Valuation under Companies Act

Valuation under Companies Act 2013

Enterslice provides best-in-class services for Valuation under the Companies Act. Our experts are registered with the Insolvency and Bankruptcy Board of India (IBBI) and obey the code of conduct. They're highly skilled and capable of providing service as per the client's needs. Our valuation experts have hands-on experience with the detailed Valuation of companies of different domains; they combine different valuation metrics and methods to come to the most accurate fair market value of a company or business. Our package includes all the important attributes related to the Valuation, like asset valuation, tangible asset valuation, intangible asset valuation, equity valuation, Valuation of land, building and machinery, and many more. Our experts will guide and help the client in the best way possible to provide the best results.

Overview of Valuation under the Companies Act

The Companies Act 2013 lists various rules and regulations that companies must follow. Valuation under the Companies Act 2013 is a critical aspect, and companies are required to obtain a valuation report. The valuation process involves studying a company's assets and liabilities to understand its financial position compared to similar companies. This examination includes determining the fair value of each asset in the balance sheet and the value of each liability in the income statement. The Act deals with the Valuation of various company assets such as property, stocks, shares, debentures, securities, goodwill, net worth, and liabilities. The primary objective of this section is to ensure transparency and accountability in the business valuation process to safeguard the interests of shareholders and investors.

Major Services for Valuation as per the Companies Act

Startup Valuation

A startup can benefit from Valuation in many ways; the valuation report can used to pinpoint the areas that need assistance and to know about the strategies that are working or not working for the company.

Financial Reporting

Financial reporting is an important aspect of Valuation under the Companies Act. Our team of highly skilled professionals will suggest and compile standard financial reports for your company to aid Valuation.

Fair Value Reporting

A fair value report is an important necessary paper that is made while evaluating a business. Our team of experts is fully capable and has hands-on experience in compiling fair-value reports according to the standards.

Major Factors Affecting the Valuation of a Business

Valuation Technique

The technique used by a business valuer to value a business will directly impacthe Valuation of the business. A valuation advisor will correctly choose the best valuation method to determine the precise value of the business. Many approaches can be used to value a business.

Similar Sales Data

The valuation advisor will have access to a whole bank of similar sales data to compute a precise market value for the business. A data point, as such, delivers deep levels of insights that can be used to draw evaluations between businesses.

Expert Valuer

The hands-on experience/expertise and familiarity of a business valuer are essential as they add significance to the valuation process. Their understanding of the local marketplace can help measure the value a business holds to the local community and its customer base.

Business Attributes

The features of the business, from the location, physical premises, and tools to effectiveness, company obligations, and assets, will ultimately contribute towards its market value. How much buyers are keen to pay for the business is an additional factor that's likely to underwrite its worth.

Valuation Standards and Their Importance

Valuation standards are a set of principles, guidelines, and procedures that govern how Valuation should be carried out and reported. These standards aim to improve the dependability, uniformity, and comparability of valuations performed by companies. The Companies Act of 2013 acknowledges the significance of valuation standards and mandates their use for various purposes. The purposes are listed below-

Financial Reporting

Valuation standards play a crucial role in enabling companies to prepare precise financial statements by ensuring that the Valuation of assets, liabilities, and equity is conducted impartially and uniformly. Standardized valuation practices allow investors, creditors, and other stakeholders to make informed decisions based on accurate and dependable financial information.

Mergers and Acquisitions

Valuations play a critical role in mergers, acquisitions, and other corporate restructuring activities. Companies that follow valuation standards can accurately determine the fair value of assets and liabilities involved in such transactions. This helps ensure that all parties involved receive a fair share and minimizes the risk of undervaluation or overvaluation, protecting the interests of shareholders.

Equity Issuance

Companies often issue new shares or securities, and in such cases, there are valuation standards in place. These standards help determine the fair value of these financial instruments, ensuring that the price at which shares are issued reflects their true value. This practice safeguards the interests of both the issuing company and potential investors.

