Regulatory Valuation: Lecture given for Certification Course on Valuations conducted by ICSI at New Delhi

1. Regulatory Valuation

2. “In the business world, the rearview mirror is
always clearer than the windshield”
Warren Buffett

3. Valuation (Part – A)
What and Why
How
Valuation in Indian Regulatory Environment (Part – B)
When and Who
Some Specific Tricky Issues (Part – C)
Tricky Issues

4. Part – A
Valuation

5. WHAT & WHY

6. Value & Valuation
Value is*
An Economic concept;
An Estimate of likely prices to be concluded by the buyer and seller of a good or service
that is available for purchase;
Not a fact.
Valuation is the process of determining the “Economic Worth” of an Asset or
Company under certain assumptions and limiting conditions and subject to the data
available on the valuation date.
* Source -International Valuation Standard Council

7. Key Facts
PRICE IS NOT THE SAME AS VALUE
VALUE VARIES WITH PERSON, PURPOSE AND TIME
TRANSACTION CONCLUDES AT NEGOTIATED PRICES
VALUATION IS HYBRID OF ART & SCIENCE

8. S Standard of Valuation
T Thesis of Valuation
E Economics of Valuation
M Methodologies of Valuation

9. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Standard of Value is the hypothetical conditions under which a business is valued.
While selecting the Standard of Value following points is to be taken care of
Subject matter of Valuation;
Purpose of Valuation;
Statute;
Case Laws;
Circumstances.
Types of Standard of Value:
FAIR MARKET VALUE
INVESTMENT VALUE
INTRINSIC VALUE
FAIR VALUE

10. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Thesis of Value is Premise of value which relates to the assumptions upon which
the valuation is based.
Premise of Value
Going Concern – Value as an ongoing operating business enterprise.
Liquidation
– Value when business is terminated . It could be ‘forced’ or ‘orderly’.
Value-in-use
Value-in-exchange

11. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Valuation across business cycle follow the law of
economics
Turnover/Profits: Drops


Declining
Cos.
`



Mature
Cos.





sti f or P / r ev onr uT
High Growth
Cos.


Growing
Cos.
Start Up
Cos.








Proven Track Record: Substantial
Operating History
Method of Valuation: Entirely
from Existing Assets
Cost of Capital: N.A.
Turnover/Profits: Saturated
Proven Track Record: Widely Available
Method of Valuation: More from Existing Assets
Cost of Capital: May be High
Turnover/Profits : Good
Proven Track Record: Available
Valuation Methodology: Business Model with Asset
Base
Cost of Capital: Reasonable
Turnover/Profits: Increasing still Low
Proven Track Record: Limited
Valuation Methodology: Substantially on Business Model
Cost of Capital: Quite High
Turnover/Profits: Negligible
Proven Track Record: None
Valuation Methodology: Entirely on Business Model
Cost of Capital: Very High
Time

12. HOW

13. Enterprise / Business Value
Intangibles#
Equity#
Net Current
Assets#
Net Debt
#
Stakeholders
# Based on Market Values
Fixed
Assets#
Assets

14. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Valuation Approaches
Fundamental Method
Income Based
Method
Asset Based
Method
Relative Method
Market Based
Method
Other Method

15. Need of several valuation methods?
Each has strengths and weaknesses
Different methods useful in different situations
Each gives a different “take” on the value of the
company’s stock
Provides a range of valuations instead of point
estimates
Helps in Sanity Check
While concluding Value, all the methodologies must be considered and then weights applied
as per the facts of the case. In other words, Value conclusion should be based on the
Professional Judgement and Simple Average should best be avoided while concluding
Value.

16. Choice of Valuation Approaches
“Value in Valuation is a question,
and
Your choice of Method is the first step
towards answer”
Applicability of a particular approach depends upon:
On whose behalf? – one buyer vs another buyer, buyer vs seller;
For what purpose? – independent strategic acquisition, group company consolidation, cross
border transaction;
When? – distress situation, industry downturn, boom etc;

17. Choice of Valuation Approaches
•
In General, Income Approach is preferred;
The dominance of profits for valuation of share was emphasised in “McCathies case”
(Taxation, 69 CLR 1) where it was said that “the real value of shares in a company will depend more on
the profits which the company has been making and should be capable of making, having regard to
the nature of its business, than upon the amount which the shares would realise on liquidation”.
This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s
case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.)
(122 ITR 38).
• However, Asset Approach is preferred in case of Asset heavy companies
and on liquidation;
• Market Approach is preferred in case of listed entity and to evaluate the
value of unlisted company by comparing it with its listed peers;

