Get a Valuation Certificate for estimating your company's worth and to attract funding. We are registered valuers recognized under Companies Act.
What is Startup Valuation?
In simple terms, startup valuation is the process of quantifying the worth of a company, aka its valuation. During the seed funding round, an investor pours in funds in a startup in exchange for a part of the equity in the company. This is why valuation is important for entrepreneurs as it helps in determining the equity which they have to give to a seed investor in exchange of funds. It is also of great importance for an investor as they need to know how much company’s share they will receive in lieu of the funds invested during the seed stage. So, fundamentally, startup valuation can prove to be a real deal maker or breaker, which is why valuation does not involve any guesswork on the basis of valuation of other similar startups.
In addition, before proceeding with calculating the actual value of a company, founders need to have proper knowledge about how the entire process of startup valuation works. Quote an absurdly high figure to seed investors, even when there is no revenue generation, and the expectations will be quite high, and if a startup is unable to meet the high targets, it might have to raise funds at a lower valuation in the next round.
This may prove negative in the long run, and the startup or founder might have a tough time convincing other seed investors or companies for seed funding. Conversely, quote too low and the startup may end up giving a larger chunk of equity to investors, which will again prove negative
Why do we require Valuation?
Under the provisions of the Companies Act, a Registered Valuer’s report on valuation of equity shares is mandatory in the following situations:
- Issue of new shares to shareholders under Section 62 except in case of a rights issue
- Merger, amalgamation or restructuring under Section 230-232, requiring a valuation of assets or shares, or requiring a swap ratio to be calculated for a share swap on merger of two companies
- Acquisition of minority shareholding under Section 236 by existing shareholders who hold over 90% of the company’s shares
- Allotment of shares for consideration other than cash and issue of sweat equity
- Buyback of shares from some or all shareholders under Section 68
- Liquidation of a company under the Insolvency and Bankruptcy Code, 2016
A Registered Valuer’s report on valuation of equity shares is also recommended or considered “good to have” in the following situations:
- Rights issue to existing shareholders under Section 62
- Capital reduction of a company under Section 66
- Any other corporate actions that involve a value being assigned to equity shares or securities
It means that any companies raising funds by issue if equity share or compulsory convertible preference share need to get valuation report from a registered valuer.
Who is a Registered Valuer?
A Registered Valuer is a valuation professional who can value shares, securities, intangible assets or tangible assets. Registered Valuers may be Chartered Accountants (e.g. in the case of equity valuations), engineers and surveyors (in the case of property or tangible assets) or specialised valuation professionals. Becoming a Registered Valuer involves a certain amount of training, more than 3 or 5 years’ valuation experience and having a valid, ongoing certificate of practice (COP) to practise as a RV.
The RV qualification is granted and monitored by the Insolvency and Bankruptcy Board of India (IBBI) in coordination with Registered Valuer Organisations, so a Registered Valuer must be able to provide a valid COP and registration number.
Now many start-ups would be wondering would my CA not do my startup valuation, the answer is NO. CA cannot issue valuation certificate for start-up valuation any more. Business valuation needs to be by a registered valuer
What are the common overlaps of valuation requirements under various statutes?
We see an overlap of valuation requirements from multiple statutes in most cases now, often unnoticed by clients who may only be aware of one or two.
This is because, for many companies, the transactions listed above are covered not just by the Companies Act but also by FEMA (Foreign Exchange Management Act, 1999), Income Tax Act 1961, SEBI guidelines and/or international tax requirements. Multiple factors determine the applicability of these statutes, including nature of company, type of buyer and seller, resident status of buyer/seller, and type of transaction.
For example, a fresh issue of shares by a private limited company to an overseas shareholder triggers valuation requirements under Companies Act, FEMA and Income Tax. A fresh issue to a domestic shareholder triggers valuation requirements under Companies Act and Income Tax, and also creates additional requirements for the shareholder under Income Tax.
FEMA laws disallow purchase/sale/issue of shares to/from a non-resident entity if the transaction takes place above/below a certain price, determined by a valuer. Income tax laws also have provisions that tax a buyer or seller of shares for paying too low/too high a price. Further, while most laws allow 'fair value' as a basis of valuation (which usually means an income or market approach based valuation), specific Income Tax provisions require a net-worth based valuation, resulting in much lower values and greater possibility of the buyer/seller being taxed.
FEMA laws require a Chartered Accountant or a CA firm to carry out valuations. Income Tax laws require CAs or merchant bankers (depending on the clause), as would SEBI guidelines. International tax requirements would usually be satisfied with a CA report. While it is expected that in future, all of these will be expanded to allow Registered Valuers, that change has not taken place yet.
How do we deal with overlaps in valuation requirements?
Considering the valuation requirements triggered by various laws, it is important to:
- Create a single set of management forecasts that can be used for all valuation requirements to ensure consistency.
- Have fair values within a close range for the respective purposes as at a certain date. Some of these reports may become part of public records and it would definitely trigger tax assessments or FEMA action if there are two reports for the same valuation date, with very divergent values.
- Ensure that a report prepared for tax purposes is not submitted anywhere else, and so on. This is because there are often statute-specific approaches or parameters which are included in reports, making them inappropriate for other purposes.
Why to get valuation from us?
For most companies, the ideal solution is to appoint a Registered Valuer who is also a CA with sufficient experience in covering all types of valuation, who would therefore be able to cover multiple requirements in a consistent manner with no danger of diverging values being presented.
We have team of Registered Valuer who are chartered accountants and accordingly a single valuation report from us can work under multiple statute.
Is Merchant Banker Valuation Report required?
Well the DIPP as made amendments to startup India policy relaxing the requirement of Merchant Banker certification, now the only prescribed persons to get a business valuation of shares of a start-up is by a Registered Valuer. So we can help you with your valuation.