Regulatory Compliance

Compliance with valuation standards is mandatory for certain regulatory requirements under the Companies Act of 2013. These requirements include the Valuation of shares for buybacks, assets for liquidation purposes, intangible assets, and more. Adhering to the prescribed standards ensures that companies meet their legal obligations and maintain transparency in their operations.

Meaning, Section and Valuation Advisors as per the Companies Act

Meaning

The process of determining the market value of a business or the worth of an asset is referred to as Valuation. To determine the worth of a company, valuation consultants consider factors such as its growth rate, projected future earnings, the value of its tangible and intangible assets, and the company's management. Valuation is used to determine the value of shares and other securities and the value of the company and its assets. Valuation consultants employ various valuation methods to arrive at the most accurate value. Valuation is used for more than just determining a company's market value.

Sections

To comply with the Companies Act 2013, a company must conduct a valuation of its assets, stocks, properties, debentures, shares, goodwill, net worth, and liabilities. The sections that stipulate the need for Valuation under the Companies Act 2013 are- Section 62 (Preferential issue of further shares), Section 230(1), 230(3), 232(3)(h) (Compromise or arrangement), Section 192(2) (Non-cash transactions involving directors), Section 232 (Mergers and Acquisitions), Section 236( Purchase minority shareholding), Section 281 (Submission of report by company liquidator).

Valuation Advisor

A valuation advisor is a group of specialists hired by a company to conduct a business valuation. They are responsible for assessing the company's market value and determining the value of its assets, shares, and stock. The advisor employs various valuation methods to arrive at an accurate assessment. They conduct extensive research and prepare a business valuation report to be used for different purposes, such as litigation, buyouts, or the sale/purchase of a business. Valuation advisors are well-versed in the attributes of Valuation under the Companies Act 2013 and are experts in their field.

Amendments in Valuation as per the Companies Act

Previously, there was only a makeshift framework for valuation professionals, which the Companies Act primarily governed. The government has now designated the Insolvency and Bankruptcy Board of India (IBBI) as the authority to implement the new 'Registered Valuer' regime. This change was necessary because the Insolvency and Bankruptcy Code (IBC) was being used to sell distressed companies worth millions, and there was no standard formula for valuing these assets, nor was there a proper regulatory framework for the valuation profession. Valuing a company accurately is also an important aspect of any merger and acquisition. In response, the Ministry of Corporate Affairs introduced the Companies (Registered Valuers and Valuation) Rules 2017. The rules set out the eligibility criteria for obtaining certification as a registered valuer, as well as the process for obtaining certification. According to the rules, the IBBI, established under the Insolvency and Bankruptcy Code, 2016, will act as the 'Registering Authority'. It will conduct exams and grant certifications to individuals who wish to be designated as 'Registered Valuers'. However, this rule does not apply to valuations required under other laws.

Rules of Valuation under the Companies Act

Here's a detailed explanation of the sections for Valuation in the Companies Act-

Section 62(1)

The provisions under section 62(1) of the act state that if a company with share capital intends to increase its subscribed capital by issuing more shares, such shares shall be offered to- If you own equity shares of the company at the time of the offer, you will receive a letter with the offer conditions. The number of shares in the offer will be proportional to the paid-up share capital of your current shares, as close as possible, given the circumstances. The employees who are under a scheme of employees’ stock options are subject to a special resolution passed by the company and subject to such conditions as may be prescribed.

Section 192(1)

This section provides that no company shall enter into an arrangement containing some attributes like- A company director, its holding, subsidiary, or associate, or a connected person cannot acquire company assets for consideration other than cash or the company acquires or is to acquire assets for consideration other than cash from such director or person so connected. Unless prior approval for such an arrangement is accorded by a resolution of the company or holding company in a general meeting under sub-section (1), it must include the particulars of the arrangement along with the value of the assets involved in such arrangements duly calculated by a registered valuer.

Section 192(2)

As per Section 192(2), when a company or holding company seeks approval of a resolution in a general meeting under sub-section (1), the notice for such approval must include the details of the arrangement, along with the value of assets involved in the arrangement. A registered valuer must calculate this value.

