Practical issues in Share Valuations for Companies under Companies Act and Income Tax

With effect from 1st February 2019, Companies Act, 2013 has brought in effect Valuations from Registered Valuers duly registered with Insolvency and Bankruptcy Board of India (IBBI). There are three categories of Valuers and approximate number of valuers registered with IBBI as on 22 nd Feb 2019 are as under:

Plant & Machinery - 90
Land & Building - 599
Securities or Financial Assets - 197

Total 786

It is seen that there is acute shortage of Registered Valuers though the number is gradually increasing.

About IBBI Registered Valuers u/s 247 of the Companies Act, 2013

It is prevalent since many years, especially post liberalization of economy in 1992. However, valuation as a profession was neither under purview of any authority nor any specific guidelines or standards were issued for the same. For the first time, Companies Act, 2013 incorporated provisions of Registered Valuers and made mandatory to obtain reports from Registered Valuers w.e.f. 1st February 2019.

In this regards, Ministry of Corporate Affairs (MCA) has issued notification dated 18/Oct/2017 to notify section 247 of the Companies Act , 2013. Section 247 is governing section for Registered Valuers. MCA has issued The Companies (Registered Valuers and Valuation) Rules, 2017 for procedural matters. Accordingly, IBBI is appointed as Authority to overall supervision, management and registration of Valuers under the Act.

Provisions under Income Tax:

Under Income Tax, three persons can get affected under various provisions of the Income Tax, if Shares are issued or transferred at a consideration less than Fair Market Value (FMV) i.e. Buyer, Seller or Company in self. Examples are given below.

FMV can be calculated under DCF Method certified by a Merchant Banker or under NAV method with certain adjustments u/r 11UA. Therefore, for every fresh allotments or wherever there is need to arrive FMV, valuation from Merchant Banker under DCF method shall be required, if party opt the option. As such there shall be 2 separate valuators for same purpose i.e. Registered Valuer as well as Merchant Banker. There is thin possibility that both valuations shall be same. Registered Valuer shall arrive the valuation as per Valuation Standards and Methodologies, whereas Merchant Banker shall arrive only under DCF Method. So Companies shall bear unnecessary costs for two valuations for a single transaction.

Conflict:

There is a need to align provisions of laws i.e. Companies Act as well as Income Tax so that there is uniformity in valuation process and Companies do suffer with extra cost or tax demands.

Registered Valuers are suppose to carry out valuation as per International Valuation Standards and Methodologies including DCF Method. Whereas, under Income Tax, FMV shall be calculated under DCF method certified by Merchant Banker.

Example of practical issues:

Scenario	Transaction	Effect for Company	Effect for Buyer	Effect for Seller
1	Issue of Additional Shares: Valuation from Registered Valuer - Rs. 10 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 8 Lakhs	Company shall pay tax on Rs. 2 Lakhs as Other Income u/s 56.	No Effect	NA
2	Issue of Additional Shares Valuation from Registered Valuer - Rs. 8 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 10 Lakhs	No Issue	Will pay on Rs. 2 Lakhs as additional Income u/s 56.	NA
3	Transfer of Shares Rs. 10 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 8 Lakhs	No Effect	No Effect	Seller shall pay tax on Rs. 10 Lakhs
4	Transfer of Shares Rs. 8 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 10 Lakhs	No Effect	Will pay Tax on Rs. 2 Lakhs as in Other Income u/s 56	Will pay Capital Gains Tax on deemed Sales price of Rs.10 Lakhs

Valuation Reports from Valuers are usually required in following Situations (Illustrative List):

Valuation of Business / Firm / Company
Valuation of Intangibles such Goodwill, patents, copyrights, technical knowhow, franchise agreements, etc.
Conversion of Proprietorship/Partnership into Company
Inter Group Company Share Transfers
Valuation of Shares and Securities under Companies Act, Foreign Direct Investments, etc.
Valuation for Swapping of Shares in case of Amalgamation
Valuation for Family Settlement
Valuation for Arbitration/Dispute Settlement/ Dispute Resolution
Valuation for Specific Purpose
Valuation in case of Take Over of Companies
Valuation of Shares for Transfer Pricing under Income Tax
Calculation of Fair Value as per IND-AS / IFRS/ Accounting Standards

However, under Companies Act, 2013, IBC Code and Certain SEBI Regulations, in following scenarios Valuations reports from Registered Valuer is required.

