Valuation Of Companies under companies act and FEMA
valuation under the Companies Act
Section 247(2) provides for how the valuation is to be performed under the Companies Act. It states that a registered valuer needs to make a fair, impartial, and true valuation of assets of a company that is required to be valued.
It also provides for due diligence to be performed by the valuer during the valuation. Furthermore, it states that the valuer has to perform the valuation according to the rules as may be prescribed by the Ministry of Corporate Affairs.
Apart from the above-mentioned duties, there are restrictions imposed upon a registered valuer under Section 247(2).
A registered valuer is prohibited from undertaking the valuation of any asset in which he has any direct or indirect interest, or becomes so interested at any time during or after the valuation.
Rule 16 of the Companies (Registered Valuers and Valuation) Rules, 2017 also sets out valuation standards to be undertaken by a registered valuer.
This Rule states that valuations shall be performed as per the valuation standards notified from time to time by the central government, thus giving powers to the central government to notify methods to be adopted for valuation.
Furthermore, it provides that, until there is any prescribed notification from the central government the registered valuer shall perform the valuation according to:
An internationally accepted valuation methodology;
Valuation standards adopted by any valuation professional organization, or Valuation standards are specified by the Reserve Bank of India, Securities, and Exchange Board of India, or any other regulatory body.
It also provides for due diligence to be performed by the valuer during the valuation. Furthermore, it states that the valuer has to perform the valuation according to the rules as may be prescribed by the Ministry of Corporate Affairs.
Apart from the above-mentioned duties, there are restrictions imposed upon a registered valuer under Section 247(2).
A registered valuer is prohibited from undertaking the valuation of any asset in which he has any direct or indirect interest, or becomes so interested at any time during or after the valuation.
Rule 16 of the Companies (Registered Valuers and Valuation) Rules, 2017 also sets out valuation standards to be undertaken by a registered valuer.
This Rule states that valuations shall be performed as per the valuation standards notified from time to time by the central government, thus giving powers to the central government to notify methods to be adopted for valuation.
Furthermore, it provides that, until there is any prescribed notification from the central government the registered valuer shall perform the valuation according to:
An internationally accepted valuation methodology;
Valuation standards adopted by any valuation professional organization, or Valuation standards are specified by the Reserve Bank of India, Securities, and Exchange Board of India, or any other regulatory body.
Valuations under the FEMA Act
FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 is the Act that regulates the transfer of capital instruments.
This Act allows a person residing outside India to transfer his capital assets in an Indian company to a resident Indian by way of sale and vice-versa.
The whole transfer is governed according to the regulations of this Act. This sale is basically done at the value prescribed by the transfer guidelines under FEMA.
As per these guidelines, the transfer should be done at arm’s length price according to any internationally accepted methodology.
In practice, the expression “internationally accepted pricing methodology” primarily turns to the use of the Discounted Cash Flow method (DCF).
In many cases, if there is a need to apply any other internationally accepted pricing methodology other than Discounted Cash Flow Method (DCF) then the background needs to be documented.
This Act allows a person residing outside India to transfer his capital assets in an Indian company to a resident Indian by way of sale and vice-versa.
The whole transfer is governed according to the regulations of this Act. This sale is basically done at the value prescribed by the transfer guidelines under FEMA.
As per these guidelines, the transfer should be done at arm’s length price according to any internationally accepted methodology.
In practice, the expression “internationally accepted pricing methodology” primarily turns to the use of the Discounted Cash Flow method (DCF).
In many cases, if there is a need to apply any other internationally accepted pricing methodology other than Discounted Cash Flow Method (DCF) then the background needs to be documented.
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