Section 230(1)

This section proposes if a compromise or arrangement between a company and its creditors or any class of them or compromise or arrangement between a company and its members or any other class of them is about to happen or is ongoing.

Section 230(3)

According to the Act, if a meeting is planned to be called due to an order from the tribunal under sub-section (1), a notice of the meeting must be sent to all creditors or a specific class of creditors, as well as all members or a specific class of members and debenture-holders of the company. The notice should be sent individually to the address registered with the company, and it must be accompanied by a statement that divulges the details of the compromise or arrangement, a valuation report, and an explanation of the effect it will have on creditors, key managerial personnel, promoters, non-promoter members, and debenture-holders. The statement should also explain the effect of the compromise or arrangement on any material interests of the company's directors or the debenture trustees, as well as any other prescribed matters.

Section 232(3) (h)

According to this section, the tribunal can approve the compromise or arrangement after ensuring that the procedure mentioned in sub-sections (1) and (2) has been followed. If the transferor company is listed and the transferee company is unlisted, the tribunal can make a subsequent order to provide for the same- The transferee company shall remain an unlisted company until it becomes a listed company. In case the shareholders of the transferor company choose not to be a part of the transferee company, arrangements will be made for the payment of the value of their shares along with other benefits. The payments will be based on a pre-determined price formula, or an evaluation will be conducted. The tribunal will oversee the arrangement made under this provision.

Section 236 (1)

According to the Act, if an acquirer or a person acting in concert with the acquirer holds 90% or more of the issued equity share capital of a company or if any person or group of persons holds 90% of the issued equity share capital of a company due to an amalgamation, share exchange, conversion of securities, or any other reason, then the acquirer, person or group of persons must notify the company of their intention to buy the remaining equity shares.

Section 236 (2)

According to this Act, if an acquirer, person, or group of persons under sub-section (1) acquires a company, they are required to make an offer to buy the equity shares held by the minority shareholders of the company. A registered valuer will determine the price for these shares in accordance with the rules prescribed.

Section 281

According to this Act, if a tribunal has issued a winding-up order for a company or appointed a company liquidator, the liquidator must submit a report to the tribunal within sixty days of the order. The report should contain all the details of the company's assets, including their location and value. It should also separately state the cash balance in hand, the money in the bank, if any, and any negotiable securities held by the company. The Valuation of the assets must be obtained from a registered valuer for this purpose.

5 Significant Metrics Used by Valuation Experts

Value investors rely on various stock metrics to evaluate and understand stocks that they believe are undervalued by the market. These metrics include the P/E ratio (price-to-earnings ratio), P/B ratio (price-to-book ratio), D/E ratio (debt-to-equity ratio), FCF (free cash flow), and PEG ratio (price/earnings to growth ratio). Each of these ratios provides different insights that investors use to make informed decisions. For instance, FCF indicates how efficient a business is at generating cash, while the P/E ratio confirms the market value of the stocks compared to the company's earnings. The P/B ratio compares a company's net worth to its market capitalization, and the D/E ratio informs investors about how a business is financing its assets.

Three Key Methods to Determine Valuation of an Asset

Cost Method

The cost approach of Valuation says that the value of a property will be equal to the cost of rebuilding it again. In other words, to calculate the value of the asset, the valuation expert calculates the price/cost to rebuild a structure with identical attributes. In this, aspects like cost of construction, cost of land, and less depreciation are considered. Although this method is not considered a reliable source to get the correct Valuation, it can be useful in certain conditions where the Valuation of a property with unique features is to be calculated, etc.

Income Method

The income approach of real estate valuation considers the income a property generates to calculate its market value. The net operating income is divided by the capitalization rate to attain the value of the asset. Expert valuers consider factors like property's operating efficiency, condition of the property, and vacancy (space) when they're using this method to calculate the Valuation. The income-based approach is widely considered the most difficult and calculation-intensive. This method is very similar to the DCF method of calculating a business's finances.

