Dilemma – Who will do - Valuation of Securities (Company Law Or Income Tax) - Series 431

Dilemma –
Who will do - Valuation of Securities
(Company Law Or Income Tax)

Short Summary:

We have received queries / questions many persons Like: Professionals / corporate on subject “Who is eligible to do valuation of Securities under Companies Act or Income Tax Act ?

There is difference in views of professionals, business entities even authorities on above mentioned question. In below mentioned editorial author will discuss provision of Valuation in concerned to above question.

Background:
To find out solution of above mentioned discussion, we have to go through following checks:

Check I:  Mode of Allotment.
Check II: Whether Valuation required as per Company Law or Income Tax Act or Both.
Check III: If Valuation required, then who will do valuation as per Companies Act or Income Tax Act.


In this editorial author shall start discussion from CHECK III i.e. who can do the valuation of Securities as per Companies Act or Income Tax Act.

CHECK III:

Legal Provisions:

Companies Act, 2013:

Registered Valuer rules and section notified w.e.f. 18th October, 2017 (Section 247).

Registered Valuer Rules:                                                        Transitional Arrangement (Rule 11)

Any person, who may be rendering valuation services under the Act, on the date of commencement of these rules, may continue to render valuation services without a certificate of registration under these rules upto 31st January, 2019:

Note: Till 31st January, 2019 which peoples are allowed to render valuation services under Companies Act, 2013?

Nowhere under Companies act has this questioned answered. Except “Rule 13 Issues of Shares on Preferential Basis”.

As per rule 13, Explanation:-

“For the purposes of these rules, it is hereby clarified that, till a registered valuer is appointed in accordance with the provisions of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent Chartered Accountant in practice having a minimum  experience of ten years.”

NOTE: One can opine that after 31st January, 2019 only a person registered as Registered Valuer as per Section 247 read with relevant rules are eligible to do valuation of Securities. Except Registered valuer no other persons like (Merchant Banker or Chartered Accountant) can do the valuation of Securities.

Legal Provisions:

Income Act, 2013:

The valuation rules are specified under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions under the Income-tax Act, 1961 (‘the Act’) which cover valuation options in case of various assets including equity shares and other securities.

There are two options for valuation

a)      Fair Market Value: Under this Method as per Rule 11U, there is no specific requirement that which person will do the valuation. Therefore, one can opine that any person can do the valuation for issue of shares on fair Market Value.

b)     Discounted Free Cash Flow Method: Under this method only Merchant Banker can do the Valuation of Securities. Earlier, a Chartered Accountant was also permitted to determine the FMV of such equity shares. However, with effect from 24th May 2018, this right of Chartered Accountant is taken away and therefore only Merchant Banker is authorised to determine the FMV of such equity shares.



NOTE: One can opine that under Income Tax Act :
·        If Shares are issued on Face Value no need to obtain of Valuation Report. Valuation report is required to obtain only in case of issue of shares on Premium.
If Shares are issue of “Fair Market Value” in such case Valuation report can be obtain from any person. (Its not mandatory that person should be CS, CA or Merchant Banker)
§  In case of Valuation of Shares on “DCF” method then only Merchant banker can do the Valuation.
    
   Quick Bites:

I.   If Valuation report taken from Registered Valuer as per Companies Act. Whether such Report shall be considered valid under Income Tax Act?

As per above mentioned provisions of Companies Act and Income Tax Ac if,

Valuation report is based on method other than DCF , then

§  Anyone can do valuation as per Income Tax Act and
§  Registered Valuer can do Valuation as per Company Law.

Therefore, one can opine that if Valuation report taken from Registered Valuer under Companies Act such report shall be valid under Income Tax Act.


CHECK I & II:

First we should be very clear that Allotment of securities can be done in following ways:-

      1.       Right Issue of Shares [Section 62(1)]
      2.      Preferential allotment of Share [Section 62(1)(c)]
      3.       Private Placement of Shares [Section 42)

A.                     Sections 62: Right Issue of Shares

As per Section 62(1), A Company can issue and allot shares on Face Value irrespective of Net worth of Company. However, under Section 62 there is no requirement of Valuation of Shares. Therefore, one can opine that in case of right issue there is no need of Valuation Report.
   
    Quick Bites:
II.            In case of issue of shares on Premium under Right Issue of Shares, Whether Valuation report required?
·         As per Companies Act
·         As per Income Tax Act

Companies Act: There is no requirement of valuation report for right issue of shares under Companies Act, Irrespective of fact whether shares issue on Face Value or Premium.

Income Tax Act: As per Income Tax Act in case of right issue of shares, shares are issued to existing shareholders only in proportion to their shareholding. Therefore, no need of Valuation of Shares.
Therefore, one can opine that in case of right issue of shares whether on face value/ premium no need of Valuation Report as per Both Acts.


B.                     Preferential Allotment of Shares:

As per Section 62(1)(c), for preferential allotment shares company have to follow rule 13 also. As per rule 13, “(g) the price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered value”

Therefore, one can opine that it is mandatory for preferential allotment of shares to obtain Report of Registered Valuer, irrespective of fact whether allotment made on Face Value/ Premium.

III.   In case of issue of shares on Face Value/ Premium under Preferential Allotment Shares, Whether Valuation report required?
·         As per Companies Act
·         As per Income Tax Act

Companies Act: Irrespective of Fact shares allotted on Face Value or Premium. It is mandatory to obtain report of Registered Valuer for allotment of shares as preferential allotment.

Income Tax Act: As per Income Tax Act until unless shares are issued on premium there is no need of valuation certificate. However, if shares issued on premium then valuation report issued by registered Valuer shall be accepted here.
Therefore, one can opine that Valuation is mandatory for allotment of shares on preferential basis and report taken from registered valuer shall fulfill the purpose of both acts.


C.                     Private Placement of Shares:

As per Section 42, for preferential allotment Shares Company have to follow rule 14 also. As per section 42 price of security shall be determined by the report of Registered Valuer.

Therefore, one can opine that it is mandatory for Private Placement of shares to obtain Report of Registered Valuer, irrespective of fact whether allotment made on Face Value/ Premium.

IV.  In case of issue of shares on Face Value/ Premium under Private Placement of Shares, Whether Valuation report required?
·         As per Companies Act
·         As per Income Tax Act

Companies Act: Irrespective of Fact shares allotted on Face Value or Premium. It is mandatory to obtain report of Registered Valuer for allotment of shares as Private Placement.

Income Tax Act: As per Income Tax Act until unless shares are issued on premium there is no need of valuation certificate. However, if shares issued on premium then valuation report issued by registered Valuer shall be accepted here.
Therefore, one can opine that Valuation is mandatory for allotment of shares on Private Placement and report taken from registered valuer shall fulfill the purpose of both acts.


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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

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