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The importance of NBFCs, or Non-Banking Financial Companies, has increased in the Indian financial system. Although these institutions are not directly banks, they provide various types of loans, investments, and financial services. Many small and medium-sized businesses, as well as consumers, can easily obtain loans through NBFCs.
A high-quality valuation report is crucial for obtaining accurate information about the financial position, assets, and liabilities of an NBFC. This helps with future planning of the company, including investment and legal aspects. In this blog, we will discuss the need for valuation of NBFCs, their rules, and compliance issues.
An NBFC, or Non-Banking Financial Company, is a financial institution that operates similarly to a bank. They do not maintain savings accounts or provide check facilities, but offer services such as loans, investments, and leasing.
NBFCs can be of different types, such as NBFC-Investment, NBFC-Micro Finance Institution (MFI), NBFC-Factor, etc. They work with small businesses in rural areas and with those who are financially disadvantaged. NBFCs are often in high demand, as they can provide loans at lower rates than banks.
Valuation of NBFCs means determining their true financial value. This valuation helps to know the profit and loss of the business. This also becomes mandatory during investments, loan book sales, company share transfers, or mergers and acquisitions (M&A).
A proper valuation report aids in the company’s future planning. If an investor wants to invest new money, they can decide after reviewing this report. Apart from this, regulatory bodies such as the RBI and SEBI also sometimes request a valuation report.
Without valuation, financial reporting remains incomplete, and sometimes legal complications arise. Therefore, every NBFC needs to conduct regular and proper valuations.
It is essential to adhere to specific laws and regulations when dealing with NBFCs. The RBI prescribes these rules, as do the Ministry of Corporate Affairs (MCA) and the Income Tax Department. Failure to follow these can lead to legal complications.
Firstly, it is mandatory to appoint a registered valuer while preparing the valuation report of NBFCs. This is prescribed as per the Companies (Registered Valuers and Valuation) Rules, 2017. Only approved valuers can give reliable reports as per the law.
Secondly, if an NBFC transfers its shares or accepts new investments, the information must be submitted to the MCA along with the correct valuation report. Providing incorrect information or filing without valuation can result in a penalty.
Thirdly, as per RBI guidelines, NBFCs are required to report the correct value of their assets and liabilities by Ind AS (Indian Accounting Standards). As a result, the company’s financial position is presented realistically.
Fourth, as per sections 56 and 50CA of the Income Tax Act, if a company’s shares are sold below their fair value, the excess difference is treated as taxable income. Therefore, sharing a transfer or investment without proper valuation can be a risky endeavor.
Most importantly, these compliances are not only necessary for compliance with the law but also for gaining investor confidence in the company. When an NBFC conducts proper valuation, it facilitates future funding, risk management, and legal clearance.
Different types of valuation methods are used depending on the nature of the NBFC. Every NBFC has different income, assets, liabilities, and plans; hence, the same valuation model is not applicable for all companies. Below are some common methods explained-
The current value of the company is determined based on future income or cash flows. If an NBFC is making regular profits and future income is predictable, then this method is most suitable. Long-term finance companies often use it.
The net value obtained by deducting liabilities from the total assets of the NBFC is considered the valuation. This method is more effective for NBFCs that have a large investment or loan portfolio and irregular income streams.
The market value of the company is determined by analyzing the market value of other similar NBFCs (especially if they are listed). It is also known as the comparative method and is especially used when there are many NBFCs in the same industry.
The financial strength and performance of an NBFC are determined based on future income. It takes into account taxes, expenses, and market risks. It is helpful for those who operate based on income.
Sometimes a hybrid method is also used. In this case, a report is prepared by combining multiple models to increase its reliability. The consultant or registered valuer selects the appropriate method based on the nature of the company.
A valuation report is a comprehensive financial document that indicates the financial condition, future trends, and ethical direction of the business. Below are some of the important items that a typical NBFC valuation report should include-
This section explains the essence and purpose of the report. It helps any reader understand the entire report.
The purpose of the valuation, such as for share transfer, borrowing, or investment, is explained here.
The nature of the NBFC’s business, its services, market position, and management structure are detailed.
This section provides information on income and expenses, assets, and liabilities for the past few years, as well as future financial projections.
The methodology used for the valuation and the assumptions made on its basis are clearly stated.
This section determines the total financial value or share price of the company.
A certificate signed and approved by a registered valuer.
If a valuation report is prepared within these substantive and legal frameworks, it is acceptable to regulatory agencies, investors, and management.
