This article is written by Saswata Tewari, from the University of Petroleum and Energy Studies, Dehradun. This article discusses the valuation of securities under the new regime, including preferential issues, takeover offers, delisting, and buyback of shares.

Introduction

Valuation is very important be it in any aspect of our lives. When we know how much something is worth, we are more likely to determine how often we will use the item or how we shall trade or sell it. However, in business, the proper valuation of the assets determines the company’s true value. The more valuable assets a business has, the more valuable the business becomes.

In India, the valuation of a business’s assets and capital is primarily governed by the provisions of the Companies Act, 2013. The 2013 Act established the concept of a “Registered Valuer” in a separate chapter designed to cover all types of valuation requirements. The concept of registered valuer is new to the Companies Act. The key goal of implementing this decision is to establish different valuation criteria and to control the practice, resulting in greater transparency and better governance during valuations.

The valuation made by a registered valuer only applies to the valuation of assets, liabilities, shares, etc, that is required under the Companies Act 2013. It does not apply to valuations required under other laws unless the other laws mandate valuation by a registered valuer, However, certain SEBI Regulations also mandate valuation by a registered valuer.

Registered Valuer

According to chapter XVII Section 247 of the Companies Act 2013, it is stated that a registered valuer must value any property, stocks, shares, debentures, securities, or goodwill, or any other assets or net worth of a company or its liabilities, that is required to be valued under the provisions of this Act. This chapter should be read in conjunction with Rule 17 of the Draft Rules, which outlines the registration requirements, the right of the valuer, the approach and methods that register valuers should use, and the contents of the Valuation Report.

Characteristics of a Registered Valuer

• According to the Companies Act, all valuations must be performed by a registered valuer, and the registered valuers for a company’s valuation needs must be appointed by the Audit Committee or, in its presence, by the Board of Directors.
• According to the Draft Rules, an individual who is to be qualified to function as a registered valuer must apply for registration as a valuer with the Central Government or an organization or agency notified by the Central Government.
• Draft Rules also state that the following individuals are eligible to apply to become registered valuers:

1. a full-time practising Chartered Accountant, Company Secretary, or Cost Accountant, or a retired member of the Indian Corporate Law Service, or any individual with an equivalent Indian or foreign qualification that the Ministry of Corporate Affairs can recognise by order.
2. a merchant banker who is registered with the Securities and Exchange Board of India.
3. a full-time practising engineer who is a member of the Institute of Engineers.
4. a full-time practising architect who is a member of the Institute of Architects.
5. an individual or entity with the requisite skills and qualifications, as determined by the Central Government from time to time.

Also, as per Section 247(2) of the Companies Act, 2013, it is required for the registered valuer to:

• Make an unbiased, accurate, and equitable assessment of any assets that need to be valued.
• When performing the duties of a valuer, exercise due diligence.
• Make the valuation by such rules as may be prescribed.
• He must not conduct the valuation of any assets in which he has a direct or indirect interest or becomes involved at any time during or after the valuation.

Valuation

Valuation transactions are not only governed by the Companies Act but are also mandated under various provisions of the SEBI and Income Tax Act, 1961. The following are some of the valuation transactions in the case of private, unlisted public companies, and listed companies:

Nature of transaction	Private Company	Unlisted Public Company	Listed Public Company
Preferential Issue	Yes, valuation can be done by a registered valuer.  (Sections 42 and 62 of Companies Act 2013)	Yes, valuation can be done by a registered valuer.  (Sections 42 and 62 of Companies Act 2013)	Valuation is not required if frequently traded shares. If shares are not traded frequently, then the issue price can be valued by MB or CA. (Regulation 76A of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009)
Buyback of shares	Valuation is not required but a valuation report can be obtained from a merchant banker, chartered accountant or a registered valuer for justifying the buyback price. (Rule 17 of Companies (Share Capital & Debentures) Rules, 2014, Section 69 of the Companies Act, 2013)	Valuation is not required but a valuation report can be obtained from a merchant banker, chartered accountant or a registered valuer for justifying the buyback price. (Rule 17 of Companies (Share Capital & Debentures) Rules, 2014, Section 69 of the Companies Act, 2013)	Valuation is not required but a valuation report can be obtained from a merchant banker, chartered accountant or a registered valuer for justifying the buyback price. (Rule 17 of Companies (Share Capital & Debentures) Rules, 2014, SEBI (Buy-Back of Securities) Regulations, 2018)
Purchase of Minority Shareholding	Shares of Minority shareholding can be acquired at a price calculated by a registered valuer. (Sec 236 of the Companies Act, 2013)	Shares of Minority shareholding can be acquired at a price calculated by a registered valuer. (Sec 236 of the Companies Act, 2013)	Valuation can be done by a merchant banker as per SEBI Circulars.
Mergers & Amalgamations	Yes, valuation can be performed by a registered valuer. (Section 230 of the Companies Act 2013, Rule 6(3) of Merger Rules)	Yes, valuation can be performed by a registered valuer. (Section 230 of the Companies Act 2013, Rule 6(3) of Merger Rules)	Yes, valuation can be performed by a chartered accountant. (SEBI Circulars)
Delisting regulations	Not Applicable	Not Applicable	Valuation can be performed by a registered valuer or a chartered accountant or a merchant banker. (Section 247 of the Companies Act 2013, Regulation 23 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011)

Valuation of preferential issues

The issue of preferential shares is ruled by the Section 62(1)(c) of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital and Debenture) Rules 2014. It states that a company with a share capital may propose to increase its subscribed capital by issuing additional shares to any individuals at any time, if it is approved by a special resolution, either in exchange of cash or some other consideration, and if the price of such shares is determined by a registered valuer’s valuation report. However, it is subject to the provisions of Chapter III and any other conditions as may be prescribed.