18. Valuation depends upon
Purpose
• Mergers
• IPO
• Acquisitions /
Investment
• Voluntary
Assessment
Regulatory
Accounting
• RBI
• ESOP
• Income Tax
• Purchase Price
Allocation
• SEBI
• Impairment /
• Stock Exchange Diminution
• Companies Act
Dispute
Resolution
Value
Creation
• Company Law • Equity Research
Board/ Courts •
Credit Rating
• Arbitration
• Corporate
• Mediation
Planning

19. Sources of Information for Valuation
Historical financial results –
Income Statement, Balance
Sheets and Cash Flows
Sources of
Information
Data available in Public
Domain – Stock Exchange /
MCA/SEBI/Independent Report
Data on comparable
companies – SALES/EVEBITDA/ PAT/BV
Promoters and Management
background
Discussion and
Representation with/by
the management of the
Company
Data on projects
planned/under
implementation
including future
projection
Industry and Regulatory
trends

20. Key drivers of valuation
CASH FLOW
Investor assign value based on the cash flow they expect to receive in the
future
- Dividends / distributions
That’s why DCF is most
- Sale of liquidation proceeds
Value of a cash flow stream is a function of
- Timing of cash Receipt
- Risk associated with the cashflow
prominent
valuation
method
ASSETS
Operating Assets
- Assets used in the operation of the business including working capital, Property, Plant &
Equipment & Intangible assets
- Valuing of operating assets is generally reflected in the cash flow generated by the
business
Non - Operating Assets
- Assets not used in the operations including excess cash balances, and assets held for
investment purposes, such as vacant land & Securities
- Investors generally do not give much value to such assets and Structure modification
may be necessary
Need for Restructuring

21. Rule of Thumb
A rule of thumb or benchmark indicator is used as a
reasonableness check against the values determined by the
use of other valuation approaches.
Industry
Valuation Parameters
Hospital
EV/Room
Engineering
Mcap/Order Book
Mutual Fund
Asset under management
OIL
EV/ Barrel of equivalent
Print Media
EV/Subscriber
Power
EV/MW, EBITDA/Per Unit
Entertainment & Media
EV/Per screen
Metals
EBITDA/Ton, EV/Metric ton
Textiles
EBITDA depend upon capacity utilization Percentage & per spindle value
Pharma Bulk Drugs
New Drug Approvals , Patents
Airlines
EV/Plane or EV/passenger
Shipping
EV/Order Book, Mcap/Order Book
Cement
EV/Per ton & EBITDA/Per ton
Banks
Non performing Assets , Current Account & Saving Account per Branch
However, Exclusive use of Rule of Thumb is not recommended

22. Part – B
Valuation in Indian Regulatory Environment

23. WHEN & WHO

24. SNAPSHOT OF REGULATORY VALUATIONS IN INDIA
Transactions
Inbound Investment
Inbound Investment
Prescribed Methodologies
Mandate to be done by
DFCF
DFCF
CA // MB
CA MB
Valuer Discretion
Valuer Discretion
>5Mn$ - MB, otherwise CA/MB
>5Mn$ - MB, otherwise CA/MB
Gift of Unquoted Equity
Gift of Unquoted Equity
Shares (Min)
Shares (Min)
NAV
NAV
-
Gift of Unquoted Equity Shares
Gift of Unquoted Equity Shares
from Resident (Max)
from Resident (Max)
DCF (Valuation Based on Assets,
DCF (Valuation Based on Assets,
Business & Intangibles is also
Business & Intangibles is also
acceptable)
acceptable)
FCA // MB
FCA MB
Price it would fetch if sold in open
Price it would fetch if sold in open
market
market
MB
MB
ESOP Tax
ESOP Tax
Valuer Discretion
Valuer Discretion
MB
MB
Transfer Pricing
Transfer Pricing
Arm Length Price
Arm Length Price
-
ESOP Accounting
ESOP Accounting
Option – Pricing Model
Option – Pricing Model
-
Takeover Code/ Delisting Takeover Code/ Delisting Infrequently Traded
Infrequently Traded
Only Parameters Prescribed – Return
Only Parameters Prescribed – Return
on Net Worth, EPS, NAV vis-a vis
on Net Worth, EPS, NAV vis-a vis
Industry Average
Industry Average
CA/MB
CA/MB
Takeover Code/ Delisting Takeover Code/ Delisting Frequently Traded
Frequently Traded
Based on Market Price
Based on Market Price
-
Preferential Allotment to Others
Preferential Allotment to Others
Based on 26 weeks // 2 weeks Market
Based on 26 weeks 2 weeks Market
Price
Price
-
Valuer Discretion
Valuer Discretion
CA // MB
CA MB
Reserve Bank of
India
Outbound Investment
Outbound Investment
Income Tax
SEBI
Stock Exchanges
Gift of Unquoted Shares other
Gift of Unquoted Shares other
than Equity Shares
than Equity Shares
Preferential Allotment to
Preferential Allotment to
promoters / their relatives for
promoters / their relatives for
consideration other than cash
consideration other than cash
Companies Act,
1956
Sweat Equity
Sweat Equity
Companies Act,
2013
any property, stock, shares,
any property, stock, shares,
debentures, securities or goodwill
debentures, securities or goodwill
or any other assets or the net
or any other assets or the net
worth of the Company or its
worth of the Company
its
liabilities
liabilities
Valuer Discretion
Valuer Discretion
To be prescribed
To be prescribed
-
REGISTERED VALUER
REGISTERED VALUER