Market Method

The market approach of valuation computes the valuation of an asset by comparing and considering similar sales data, selling prices, etc., of similar or similar assets. The market-based approach is one of the most widely used approaches to calculate the valuation of an asset. Due to the fact that this method is dependent on comparable data of similar assets, this method is highly effective when abundant comparable data is available. In the absence of comparable data, the valuation expert utilizes a different approach.  

Other Services offered by Enterslice for Valuation as per the Companies Act

Risk Extenuation

There are several risks involved in the process of Valuation. Our team of expert advisors is well-versed in the legalities involved in the valuation process; they will mitigate all the risks associated with the process.

Registered Valuer

Our experts are IBBI-certified professionals who are fully equipped to provide valuation services as per the norms of the Companies Act 2013. Enterslice is a one-stop solution for all your business needs.

Tax Valuation

We understand that Tax valuation can be very complex and more scrutinized by governing establishments. Our experts have hands-on experience with working on tax valuation and will give appropriate guidance for the same.

ESOP Valuation

Employee Stock Ownership Plans (ESOPs) allow companies to sell fragments of their business shares to the employees. Our expert advisors will assist you in every step involved in the process of ESOP valuation.

Benefits of hiring Enterslice’s Expert Valuation Services

The implementation of valuation standards by a valuation advisor in the framework of the 2013 Companies Act provides a number of advantages for businesses, investors, and other interested parties. A valuation advisor will help establish a set of valuation standards that will create a common language and approach to conducting a valuation. Following standardized valuation practices by a valuation advisor increases transparency and instils confidence among investors and stakeholders. They can rely on the credibility of Valuation, reducing the information asymmetry between management and external parties. Other aspects include-  

• Dispute resolution: valuation standards are a strong set of rules that you can rely on if there is a dispute about the fair market value of your assets and stocks.
• Compliance and legal protection: The valuation advisor will help comply with valuation standards and guidelines so that the company enjoys legal protection.
• They will also reduce the risk of non-compliance with regulatory necessities. This safeguards the company’s standing and protects it from potential penalties and legal ramifications.

Enterslice’s Success Stories

Enterslice is a highly regarded valuation firm in the country. We are known for our impartiality, technical proficiency, and independence. Our team of expert valuers is part of an international network where they share knowledge and expertise to aid smooth work across channels. With over 10+ years of experience, Enterslice has provided in-depth financial, analytical, and economic proficiency to help clients make better decisions. Our valuers are registered with appropriate regulatory authorities, ensuring 100% customer satisfaction.

Requisites for Valuation of Different Assets

For Land and Buildings

A person registered as a valuer must hold a graduate or postgraduate degree in civil engineering, architecture, or town planning and have a minimum of 3-5 years of experience.

For Plant and Machinery

A registered valuer must have a minimum of a bachelor's degree in mechanical or electrical engineering and have at least three to five years of experience.

For Financial Assets

A minimum of 3 years of experience in finance is required after graduation from ICAI, ISCI, or Institute of Cost Accountants of India, or an MBA with a specialization in finance.

Risks of Not Hiring a Valuation Service Provider

A company valuation is executed by a competent business valuer with access to data on how much comparable businesses sold for. Improper Valuation can lead to either overvaluation or undervaluation. Overvaluing a business means overestimating how much it's worth. This can result in a lot of hitches, such as unrealistic expectations for a payday that’s likely to be less than anticipated. This could wreck your financial plans for life post-sale as the return from your investment may not mirror those forecasts. Undervaluing a business means underestimating how much it is worth. How much you are likely to produce from the sale of a business will outline your financial plans post-sale, your investment choices, and the imposingness of these plans.

necessary paperation of the Valuation Report

The Paper works is the key record of the evidence that was assimilated and analyzed, the measures that were processed, the valuation methods and methodologies that were scrutinized and employed, as well as the evaluation result. It is up to the proficient opinion of the expert valuer to choose the measure of Paper works, as well as its type and substance. While directing an evaluation, it is significant to have adequate Paper works of the substances that will be trusted. According to the amendment in the Companies Act, the necessary paper is to be kept by the evaluator for a duration of three years.