Business Valuation

What to Expect in a Merchant Banker Valuation Report?

Raising funds is critical for investors intending to establish a startup business in India. Investors are required to understand the company’s valuation before making any investment-related decisions. The valuation guarantees a detailed assessment to facilitate the startup’s net growth. For this purpose, investors must refer to the merchant banker valuation report according to the requirements of fundraising in India.

Merchant Banker Valuation Report: Comprehensive Overview

A merchant banker valuation report is a formal document prepared to reflect estimates of the fair market value (FMV) of a company’s shares and other securities. It must be based on a thorough analysis of the company’s financial health and growth prospects.

The merchant banker valuation report is always prepared by the authority holding the Merchant Banker Valuation License in India. Section 11UA of the Income Tax Act also provides for the issuance of merchant banker valuation reports. 

Who is a Merchant Banker?

A merchant banker is an applicant registered under the Securities and Exchange Board of India (Merchant Banker) Regulation of 1992. Category I SEBI registered merchant bankers are authorized entities eligible for the merchant banker valuation report issuance.

Simply, merchant bankers are institutions offering various financial services to companies registered in India. The following are the services offered by the merchant bankers:

• Access the value of the assets of the company;
• Underwriting (assuming) of security issuances like stocks and bonds;
• Fundraising and loan services;
• Provides financial advisory;
• Provides advisory on mergers and acquisitions.

Benefits of Merchant Banker Valuation Report

The benefits of issuing a merchant banker valuation report in India assist investors in making appropriate choices for investment. The following are the benefits of issuing a merchant banker valuation report are as provided below:

1.    Facilitate Investment-Related Decisions

The merchant banker valuation report facilitates investment-related decisions by calculating and assessing the risks associated with a company’s return on investment.

2.    Ensure Regulatory Compliance

The merchant banker valuation report ensures compliance with the provisions of mandatory regulations like the Income Tax Act of 1961. Further, the merchant banker valuation report from a SEBI-registered merchant banker assists in issuing equity shares at a premium under specific conditions defined under the IT Act 1961.

3.    Secure Financial Transparency

The benefit of issuing a merchant banker valuation report assists companies in securing transparency by providing a standardized and independent assessment of their value.

4.    Assists in the Growth of the Company

Companies intending to merge, acquire, or enter into strategic partnerships enjoy the benefit of issuing a merchant banker valuation report, which ultimately assists in the company’s growth.

5.    Enhance Credibility

The merchant banker valuation report enhances credibility among stakeholders by providing a detailed picture of the startup company’s financial and organizational structure.

6.    Assists in the Mitigation of Risks

The merchant banker valuation report assists in mitigating the risk of any dispute or disagreement related to the value of the assets.

7.    Serves as a Negotiation Tool

The merchant banker valuation report serves as a negotiation tool for the amount and terms of the investment options.

What is Included in a Merchant Banker Valuation Report?

The components included in the merchant banker valuation report assist the investors in making informed business decisions based on the company’s valuation. The following is the information included in a well-structured merchant banker valuation report:

1. Executive Summary

Initially, the executive summary of the report is required to be prepared by the merchant banker, specifying the purpose of the valuation of the company. Consider the following information required to be reported in a merchant banker valuation report:

• Scope of the report;
• Purpose of preparing the report;
• Key findings of the report;
• Date of valuation;
• Date of report.

2. Background of the Company

Next, a brief description of the background of the company or the assets being valued must be included in the merchant banker valuation report. The following is the list of crucial information that must be included in the merchant banker valuation report:

• Description of the business;
• Area of operation of the business;
• Description of the services of the company;
• Historical background of the business;
• List of board of directors and shareholders enrolled in the company;
• Governance and management in the business.

3. Industry Analysis

Further, the merchant banker valuation report must comprise an analytical overview of the industrial landscape. Industrial dynamics like technology, consumer trends, and economic factors must be mandatorily reviewed before it is issued.

The following is the list of important information required for issuing a merchant or expecting a merchant banker valuation report:

• Detailed analysis of the industrial overview;
• Historical market price (as per stock exchange);
• The market size of the competitive landscape;
• Growth trends in the regulatory environment;
• Challenges in the target market.

4. Financial Analysis

A detailed analysis of the company’s financial position must be included in the merchant banker valuation report of the companies or the investors making investment-related decisions. The following financial information must be mandatorily included while preparing a merchant banker valuation report:

• Historical financial performance of the company;
• financial projection of the company;
• Financial ratios;
• Details of transactions;
• Details of shares issued;
• Financial information, balance sheet, and cash flow statement.

5. Valuation Methodology

The merchant banker valuation report also outlines the methodology and procedure used to calculate the company’s estimated value. The following are the crucial approaches required to be considered while preparing a merchant banker valuation report:

• Market Approach

The market approach is used to compare the identical or similar assets for which price information is available. It is also known as the market multiple approach, which applies the valuation theory that similar assets are sold at similar prices.

The market price method, comparable companies quoted multiple methods (CCM), and comparable company transactions multiple (CTM) methods are three different methods used to prepare the valuation report under the market approach.

• Income Approach

The income approach converts future cash flow into a single current value. This method determines the value of company assets by issuing the merchant banker valuation report.

The income approach provides an estimated present value of the future economic benefits available in the form of assets and future income streams.

• Cost of Asset Approach

The cost approach, also known as the asset approach, is a method used for issuance of the merchant banker valuation report. It calculates the value of the current replacement or reproduction cost of an asset and makes relevant deductions.

Simply, this approach provides a calculated equity value (adjusted net asset value) of the company’s major assets.

• Other Approaches

The discounted cash flow approach (DCF), comparable company approach, and precedent transaction approach are other approaches that assist in the merchant banker valuation report.

• Risk Factor (if any)

The merchant banker issuing a merchant banker valuation report must identify and assess the key risk factors (like market, operational, and regulatory risk) impacting the company’s valuation. The report must also include risk mitigation strategies.

7. Summary of the Valuation

Next, the merchant banker valuation report must comprise the summary and final output of the issuing the valuation report. The following are some of the examples of the summary of the valuation included in the merchant banker valuation report:

• Detailed analysis of valuation;
• Valuation of key financial assumptions made during the valuation process;
• Final range of valuation (outcome);
• Conclusion of the valuation report;
• Official signature and stamp of the merchant banker.

8. Appendices

The supporting documents, also known as appendices, must be attached to disclaim, caveat, or restrict the usage of the valuation report. The appendices attached to the merchant banker valuation report must include the following:

• Financial statement of the company;
• Report of market research conducted;
• Calculated worksheet;
• Glossary of terms and abbreviations used in the valuation report.

Consequences of Inaccurate Merchant Banker Valuation Report

The merchant bankers are liable to certain consequences or legal implications of preparing an inaccurate merchant banker valuation report. The following are the implications of preparing a merchant banker valuation report:

• Withheld approval for issuance of shares;
• Loss of credibility and reputation of the company;
• Strict tax penalties (for non-compliance with the Income Tax Act);
• Financial implication (in consonance with the provisions of the law).

Conclusion

Merchant banker valuation reports facilitate transparency among investors intending to make informed decisions about the company’s finances. The issuers of the valuation report use crucial methods to provide an accurate value of the companies and their assets. Simply put, the key components included in the merchant banker valuation report empower companies, investors, and other stakeholders to tackle the complexities observed in the valuation of the business smoothly.

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