25. RBI Valuation Guidelines

26. FDI
VALUATION
• Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time deals
with Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000.
•In terms of Schedule 1 of the Notification, an Indian company may issue equity
shares/compulsorily convertible preference shares and compulsorily convertible debentures
(equity instruments) to a person resident outside India under the FDI policy, subject to inter alia,
compliance with the pricing guidelines.
•The price/ conversion formula of convertible capital instruments should be determined upfront
at the time of issue of the instruments.

27. FEMA Guidelines to Valuation
Particulars
Valuation before April 21, 2010
Guidelines in Force
CCI Guidelines
Methods Prescribed
Net Assets Value (NAV)
Profit Earning Capacity
Value(PECV)
Market Value (in case of Listed
Company)
Valuation after April 21, 2010
In case of FDI Transactions:
Listed Company: Market Value
as per SEBI Preferential
Allotment Guidelines
Unlisted Company: DFCF
In case of ODI Transactions:
No method has been prescribed
Discount
15% Discount has been
prescribed on account of Lack of
Marketability
No such Discount has been
prescribed
Historical / Futuristic
It is based on Historical Values
It is based on Future Projections
Possibility of variation As valuation is more Formulae
in Value Conclusion
based, final values came
standardized
As valuation is more dependent
on Assumptions and choice of
factors like Growth Rate, Cost of
Capital etc, value conclusion
may vary significantly.
Note: Valuation guidelines do not apply to SEBI registered venture capital

29. Approaches to FDI Valuation
Discounted Free Cash Flow Method (DFCF)
 RBI has prescribed DFCF as the only valuation method in case of FDI (excluding for
initial subscription); but has not provided any guidance on its technical aspects.
Though DFCF is one of the most acceptable Valuation methods used by Business
valuers worldwide; however DFCF for all FDI transactions-excluding for initial
subscription (like minority stake/start up valuation etc) may not yield Fair Value in
line with the Commercial understanding. However Law being such, suitable Logical
adjustments may be necessary on a case to case basis.
DFCF expresses the present value of the business as a function of its
DFCF expresses the present value of the business as a function of its
future cash earnings capacity. In this method, the appraiser estimates the
future cash earnings capacity. In this method, the appraiser estimates the
cash flows of any business after all operating expenses, taxes, and necessary
cash flows of any business after all operating expenses, taxes, and necessary
investments in working capital and capital expenditure is being met. Valuing
investments in working capital and capital expenditure is being met. Valuing
equity using the free cash flow to stockholders requires estimating only free
equity using the free cash flow to stockholders requires estimating only free
cash flow to equity holders, after debt holders have been paid off.
cash flow to equity holders, after debt holders have been paid off.

