navigating the fundraising landscape in India. However, with this guide, you’re now equipped to identify the reports you need based on your specific circumstances.
Remember, valuation reports are crucial for building investor confidence. By providing the necessary information and consulting with professionals if needed, you can ensure a smooth fundraising process and secure the capital needed to fuel your startup’s growth!
Frequently Asked Questions on Valuation Reports
Q1. Do all startups need valuation reports when raising funds?
Ans1. Not all startups need every type of valuation report. The specific report requirement depends on how you’re issuing shares and to whom.
Q2. What’s the difference between a registered valuer and a merchant banker?
Ans2. Registered valuers are accredited by IBBI and handle reports mandated by the Companies Act (e.g., private placements). Merchant bankers are SEBI-registered and create reports for income tax purposes (e.g., issuing shares at a premium).
Q3. When is a registered valuer report required?
Ans3. A registered valuer report is mandatory when issuing equity shares, preference shares, or compulsorily convertible debentures (CCDs) through private placement.
Q4. Do I need a valuation report if I’m issuing shares to existing investors?
Ans4. No, valuation reports aren’t required under the Companies Act if you’re issuing shares to existing shareholders through a rights issue process.
Q5. What about convertible notes? Do they need valuation reports?
Ans5. No, neither the Companies Act nor the Income Tax Act mandates valuation reports for raising funds through convertible notes.
Q6. When do I need a merchant banker valuation report?
Ans6. You’ll need a merchant banker’s report if you’re issuing shares at a premium (above face value) and using the Discounted Cash Flow (DCF) method for valuation for tax purposes.
Q7. I’m raising funds from foreign investors. What kind of report do I need?
Ans7. For foreign investors and FCGPR filing, you might need a report from either a SEBI-registered merchant banker (complex valuation) or a Chartered Accountant (book value-based valuation) to comply with FEMA regulations.
Q8. How much does a valuation report cost?
Ans8. The cost can vary depending on the complexity and the type of report. Generally, a registered valuer report starts at around Rs. 25,000, while a merchant banker report can start from Rs. 65,000.
Q9. How long does it take to get a valuation report?
Ans9. The turnaround time can range from 4-8 business days depending on the valuer or merchant banker’s workload and the complexity of your case.
Q10. Should I consult a professional for my valuation report?
Ans10. While this guide provides a good overview, consulting a financial advisor, lawyer, or valuation firm is recommended for specific requirements and ensuring you have the right reports for your situation.
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