Valuation under Companies Act, 2013:
Valuation is a process of evaluating the financial and economic value of a company. In a way it is the net worth of the company. In October, 2017 the Ministry of Corporate Affairs has introduced Companies (Registered Valuer and Valuation) Rules with the notification of Section 247 in the Companies Act, 2013. A new institution has been designated by the ministry for implementation of the new regime, laws and statutes, named as Insolvency Bankruptcy Board of India. The ministry also notified a new rule stating that after February 1st all valuation to be done by Registered Valuer.
Need for Valuation Process:
The valuation process is extremely important for any company or business. The owners of a company are required to conduct valuation because of the following reasons-
- For accessing any form of funding from external sources.
- To determine any tax obligations on the company or business.
- To commence the sale process.
- For making decisions and also to plan any future strategy for the enterprise.
- For legal purposes or litigations including any divorce matter.
- To resolve the disputes of the shareholders valuation process is carried out.
- To calculate or to know the net worth of the business including the value of the shares, immovable property, assets, plant and machinery etc.
Scope of Valuation Process:
The scope area in the valuation process involves the following-
- For Technical valuation- It is done by the technical valuer. Movable and Immovable property valuation process are the key areas in this.
- For Financial valuation- It is conducted by the financial valuer. The key areas of valuation process include goodwill, stocks, shares, debentures, winding up, compromise, arrangement, liquidation, securities, restructuring and corporate debt.
Factors to be considered during Valuation Process:
There are certain factors that the valuer has to consider during the valuation process. But even before that an owner needs to know the scope and area all about Valuation of shares, stocks, assets, movable or immovable property etc. as per the requirement and needs of the company. The factors to be kept in mind are-
- Nature of the business.
- Size of the enterprise.
- History of the company from its date of commencement or incorporation.
- Financial condition and position of the company.
- It’s earning capacity.
- It’s intangible value and the goodwill.
- Value of the stocks in the books.
- Sales of the stocks by the company.
- General outlook in the area of economic factor of the business.
- Company’s capacity to pay the dividend.
- Block of stocks size for valuation.
- Market price of stocks of other corporations engaged in similar activities or business area.
- Any legal issues that are substantial and the contingent liabilities affecting the business, either in India or abroad.
Statutory requirements for Valuation Process:
Any valuation process in a company is to be carried out under the statutory provisions prescribed by the Companies Act, 2013. The valuer has to follow the necessary laws as follows-
- Section 39(4)- Allotting the securities for consideration other than cash.
- Section 42- Placement of shares privately.
- Section 54 Rule 8- Issuing of sweat equity shares.
- Section 62(1)(c)- For value of further issue of shares.
- Section 67 Rule 16- Company buying its own shares for benefit of the employees by the trustees or even employees with provision of company’s money.
- Section 177(4)(iv)- Valuating the assets or the undertaking of the company.
- Section 191 Rule 17- By way of compensation, payment to the directors other than in cash.
- Section 192(2)- Any non-cash transactions that involve directors.
- Section 230(2)(c)(v)- Valuation under the Scheme of Corporate Debt Restructuring.
- Section 230(3)- Valuation under Arrangement or Compromise scheme with the members and creditors.
- Section 230(11)- Due to arrangement or compromise, offer of overtaking of an unlisted company.
- Section 232(2)(d)- Reconstruction due to merger, demerger or amalgamation of the company.
- Section 232(3)(h)- For providing existence to dissenting shareholders of transferor company, valuation is to be done by the tribunal.
- Section 236(2)- Purchasing any shareholdings in the minority.
- Section 281(1)- Asset valuation by liquidator of the company for submitting a report to NCLT.