30. Major Characteristics of DFCF Valuation
 Forward Looking and focuses on cash generation
 Recognizes Time value of Money
 Allows operating strategy to be built into a model
 Incorporates value of Tangible and Intangible assets
 Only as accurate as assumptions and projections used
 Works best in producing a range of likely values
 It Represents the Control Value

31. DFCF Valuation Process
 Understand Business Model
 Identify Business Cycle
 Analyze Historical Financial Performance
 Review Industry and Regulatory Trends
 Understand Future Growth Plans (including Capex needs)
 Segregate Business and Other Cash Generating Assets
 Identify Surplus Assets (assets not utilized for Business say
Land/Investments)
 Create Business Projections (Profitability statement and Balance Sheets)
 Discount Business Projections to Present (Explicit Period and Perpetuity)
 Add Value of Surplus Assets and Subtract Value of Contingent Liabilities

32. Free Cash Flows- Value Trend
Terminal Value is calculated for the Perpetuity period based on the
Adjusted last year cash flows of the Projected period.

33. Free Cash Flow calculation
FREE CASH FLOWS
Free cash flows to firm (FCFF) is calculated as
Taxes
EBITDA
EBITDA
Change in Non Cash Working capital
Capital Expenditure
Free Cash
Flow to
Firm
Note that an alternate to above is following (FCFE) method in which
the value of Equity is directly valued in lieu of the value of Firm. Under
this approach, the Interest and Finance charges is also deducted to arrive at
the Free Cash Flows. Adjustment is also made for Debt (Inflows and
Outflows) over the definite period of Cash Flows and also in Perpetuity
workings.
Theoretically, the value conclusion should remain same irrespective of the
method followed (FCFF or FCFE), (Provided, assumptions are consistent).

34. Cost of Capital calculation
DISCOUNT RATE – WEIGHTED AVERAGE COST OF CAPITAL
WACC
(Kd x D) + (Ke x E)
(D + E)
Where:
D = Debt part of capital structure
E = Equity part of capital structure
Kd = Cost of Debt (Post tax)
Ke = Cost of Equity
In case of following FCFE, Discount Rate is Ke and Not WACC

35. Cost of Equity calculation
DISCOUNT RATE - COST OF EQUITY
The Cost of Equity (Ke) is computed by using Modified Capital Asset Pricing
Model (Mod. CAPM)
Mod. CAPM Model
ke = Rf + B ( Rm-Rf) + SCRP + CSRP
Where:
Rf =
Yield)
B =
Ke =
Rm=
of
Risk free rate of return (Generally taken as 10-year Government Bond
Beta Value (Sensitivity of the stock returns to market returns)
Cost of Equity
Market Rate of Return (Generally taken as Long Term average return
Stock Market)
SCRP = Small Company Risk Premium
CSRP= Company specific Risk premium

36. Terminal value calculation
PERPETUITY FORMULA
– Usually comprises a Large part of Total Value and is sensitive to small
changes
– Capitalizes FCF after definite forecast period as a growing perpetuity;
– Estimate Terminal Value using Terminal Value Multiplier applied on last
year cash flows
– Gordon Formula is often used to derive the Terminal Cash (1 + g)
Flows by applying the last year cash flows as a multiple of
(WACC – g)
the growth rate and discounting factor
– Estimated Terminal Value is then discounted to present day at company’s
cost of capital based on the discounting factor of last year projected cash
flows
IMPORTANT TIP- It is advised to do Sanity check by applying Relative Valuation
Multiples to the Terminal Year Financials and also doing Scenario Analysis.

38. SEBI / Stock Exchange
Valuation Guidelines

39. Takeover Regulations
APPLICABLE LAW:
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
FREQUENTLY TRADED
SHARES
Traded Turnover of Shares ≥ 10%
[In the Last Twelve Calendar Months preceding the Month of Public Announcement (P.A.)]
Method of Valuation
1.Highest Negotiated Price Per Share under agreement attracting the obligation to make P.A.
2.The volume weighted avg. price paid or payable by acquirer or PAC during the 52 Weeks;
3.The Highest Price paid or payable by acquirer or PAC in last 26 Weeks;
4.Volume weighted average Market Price of Shares for a period of 60 trading days
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE FOR P.A.
INFREQUENTLY TRADED
SHARES
Traded Turnover of Shares < 10%
[In the Last Twelve Calendar Months preceding the Month of Public Announcement (P.A.)]
Method of Valuation
1.Book value,
2.Comparable Trading Multiples;
Such other Parameters as are customary for valuation of shares of such companies