Valuation requirements under Companies Act, 2013

Sl. no.	Section/Rule	Particulars
1	62(1)C	Valuation report for Further Issue of Shares including Preferential allotments, Allotment under ESOP.
2	192(2)	Valuation of Assets Involved in Arrangement of Non cash transactions involving Directors
3	230(2)(c)(v)	Valuation of shares, property and assets of the Company under a scheme of Corporate Debt Restructuring

4	230(3)	Valuation report along with Notice of creditors/shareholders meeting - Under scheme of compromise/Arrangement
5	232(2(d)	The report of the expert with regard to valuation, if any, would be circulated for meeting of creditors/Members
6	232(3)(h)	The Valuation report to be made by the tribunal for exit opportunity to the shareholders of transferor Company - Under the scheme of Compromise/Arrangement in case the Transferor company is Listed Company and the Transferee-company is an unlisted Company
7	236(2)	Valuation of equity shares held by the Minority Share Holders
8	281(1)	Valuing assets for submission of report by liquidator
9	305(2)(d)	Declaration of insolvency in case of proposal to wind up voluntarily
10	319(3)(b)	Power of Company Liquidator to accept shares etc, as consideration for sale of property of the Company
11	Rule 2 of (Acceptance of deposit) Rules, 2014 Companies	Exclusions from Deposits
12	Rule 8 of Companies (Share capital and Debentures) Rules, 2014	Issue of Sweat Equity Shares

Valuation Requirements under SEBI Regulations

Sr No.	SEBI Regulation	Particulars
1	SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018	158(6)(b). Conversion price of debt, as part of a debt restructuring scheme shall be certified by two independent valuer. 163(3). Where the specified securities are issued on a preferential basis for consideration other than cash, the valuation of the assets in consideration for which the equity shares are issued shall be done by an independent valuer, which shall be submitted to the stock exchanges where the equity shares of the issuer are listed: Provided that if the stock exchange(s) is not satisfied with the appropriateness of the valuation, it may get the valuation done by any other valuer and for this purpose it may seek any information, as deemed necessary, from the issuer. 165. Where the shares of an issuer are not frequently traded, the price determined by the issuer shall take into account the valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies: Provided that the issuer shall submit a certificate stating that the issuer is in compliance of this regulation, obtained from an independent valuer to the stock exchange where the equity shares of the issuer are listed.
2	SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015	87C(1)(ii). An issuer whose security receipts are listed on a stock exchange shall ensure that the valuation is conducted by an independent valuer
3	SEBI (Appointment of Administrator and Procedure for refunding to the Investors) Regulations 2018	7(2)(b). the Administrator shall engage the services of a registered valuer to evaluate the properties of defaulter that are attached by the Recovery Officer and for submission of a certified valuation reporting accordance with the guidelines issued by the Board. 8(1). The Administrator shall undertake the process of sale of properties after conducting an independent valuation of such properties by a registered valuer.
4	SEBI (Real Estate Investment Trust) Regulations, 2014	21(4). A full valuation shall be conducted by the valuer atleast once in every financial year: Provided that such full valuation shall be conducted at the end of the financial year ending March 31st within three months from the end of such year. 21(5). A half yearly valuation of the REIT assets shall be conducted by the valuer for the half-year ending on September30 for incorporating any key changes in the previous six months and such half yearly valuation report shall be prepared within forty five days from the date of end of such half year.
5	SEBI (Infrastructure Investment Trusts) Regulations, 2014	21(4). A full valuation shall be conducted by the valuer not less than once in every financial year: Provided that such full valuation shall be conducted at the end of the financial year ending March 31st within two months from the date of end of such year 21(5). A half yearly valuation of the assets of the InvIT shall be conducted by the valuer for the half-year ending September 30th for a publicly offered InvIT for incorporating any key changes in the previous six months and such half yearly valuation report shall be prepared within one month from the date of end of such half year.
6	SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.	38G(1)(a). An issuer whose security receipts are listed on a recognized stock exchange shall ensure that the valuation is conducted by an independent valuer

Valuation Requirement under Insolvency & Bankruptcy Code 2016

S. No	Regulation	Particulars	Details
1	2(1)(m)	Definitions	'Registered Valuer' means a person registered as such in accordance with the Companies Act, 2013 (18 of 2013) and rules made thereunder.
2	27	Appointment of Registered Valuers	The IRP shall within seven days of his appointment, appoint two registered valuers to determine the liquidation value of the corporate debtor in accordance with Regulation 35