For unlisted companies under Income Tax Act, Merchant Bankers valuation reports are required to arrive at “Fair Market Value” under the discounted cash flow method (DCF Method). We have a Merchant Banker associated with us and such needs can also be taken care of.
What are the cases Conditions when Valuation certificate by Registered Valuer is compulsory
|Valuation report for Further Issue of Shares
|When a company having share capital proposes to increase its subscribed share capital by a fresh issue of shares, such shares shall be offered to: Existing shareholders i.e. Rights Issue, Employees under a scheme of Employees’ Stock Option. Any other persons except those mentioned above, if authorised by a special resolution: Issue of shares on a Preferential Basis In all of the above cases, the price of the shares issued must be determined by the valuation report of a registered valuer subject to prescribed conditions.
|Valuation of Assets Involved in Arrangement of Non cash transactions involving Directors
|In case of sale or purchase of any asset involving a company and the directors of the company (or its holding, subsidiary or associate company) or a person connected with the Director for consideration other than cash, the value of the assets has to be calculated by a Registered Valuer
|Valuation of shares, property and assets of the Company under a scheme of Corporate Debt Restructuring
|In case of a compromise or arrangement between members (such as in mergers or amalgamations) or with creditors (such as in corporate debt restructuring), a valuation report in respect of shares, property or assets, tangible and intangible, movable and immovable of the company, or a swap ratio report by a Registered Valuer is required. In case of mergers, the directors are also required to circulate a report to members specifying, inter alia, any
|Valuation report along with Notice of creditors/shareholders meeting –Under scheme of compromise/Arrangement
|In case of a compromise or arrangement between members (such as in mergers or amalgamations) or with creditors, a valuation report in respect of shares, property or assets, tangible and intangible, movable and immovable of the company, or a swap ratio report by a Registered Valuer is required.
|The report of the expert with regard to valuation, if any, would be circulated for meeting of creditors/Members
|Same as above
|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
|Same as above
|Valuation of equity shares held by the Minority Share Holders
|In case an acquirer or person acting in concert with the acquirer acquire 90% or more of the equity capital in a company, they can offer to the minority shareholder (or the minority shareholder can offer to the acquirer) to acquire the minority shareholding at a valuation determined by the Registered Valuer.
|Powers and duties of Company Administrator
|A company administrator appointed by the Tribunal under section 258 of the Act to prepare a scheme of revival and rehabilitation of a sick company, shall perform such functions as may be directed by the Tribunal u/s 260. He/she may also cause to be prepared, inter alia, a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of any industrial undertaking of the company or for the fixation of the lease rent or share exchange ratio.
|Valuing assets for submission of report by liquidator
|A valuation of assets of the company prepared by the Registered Valuer is required in case of winding up, voluntarily or otherwise.
|Declaration of insolvency in case of proposal to wind up voluntarily
|Where a proposal for voluntary winding up has been made by a company, a declaration must be made by the board of directors that the Company has no debt or whether it will be able to pay its debt in full from the proceeds of assets sold in voluntary winding up. The declaration made must be accompanied by, among other things, a valuation report prepared by registered valuer of the assets of the company.
|Power of Company Liquidator to accept shares etc, as consideration for sale of property of the Company
|Any member of the transferor company who did not vote in favour of the special resolution and expresses his dissent therefrom in writing addressed to the Company Liquidator, and left at the registered office of the company within seven days after the passing of the resolution, may require the liquidator to purchase his interest at a price to be determined by agreement or the registered valuer.
|Rule 2 of Companies (Acceptance of deposit) Rules, 2014
|Exclusions from Deposits
|As per the rule, deposit includes any receipt by way of deposit or loan or in any other form by a company but does not include, among other things, money raised by issue of debentures secured by a charge on company’s assets. The amount of such debentures shall not exceed the market value of the assets as determined by a registered valuer.
|Rule 8 of Companies (Share capital and Debentures) Rules, 2014
|Issue of Sweat Equity Shares
|This rule applies to all companies except listed companies issuing sweat equity shares to its directors or employees. The rule prescribes that the sweat equity shares shall be issued at a price determined by a registered valuer as the fair price giving justification for such valuation. Also, the value of the intellectual property or know-how or any other value additions, for which the sweat equity shares have been issued to its directors or employees shall be determined by a valuation report of a registered valuer.If the sweat equity shares are issued for a non-cash consideration, the value of such non-cash consideration shall be based on a valuation report by a registered valuer. Additionally, if the sweat equity shares are issued pursuant to acquisition of an asset, the value of such asset shall also be determined based on a valuation report by a registered valuer.
To simplify above legal maxims and for better understanding, Valuation certificate from a Registered Valuer is mandatory when there is
- A fresh issue of share u/s Section 62(1)(c) ( Typically when Funds are raised by a startup up a seed fund state or venture state when fresh share are allotted to new shareholders)
- When sweat equity shares are issued to directors or key employees then a valuation certificate shall be done by a Registered Valuer.
- Valuation required under Insolvency and Bankruptcy Code.
Valuation Advisory provided in the following areas
- Valuation of Business / Firm
- Valuation of Intangibles such patents, copyrights, technical knowhow, franchise agreements, etc.
- Valuation of Shares under Companies Act, Foreign Direct Investments, etc.
- Valuation of Goodwill
- Valuation for Swap Shares in case of Amalgamation
- Valuation for Startups
- Valuation for Brands
- Valuation of Intellectual Property
- Valuation of Software
- Valuation of Debentures
- 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
- Valuation of Venture Capital
- Valuation Of Mergers and Demerger
- Valuation of Insolvency and bankruptcy (ABC)
- Valuation of Preference Shares