40. Preferential Issue (1 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Equity shares of issuer have been listed on recognized stock exchange for a period of 26
weeks or more as on relevant date
Method of Valuation
1.The average of the weekly high and low of the closing prices of the related equity shares quoted on the
recognised stock exchange during 26 weeks preceding the relevant date, or
2.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during 26 weeks preceding the relevant date.
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE

41. Preferential Issue ( 2 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Equity shares of issuer have been listed on recognized stock exchange for a period of less
than 26 weeks as on relevant date
Method of Valuation
1. The price at which equity shares were issued by the issuer in its IPO or value per share
arrived at in a scheme of arrangement under section 391 to 394 of the Companies Act, 1956,
pursuant to which the equity shares of the issuer were listed, as the case may be , or
2.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during the period shares have been listed
preceding the relevant date, or
3.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during 2 weeks preceding the relevant date.
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE

42. Preferential Issue ( 3 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Where equity shares have been issued to promoters / their relatives for consideration other
than cash, the valuation of assets in consideration for which the equity shares are issued
shall be done by an independent valuer
Method of Valuation
No Method for Valuation has been prescribed.
Valuer
Chartered Accountant or a Merchant Banker

43. ESOP Accounting Valuation
APPLICABLE LAW:
SEBI (ESOS and ESPS) Guidelines, 1999
If a Company listed on recognised stock exchange in India and issued shares under an
ESOS / ESPS, the fair value of stock option shall be estimated using an option pricing model
(Black-Scholes or a binomial model) which shall be treated as employee compensation cost
for the Company.
Method of Valuation
Black-Scholes Model
Valuer
Not Prescribed

44. Income Tax Act-1961

45. Equity Shares Valuation
APPLICABLE LAW:
Income Tax Act – 1961 and Rule 11UA
If Individual, HUF, Firm or *closely held Company receives Equity shares of a closely held
Company – Valuation norms shall apply.
Method of Valuation
Minimum Valuation- Net Asset Value
Maximum Valuation- DCF and other methods factoring Tangible and Intangibles
Valuer
No specific Valuer prescribed for undertaking Minimum Value
FCA / Merchant Banker for determining Maximum Value
*If a Public Listed Company receives any shares or anyone receives
shares of a Public listed Company, valuation norms are not applicable if
transaction takes at market price.

46. Valuation of shares other than Equity Shares
APPLICABLE LAW:
Income Tax Act – 1961 and Rule 11UA
If Individual, HUF, Firm or *closely held Company receives shares other than Equity shares
of a closely held Company – Valuation norms shall apply.
Method of Valuation
Price at which such shares will fetch in the open market.
Valuer
Valuation report to be issued by Merchant Banker

47. ESOP Tax Valuation
APPLICABLE LAW:
Income Tax Act – 1961 and Notification no. 94/2009 dated 18.12.2009 issued by CBDT
To determine the value of perquisite taxable in hands of employees
Method of Valuation
No method has been prescribed
Valuer
SEBI registered category – I Merchant Banker

48. Transfer Pricing
APPLICABLE LAW:
Section – 92 to 92F of Income Tax Act – 1961 and Rule 10A to 10E of Income-tax Rules, 1962
Any International transaction between associated enterprises at ARM LENGTH PRICE
Method of Valuation
Arm Length Price
Valuer
Not Prescribed
Role of TPO critical. Recent cases deliberating on Valuation aspects

49. Valuation for Merger
“Valuation is generally the Starting Point of the M&A process”
Judicial Pronouncements;
WHETHER VALUATION IS REQUIRED FOR MERGER?
In the matter of Shreya’s India (P) Ltd. v. Samrat Industries (P) Ltd. the Regional
Director (RD) raised an objection that no valuation report has been filed and that the
exchange ratio for amalgamation has not been worked out by an independent valuer.
“The Hon’ble High Court of Rajasthan overruled this objection and sanctioned the scheme
of amalgamation by holding that there was no legal or factual impediment to grant
sanction to the scheme of amalgamation.”
Tool for planning Stamp Duty ?
WHETHER ANY VALUATION METHODOLDY IS REQUIRED FOR MERGER?
Though there are no specific methodology prescribed for valuation under Merger,
however In Hindustan Lever Employees Union v. Hindustan Lever Ltd and Others,
Bombay High Court “accepted the ratio of 2:2:1 as Income, Market and Asset Approach on which the
valuation was based.”

