Share valuation

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Sanket

Sanket (Querist)
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11 July 2012 Hello,
Can anybody let me know the method of valuation of shares with formula

Ajay Mishra

Ajay Mishra (Expert)
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12 July 2012 Hi

Guidelines on Share Valuation
In India, the Capital Issues (Control) Act, 1947, and
the Capital Issues (Exemption) Order, 1969, define the terms and conditions for issuance of securities by the corporate sector. Under these, while certain
security issues arc exempt from prior governmental authorization, no issues can be made without such approval if they arc priced higher or lower than the face (par) value. Thus, for every share issue which is proposed to be made at a premium, companies have to seek the approval of the Controller of Capital Issues (CCI), the governmental agency responsible for administering the securities regulation in the country. One of the major functions of the CCI is to
determine the price at which a share issue is to made. The office of the CCI has prepared for this purpose detailed guidelines for valuation of shares. The share valuation process proposed by the CCI
guidelines can be summarized as follows:
• The "Fair Value (FV)" of a company's shares is to be com putcd by averaging the values obtained by the "Net Asset Value (NAV)" method and the "Profit Earning Capacity Value (PECV)" method. These computations are to be largely based on audited accounts of the recent past.
• The market price of the company's share based on the previous three years' high-low would only be kept "in the background" and is to be largely used for fine-tuning the FV,
• The NAV is nothing but the traditional book value per share computed on the basisof the latest published annual accounts.
• The PECV is to be calculated in the normal course by capitalizing the average of the after tax profits for the preceding three years at specified capitalization ratesand dividing the resultant fig
ure by the number of equity shares.
• The capitalization rates arc different for trading, manufacturing and "intermediate" companies. The PECV is to be recomputed by using lower capitalization rates in the case of shares which arc highly regarded by the market. Similarly, there arc specific suggestions for computing the average in cases of high variability of profits.
• There arc also definitions specifying in detail the various inclusions and exclusions in computing NAV, PECV and average market price.

Regards

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