If an NBFC fails to comply with the valuation rules, it becomes a punishable offence. Firstly, according to the Companies Act, 2013, if a company conducts a valuation without the assistance of a registered valuer, a fine can be imposed on the company and its concerned officers.
Secondly, the RBI has provided specific guidelines requiring NBFCs to submit regular financial reports and valuation reports every quarter. If this is not followed, the RBI can even cancel the approval.
Thirdly, according to the Income Tax Act, if shares are transferred at a price lower than their fair market value, the additional difference must be considered income and taxed. This creates an additional tax burden on the company.
Additionally, if there is an error or negligence in the valuation report, it may lead to a loss of investor confidence in the future. There may also be problems in obtaining IPOs, FDI, or bank loans. Therefore, it is essential to conduct valuations correctly and by the rules.
Enterslice is trusted in the world of NBFC valuation and compliance. We are backed by a team of experienced registered valuers, finance experts, and compliance consultants to help you through the entire process.
We select the appropriate valuation method based on your company’s profile, financial statements, and objectives, and generate reliable reports. We prepare all reports according to the relevant norms to ensure they are acceptable to the RBI, MCA, or the Income Tax Department.
Apart from valuation, we also assist with RBI NBFC registration, FEMA compliance, investor guidance, and the preparation of legal documents for NBFCs. Enterslice can be your right guide for a secure financial future for your company.
A properly prepared valuation report is a sign of the NBFC’s future growth, investment worthiness, and business transparency. Incorrect or illegally prepared reports not only incur financial penalties but also tarnish the company’s credibility. Timely and accurate valuation and financial modelling are very important responsibilities for NBFCs.
By partnering with Enterslice, you can ensure that your NBFC is compliant and properly prepared for the future. Contact Enterslice experts today and start your NBFC annual compliance journey with confidence.
A valuation report determines the actual financial value of an NBFC. It is required at the time of share transfer, new investment, borrowing or business combination. Investors and regulators make decisions based on the report. Proper valuation enhances the transparency and credibility of the company, facilitating the overcoming of legal hurdles.
No, not always. However, if there is a major transaction, such as a share transfer, restructuring, new investment, merger, or acquisition, in an NBFC, then valuation becomes mandatory. In some special cases, it may also be required to be done by the directions of the RBI or the MCA. Therefore, every NBFC should undergo regular financial valuation.
Only approved or registered valuers are permitted to prepare a valuation report for an NBFC. This is mandatory as per the Companies (Registered Valuers and Valuation) Rules, 2017. Preparing the report through an unauthorised person is not acceptable and can lead to legal issues. Hence, one should always take the help of a professional valuer.
To prepare a valuation report, the company's memorandum, articles of association, last year's audit report, balance sheet, income statement, financial projection, shareholder details, and management report are usually required. After reviewing these, the valuer analyses the company's actual financial picture and prepares an accurate report.
The timing of valuation depends on the company's activities. If there is a transfer of shares, new funding, business expansion, or restructuring, then valuation is required. It is sometimes beneficial to have a valuation done annually, especially for NBFCs that manage large loan portfolios or significant investments. Regular valuation helps the company maintain transparency and accountability.
The wrong report exposes the company to major legal risks. The Income Tax Department can levy additional tax. RBI can cancel the company's license. Additionally, investor confidence can be lost, making future funding more difficult. Therefore, it is always advisable to have the report prepared by an experienced and approved valuer.
RBI has issued various compliance guidelines for NBFCs. For example, financial reporting as per Ind AS, reporting frequency, and valuation are mandatory at certain times. If the company fails to comply with these requirements, the RBI can impose a fine or suspend the license. Therefore, it is safe to work in accordance with the RBI guidelines.
The Net Asset Value (NAV) method is most suitable for NBFCs whose main assets are various types of investments, such as shares, bonds, or financial equities. In this method, the net value is determined by analysing the total assets and liabilities of the company. It helps in highlighting the true financial position of investment-based NBFCs.
Yes, startups or new NBFCs can typically obtain a valuation easily and flexibly. However, it requires approval of the value, the company's preliminary report, and future income potential. For small companies, the NAV or income approach is typically employed. However, it is better to decide with professional advice.
Enterslice supports NBFCs from start to finish with a team of experienced valuers and compliance experts. We properly prepare valuation reports, prepare the required documents, and ensure filing in accordance with RBI or MCA norms. With the help of Enterslice, NBFC compliance can be managed without any hassle.
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