50. Valuation for Merger.. Contd..
APPLICABLE LAW FOR VALUATION FOR MERGER INVOLVING LISTED COMPANY:
1.Companies Act, 1956 [Section 391- 394];
2.Fairness Opinion [Clause 24 (h) of the Listing Agreement];
3.SEBI Notification [CIR/CFD/DIL/5/2013], dated 4 th February, 2013 and 21st May 2013 Circular
VALUATION REQUIREMENT UNDER SEBI NOTIFICATION
Valuation by independent chartered account mandatory other than those specifically exempted.
''Valuation Report from an Independent Chartered Accountant'' is not required in cases where
there is no change in the shareholding pattern of the listed company / resultant company.
After the SEBI notification, Valuation by Independent CA is required if
shares are issued under the merger and there is change in shareholding
pattern.

51. Swap Ratio Valuation
•
In case of a merger valuation, the emphasis is on arriving at the relative values of
the shares of the merging companies to facilitate determination of the swap ratio
– Hence, the purpose is not to arrive at absolute values of the shares of the
companies
•
The key issue to be addressed is that of fairness to all shareholders
– This is particularly important where the shareholding pattern and shareholders vary
between the two companies
•
There are established legal precedence for merger valuation methodologies
– Valuer’s role is to incorporate case specific factors and use appropriate
methodologies so as to determine a fair ratio
– Usually, best to give weight ages to valuation by all methods
– Market price method and Earnings methods dominate.

52. Registered Valuer
Companies Act, 2013

53. Registered Valuers
Registered Valuers
Stock, Shares,
Debentures,
Securities,
Goodwill
Financial Valuer
Technical Valuer
Property
Persons eligible to apply for being Registered as Valuer
•
A Chartered Accountant,
• Member of the Institute of
Company Secretary or Cost
Engineers or Member of
Accountant in whole time
the Institute of Architects
practice or retired member
in whole time practice.
of
Shall have 5 Years
of
Continuous
Experience,
Post
Qualification
Indian
Corporate
law
Shall have 5
Years
of
Continues
Experience,
Post
Qualification
Service or any other person
as prescribed.
• A
Merchant
Banker
registered with SEBI and
• A person or firm or LLP or
which has in employment
Merchant
under
possessing
it
carrying
CA/CS/CWA
out
for
(signing)
Valuation by such qualified
persons.
Banker
both
qualifications may act in
dual capacity.
Registered
Valuer to be
appointed
by
Audit Committee
or in its absence
by the Board of
Directors.

54. Registered Valuers
Registered Valuers
(Financial
Valuation)
Value
Responsibilities
• Valuer to make impartial, true and fair
valuation
• Not undertake valuation if directly or
indirectly interested
• Exercise due diligence
• Valuation to be done as per rules
Upon contravention
• Fine – 25,000 to 100,000
With intention to defraud
• Imprisonment upto 1 year and
• Fine- 1,00,000 to 5,00,000
Additionally upon contravention, to
refund remuneration received and also
liable for damages.

55. Section wise Requirement of Registered Valuers
Section 62(1)(c) – For Valuing further Issue of Shares
Section 192(2) – For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors
Section 230(2)(c)(v) – For Valuing Shares, Property and Assets of the company under a Scheme of Corporate
Debt Restructuring
Section
230(3)
and
232(2)(d)
–
For
Valuation
including
Share
swap
ratio
under
a
Scheme
of
Compromise/Arrangement, a copy of Valuation Report by Expert, if any shall be accompanied
Section 232(3)(h) - Where under a Scheme of Compromise/Arrangement the transferor company is a listed
company and the transferee company is an unlisted company, for exit opportunity to the shareholders of
transferor company, valuation may be required to be made by the Tribunal
Section 236(2) – For Valuing Equity Shares held by Minority Shareholders
Section 260(2)(c) – For preparing Valuation report in respect of Shares and Assets to arrive at the Reserve Price or
Lease rent or Share Exchange Ratio for Company Administrator
Section 281(1)(a) – For Valuing Assets for submission of report by Company Liquidator
Section 305(2)(d) – For report on the Assets of the company for preparation of declaration of solvency under
voluntary winding up
Section 319(3)(b) – For Valuing the interest of any dissenting member of the transferor company who did not
vote in favour of the special resolution, as may be required by the Company Liquidator
Section 325(1)(b) – For valuation of annuities and future and contingent liabilities in winding up of
insolvent company