It’s important to remember that the price at which preferential shares are issued must be calculated by a valuation report from a registered valuer with the Insolvency and Bankruptcy Board of India. If the problem is made for a consideration other than cash, the registered valuer must also assess the worth of that consideration.

Valuation of buy back

Buyback is the mechanism by which a company repurchases its stock and other designated securities from its current shareholders at a price greater than the market price. It’s a way for the company to repay its investors. A company’s buyback of its shares is nothing more than a reduction in share capital. In general, a buyback is required when management believes that the shares are undervalued or if the number of outstanding shares is decreasing.

The buyback of securities by an unlisted company is governed by Section 68, Section 69  and Section 70 of the Companies Act, 2013, as well as Rule 17 of the Companies (Share Capital & Debentures) Rules, 2014. However, in addition to the Companies Act, 2013, the buyback of a listed company must follow the SEBI (Buy-Back of Securities) Regulations, 2018 released by the Security Exchange Board of India (SEBI) in accordance with Sec 68(2)(f) of the Companies Act, 2013.

In the case of a private company and unlisted public company, valuation of shares is not required but a valuation report can be obtained from either a merchant banker or a chartered accountant or a registered valuer for justifying the buyback price of the shares whereas in the case of buyback of a listed company.

Valuation of takeovers

According to Section 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, a member of the company shall make an application for arrangement, for takeover offer in terms of sub-section(11) of Section 230 of the Companies Act 2013, when such member of the company, together with any other member, owns not less than three-fourths of the company’s shares and such application has been filed for acquiring any portion of the remaining shares of the company.

Now the application that is to be filed by the member shall contain the following things:

• A value report prepared by a registered valuer discloses the specifics of the valuation of the shares proposed to be purchased by the member after taking into account the two factors mentioned below:

1. the highest price paid for acquisition of shares by any individual or group of individuals in the previous twelve months;
2. the fair price of the company’s shares, as calculated by the registered valuer after considering valuation criteria such as return on net worth, the book value of shares, earnings per share, price earning multiple relative to the industry average, and other parameters customary for evaluation of such companies’ shares.

The application also requires the details of a bank account that the member will open separately and deposit an amount of not less than one-half of the total consideration of the takeover offer.

Valuation of delisting

Delisting is just the opposite process of the initial public offering. When a company goes public, its shares are listed on stock exchanges and can be exchanged regularly (bought and sold). In comparison, if a public company decides to go private, it would delist from the stock exchanges, which ensures that the company’s shares will no longer be eligible for trading on the stock exchange’s website.

Now there are two types of delisting – 

• Voluntary delisting 

Voluntary delisting is a strategic step in which a promoter of a listed company and the listed company decide to delist the shares from the stock exchanges in India. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 regulate voluntary delisting.

• Involuntary delisting

Involuntary delisting, also known as forced delisting, occurs when companies don’t particularly want to leave the markets. It is, in effect, a sanction imposed by the regulatory authorities like the SEBI, or the Stock Exchange that prevents the business from accessing the capital markets and all that entails. This is mostly due to the company’s failure to follow the rules and regulations set out in the ‘Listing Agreement’ when it first went public. Involuntary delisting occurs on any of the grounds prescribed in the rules made under Section 21A of the Securities Contract (Regulation) Act, 1956.

In the case of voluntary delisting, a merchant banker is appointed under Regulation 8(1A) of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009  who has to perform the reverse book building process to announce the final price of the shares which is to be accepted by the promoter of the company. The process of reverse book building is to efficiently discover the right price of the shares of the shareholders to be bought back by the promoter of the company.

In the event of involuntary delisting, the stock exchange now appoints an independent valuer, who is responsible for determining the fair value of the delisted shares.

Conclusion

Valuation of the company is just as critical as deciding on a suitable approach for a professional valuation. If any portion of the company is not properly valued, it may cause uncertainty and instability in the future, potentially leading to legal action against the group performing the valuation. The provision for the new valuation regime was made at a time when stressed companies valued thousands of crores were being sold under the Insolvency and Bankruptcy Code, and there was no uniform procedure for properly valuing company assets or a regulatory structure regulating the valuation profession.

This article just goes into a few of the valuation transactions. The new regime clarified how value is calculated for all forms of valuation transactions that may occur in a company.

References

• http://gtw3.grantthornton.in/assets/CompaniesAct_RegisteredValuer.pdf
• https://taxguru.in/company-law/preferential-issue-shares-companies-act-2013.html
• https://taxguru.in/company-law/provisions-related-to-private-placement-under-companies-act-2013.html
• https://blog.smallcase.com/public-to-private-delisting-101/
• https://www.mondaq.com/india/shareholders/961082/voluntary-delisting 
• http://vinodkothari.com/wp-content/uploads/2020/04/Note-on-Delisting-of-equity-shares-1.pdf
• https://taxguru.in/company-law/valuation-regime-companies-act-2013.html
• https://www.jkgupta.com/buyback-of-shares-and-securities/
• https://taxguru.in/company-law/takeover-rules-unlisted-company-companies-act-2013.html

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