Valuation from Registered Valuers (RV) and Merchant Bankers (MB)

Valuation from Registered Valuers (RV) and Merchant Bankers (MB)

Blog Article

Valuation of equity shares, capital instruments, and other business assets is very important and mandatory for ensuring regulatory compliance, especially when dealing with non-resident transactions for FDI under FEMA (Foreign Exchange Management Act, 1999) and the Companies Act, 2013. In this article, we research into the guidelines for valuation report, particularly focusing on the roles of Registered Valuers (RV) and Merchant Bankers (MB), who play an essential role in ensuring accurate valuations.

What is a Valuation Report?
A valuation report provides an assessment of the fair market value of shares or assets of a company based on accepted methodologies. These reports are mandatory under various Indian laws, including FEMA and the Companies Act, 2013. Certified professionals like Registered Valuer (RVs), Chartered Accountants (CAs), or Merchant Bankers (MBs) are authorized to issue these reports, ensuring transparency, fairness, and regulatory compliance in transactions involving resident and non-resident entities.
RBI Guidelines for Valuation of Equity Shares and Capital Instruments for Non-Residents
The Reserve Bank of India (RBI) has established specific guidelines governing the valuation of equity shares and capital instruments for non-residents under FEMA. These guidelines are applicable for both listed and unlisted companies and ensure that transactions between residents and non-residents are executed at arm's-length prices.

Major Types of Transactions Involving Non-Residents:
• Transfer or Allotment of Shares: Between an Indian company and non-resident individuals or entities.
• Swap of Capital Instruments: Between a resident and non-resident entity.
• Subscription to Memorandum of Association (MOA): Involvement of non-resident investors in Indian companies at inception.
• Investment in LLPs: Non-resident investment into Limited Liability Partnership (LLP).

Pricing and Valuation Guidelines as per FEMA and RBI
1. Transfer/Issue of Shares from Indian Resident to Non-Resident:
• Listed Companies: The valuation must comply with SEBI (Securities and Exchange Board of India) guidelines.
• Unlisted Companies: The fair value should be determined using internationally accepted pricing methodologies. The valuation report must be certified by a Chartered Accountant (CA), SEBI Registered Merchant Banker, or practicing Cost Accountant.
2. Transfer of Shares from Non-Resident to Resident:
• Listed Companies: Valuation must adhere to SEBI guidelines.
• Unlisted Companies: Fair value must be determined using accepted methodologies, certified by a CA or SEBI-registered Merchant Banker.
3. Overseas Direct Investment (ODI) Transactions:
• For investments exceeding USD 5 million, a valuation by a SEBI Category I Merchant Banker or an Investment Banker outside India is required.
• For investments under USD 5 million, valuation can be done by a CA or a Certified Public Accountant (CPA).
4. Swap of Capital Instruments:
• Valuation must be carried out by a SEBI-registered Merchant Banker or an Investment Banker outside India, irrespective of the amount involved.

Valuation Methodologies
The RBI mandates that valuations be based on internationally accepted methodologies to ensure fair pricing for all transactions involving equity shares and capital instruments. The most common methods include:
1. Discounted Cash Flow (DCF) Method:
The DCF method estimates the present value of projected future cash flows of a company by discounting them at a suitable rate, typically the Weighted Average Cost of Capital (WACC). The formula for free cash flow (FCF) is:
Free Cash Flow=Cash Flow from Operations−(Total Capital Expenditure−After Tax Proceeds from Sale of Assets)text{Free Cash Flow} = text{Cash Flow from Operations} - (text{Total Capital Expenditure} - text{After Tax Proceeds from Sale of Assets})Free Cash Flow=Cash Flow from Operations−(Total Capital Expenditure−After Tax Proceeds from Sale of Assets)
The DCF model is widely used, but its accuracy depends on the quality of inputs, assumptions, and the discount rate applied.
2. Net Asset Value (NAV) Method:
This method calculates the value of a company by summing up its total assets and subtracting liabilities. It is particularly useful for companies with significant tangible assets.
3. Market Price Method:
For listed companies, the market price method is used, based on the current market price of the shares as per SEBI guidelines.

Section 247 of the Companies Act, 2013: The Role of Registered Valuers (RV)
The Companies Act, 2013, introduced the concept of Registered Valuers (RV) under Section 247. RVs are certified by the Insolvency and Bankruptcy Board of India (IBBI) and are responsible for providing valuation reports for specific transactions as mandated by law. They must use internationally accepted valuation methods and their reports are critical in instances like mergers, acquisitions, share allotments, and corporate debt restructuring.

Common Cases Where Valuation Reports are Required:
• Further Issue of Shares (Section 62(1)(C)): For instruments such as ESOPs, CCPS, CCD, OCD, and private placements.
• Non-Cash Transactions with Directors (Section 192(2)): Valuation of assets in cases where directors are involved in non-cash transactions with the company.
• Corporate Debt Restructuring (Section 230): Valuation of shares, property, and assets of a company during debt restructuring.
• Exit Opportunities (Section 232): In mergers or amalgamations, especially when listed companies are transferring shares to unlisted companies.
Valuation reports needed which plays an integral role in maintaining regulatory compliance under FEMA and the Companies Act, 2013. Whether dealing with FDI, ODI, or capital instrument swaps, businesses must ensure that valuations are carried out by certified professionals like RVs, Merchant Bankers, or Chartered Accountants. Following RBI and SEBI guidelines ensures fairness and transparency, making sure that transactions are priced accurately and meet legal standards.
Valuations reports are not just a formality; they safeguard against potential legal issues, ensure adherence to arm's-length pricing, and foster trust among investors, regulators, and stakeholders. For startups and companies handling foreign investments for FDI and registering a foreign subsidiary company in India, obtaining proper and certified valuation reports is essential for both compliance and strategic decision-making.