56. Registered Valuers (Draft Rules) – Methods of Valuation
I. Before adopting methods, decide Valuation Approach• Asset Approach
• Income Approach
• Market Approach
II. Valuer to consider following points while undertaking Valuation•Nature of the Business and the History of the Enterprise from its inception
•Economic outlook in general and outlook of the specific industry in particular
•Book Value of the stock and the Financial condition of the business
•Earning Capacity of the company
•Dividend-Paying Capacity of the company.
•Goodwill or other Intangible value
•Sales of the stock and the Size of the block of stock to be valued
•Market prices of stock of corporations engaged in the same or a similar line of business
•Contingent Liabilities or substantial legal issues, within India and Abroad, impacting business
•Nature of Instrument proposed to be issued, and nature of transaction contemplated by parties

57. Registered Valuers (Draft Rules) – Methods of Valuation
III. Registered Valuer shall make valuation of any asset in accordance with any one or more of the
following methodsa.Net Asset Value Method (NAV)
b.Market Price Method
c.Yield Method / PECV Method
d.Discounted Cash Flow Method (DCF)
e.Comparable Companies Multiples Method (CCM)
f.Comparable Transaction Multiples Method (CTM)
g.Price of Recent Investment Method (PORI)
h.Sum of the parts Valuation Method (SOTP)
i.Liquidation Value
j.Weighted Average Method
k.Any other method accepted or notified by RBI, SEBI or Income Tax Authorities
l.Any other method that valuer may deem fit provided adequate justification for use of suh method (and not
any of the above methods) is provided
IV. Registered Valuer shall make valuation of any asset as on the Valuation date and in accordance
with applicable standards, if any stipulated for this purpose.
V. Contents of Valuation report shall contain information as contained in Form 17.3

58. Registered Valuers (Forms) – Contents of Valuation report
1) Description of valuation engagement
(a) Name of the client:
(b) Other intended users:
(c) Purpose for valuation:
(2) Description of business/ asset / liability being valued
(a) Nature of business or asset / liability
(b) Legal background
(c) Financial aspects
(d) Tax matters
(3) Description of the information underlying the valuation
(a) Analysis of past results
(b) Budgets, with underlying assumptions
(c) Availability and quality of underlying data
(d) Review of budgets for plausibility
(e) Statement of responsibility for information received

59. Registered Valuers (Forms) – Contents of Valuation report
(4) Description of specific valuation of assets used in the business:
(a)Basis or bases of value
(b) Valuation Date
(c) Description of the procedures carried out
(d) Principles used in the valuation
(e) The valuation method used and reasoning
(f) Nature, scope and quality of underlying data and
(g) The extent of estimates and assumptions together with considerations underlying them
(5) Confirmation that the valuation has been undertaken in accordance with these Rules
(6) Further it is certified that valuation has been undertaken after taking into account relevant
conditions/regulations/rules/notifications, if any, issued by the Central/State Government(s) from time to time.
(i)The valuation report must clearly state the significant assumptions upon which the value is based. When
reporting there may be instances, where there are confidential figures, these must be summarized in a
separate exhibit
(ii)In his valuation report, the registered valuer must set out a clear value or range of values along with
the reasoning
(ii)In case the valuer has been involved in valuing any part of the subject matter of valuation in the
past, the past valuation report(s) should be attached and referred to herein. In case a different basis
has been adopted for valuation (than adopted in the past), the valuer should justify the reason for
such differences

60. Part – C
Some Specific Tricky Issues

61. Discounts
Discounts & Premiums come into picture when there exist difference between the
subject being valued and the Methodologies applied. As this can translate control value
to non-control and vise versa , so these should be judiciously applied.
– Impact on entity as a whole
• Discount for Entity Level
Key Person Discount
Discount for Contingent Liability
Global Studies over the years on diversified
Discount for diversified company
Discount for Holding Company
that companies trade at a discount in the range
companies and holding companies has shown
of 20%. to 40% each.
Tax Payout
•Discount for Shareholders Level – Impact on specific ownership interest
Discount Lack of Control (DLOC)
Discount Lack of Marketability (DLOM)
•% stake & special rights
DLOM:
As
per
CCI
Guidelines,
15%
discount has been prescribed; however
practically DLOM and DLOC depends
upon following factors:
•Size of distribution or dividends
•Dispute
•Revenue / Earning – Growth / Stability
•Private Company
•Shareholders Agreement caveats

