Valuations of Financial Assets and Securities
Company Valuation procedure means determining the fair value of a financial asset. Business Valuation practitioners generally conduct valuations of business in the form of tangible assets, intangible assets, intellectual property, financial assets, interests, common & preferred stock, and other securities such as employee stock option plans (ESOPs), partnership interests, warrants, private debt instruments, and other derivative products. Business Valuation provides a business overview to assist clients with dispositions, mergers and acquisitions, restructuring, taxation planning & compliance, insolvency & bankruptcy, financial reporting, litigation, strategic growth planning, dispute resolution, etc. There are three classes of asset categories valuated by a registered valuer in India.
Main classes of Assets:
- Land and Building
- Plant and Machinery
- Securities or Financial Assets
Valuations of securities or Financial Assets
- Business Valuation of Assets recognizes the market equity value instruments, debt instruments, and derivatives issued by government agencies, financial institutions, and corporate organizations.
- It estimates and determines the appropriate interest rate or interest rates of the expected cash flows.
- It drives the Valuations of Securities market equity value including liquidity, demand, and supply of similar instruments, stock market rates of similar securities, etc.
Role of Registered Valuers Post Companies Act 2013, 2017 Rules
- Through the Companies Act 2013 under section 246, the startup valuation shall be done as per provisions of the Act and by a registered valuer having the required qualification and experience.
- Registered valuers provide a framework for the development and regulation of the profession of valuers and the manner of Business valuation, including valuation standards and a code of conduct for registered valuers.
- From 1st February 2019 onwards valuation under the Companies Act 2013 and the Insolvency and Bankruptcy Code, 2016 needs to be conducted by a Registered valuer registered with IBBI.
Key reasons for Company Valuation
There are several reasons and purposes for Business valuation, a few of which are mentioned below:
- Sale of Business as a going concern: When a business is sold, it is more complex compared to other Valuations of Assets classes. Company Valuation is required for negotiation while selling the business. The value at which the transaction is done is provided by the Registered valuer.
- Startup Valuation for Taxation Purposes: Business valuation of Assets is also required to be done to arrive at proper tax treatment. The Registered valuer needs to weigh the circumstances and resolve the disagreements between tax authorities and businesses in a way that it does turn out to be a legitimate purpose.
- Company Valuation for liquidation Purposes: Businesses are also valued for liquidation or winding up focusing to close down the business, realize all the assets and pay off all the creditors of the business. Registered valuer plays a very critical role to ensure that the creditors are getting their fair dues and there is the residue left for the owners as well.
- Business Valuation for Mergers/Acquisition and Restructuring: Businesses are evaluated from an accounting perspective. Restructuring through takeovers, mergers & acquisitions, and amalgamations result in combination of financial statements and other operations of two or more existing companies into a single business. Most of the company restructure their business with an objective to bring most favourable, profitable segment, and cost-effective deal in their favour.
How ASC helps?
- Advisory for raising the valuation of equity or debt financing, including determining the equity value to be issued to the new partners or shareholders of an entity, or the valuation of equity splits at formation.
- Evaluations of listed companies, unlisted companies, businesses, shareholdings, goodwill, know-how, brands, and other intangible assets
- Advisory for Joint Ventures / Associations on equity value splits at formation or exit in an independent role
- Support for litigation or arbitration, expert witness, and adjudication work in business valuation disputes
- Evaluation opinions for unquoted debt or equity value instruments and valuations for regulatory purposes e.g. Takeover Code, the Companies Act
- Investment decision analysis
- Maximizing tax benefits for individuals and businesses
FREQUENTLY ASKED QUESTIONS
Section 247 of the Companies Act, 2013 authorises the registered valuer to undertake valuations in respect of any property, shares, stocks, securities, debentures, goodwill or any other asset, net worth or liabilities of the company. The registered valuer can be appointed by the audit committee and in its absence, by the board of directors of the company.
Equity value is nothing but the value of the business that can be attributed to the equity shareholders of the company. Following is the formula to derive the equity value:
Equity Value = Market Capitalisation
- Add: Fair value of all the stock options (in the money and out of the money)
- Add: Value of convertible securities in excess of what it would be valued without the attribute of conversion
Following are the methods that can be adopted for the valuation of the business enterprise:
- Income Approach
- Cost Approach
- Market Approach
Following are the methods for business valuation of intangible assets:
- Cost approach – It considers the replacement cost of intangible asset
- Income approach – It considers the income generated by the intangible asset
- Cost savings from intangible assets
- Excess earnings method
- Comparable method
Valuation of the equity shares of a company is required either for income tax purposes, FEMA purposes or at the time of merger and acquisition. In such a case, either of the following methods can be adopted to value the equity shares of the company:
- Discounted cash flow method
- Net Asset Value (NAV) method
- PE ratio method
- Dividend yield or profit method