62. Premium
“Beauty lies in the eyes of the beholder; valuation in
those of the buyer”
•
An investor seeking to acquire control of a company is
typically willing to pay more than the current market price
Financial
Year
No. of
Transactio
ns
Median
Premium
2006
25
37%
2007
29
20%
2008
38
26%
2009
44
29%
2010
22
31%
2011
42
32%
Total
228
30%
of the company. Control premium is an amount that a
buyer is usually willing to pay over the fair market value of
a publicly traded company to acquire controlling stake in a
company.
•
Control can be direct (shareholding or Authority to appoint
Board) or indirect (veto power, casting vote etc)
•
Research has shown that the control premium in India has
ranged from 20% to 37% in the past few years having
median of 30%.

63. Excess Cash and Non Operating Assets
Excess cash is defined as ‘total cash (in balance
sheet) – operating cash (i.e. minimum required
cash) to sustain operations (working capital) and
manage contingencies
Key Issue: Estimation of Excess Cash ?
One of the solutions is to estimate average
cash/sales or total balance sheet size of the
company’s relevant Industry and then estimate if the
company being valued has cash in excess of the
industry’s average.
Non operating Assets are the Surplus assets which are not used in operations of the business and does not
reflect its value in the operating earnings of the company. Therefore the fair market value of such Assets should
be separately added to the value derived through valuation methodologies to arrive at the value of the company.
What is an asset is not yielding adequate returns ?

64. Cross Holding and Investments
Holdings in other firms can be categorized into:
Types of Cross Holding
Minority, Passive Investments
Meaning
If the securities or assets owned in another firm represent less
than 20% of the overall ownership of that firm
Minority, Active Investments
If the securities or assets owned in another firm represent
between 20% and 50% of the overall ownership of that firm
Majority, Active Investments
If the securities or assets owned in another firm represent more
than 50% of the overall ownership of that firm
Ways to value Cross Holding and Investments:
Investment Value
By way of
Dividend Yield Capitalization or DCF based on expected
Agreement
dividends
Separate Valuation (Preferred)
holding
Shareholders
even
may
control value
less
%
command

65. Accounting Practices and Tax issues
Most of the information that is used in
valuation comes from financial statements.
which
in
turn
Accounting
are
made
practices
appropriate.
•Cash Accounting v/s Accrual Accounting
•Operating Lease v/s Financial Lease
•Capitalization of Expenses
•Notional Tax vs. Actual Tax
•Treatment of Intangible Assets
•Companies Paying MAT
•Treatment of Tax benefits and Losses
on
certain
considered

66. Company Specific Factors
It is the alignment of
Company’s value via-avis to its external
environment
• Management, Promoter Group
• Operating, Capital and Corporate Finance Strategies
• Competitive advantages and cost position
• Product / Service offering / differentiation / pricing power
•Scale & Diversification
•Customer / Supplier concentration
•Corporate Governance
•Future prospects / Growth potential
•Industry peer group
•Regulatory environment

67. Valuation Methodologies and Value Impact
Major Valuation Methodologies
Ideal for
Result
Net Asset Value
Net Asset Value (Book Value)
Minority Value
Net Asset Value (Fair Value)
Control Value
Equity Value
Comparable Companies Multiples (CCM) Method
Price to Earning , Book Value Multiple
EBIT , EBITDA Multiple
Minority Value
Equity Value
Enterprise Value
Comparable Transaction Multiples (CTM) Method
Price to Earning , Book Value Multiple
EBIT , EBITDA Multiple
Control Value
Equity Value
Enterprise Value
Discounted Cash Flow (DCF)
Equity
Firm
Control Value
Equity Value
Enterprise Value

68. Demerger resulted in increased shareholders value
Reliance Group
Market prices (In Rs)
Pre demerger
Post demerger
Reliance Industries
702
698
Reliance Capital Ventures
-
23
Reliance Communication
Ventures
-
292
Reliance Energy Ventures
-
43
Reliance Natural
Resource
“That is what
learning
is,
you
suddenly
18
understand
something you have understood all 702
your life, but in a 1074
new
TOTAL
way”
…………………………….. Doris Lessing

69. Chander Sawhney, Vice President
Corporate Professionals Capital Pvt. Ltd.
SEBI registered merchant banker
Email : chander@indiacp.com
Mobile: 9810557353; Direct: 40622252
www.corporateprofessionals.com;
D-28, South Extension, Part-I, New Delhi-110049