Valuation of Shares - A Primer

As share holding is the index of control, significant influence of another enterprise, valuing the shares at the time of purchase/sale becomes a very important task in the arrival of worth.

Purpose of valuation:

(i)          Purchase of a block of shares which may or may not give the holder thereof a controlling interest in the company.

(ii)        Purchase of shares by employees of the company where the retention of such shares is limited to the period of their employment.

(iii)   Formulation of schemes of amalgamation, absorption, etc.

(iv)   Acquisition of interest of dissenting shareholders under a scheme of reconstruction.

(v)    Compensating shareholders, on the acquisition of their shares, by the Government under a scheme of nationalization.

(vi)   Conversion of shares, say, preference into equity shares.

(vii) Advancing a loan on the security of shares.

(viii)   Resolving a deadlock in the management of a private limited company on the basis of the controlling block of shares given to either of the parties.

Methods:

There are a variety of methods used in shares valuation. 

They are

a.       Net Assets method – Intrinsic value method or Break-up value method

b.      Market yield method - Dividend yield method

c.       Fair value method.

Valuation of Equity Shares:

An equity share's intrinsic value is the price that is justified for a share when the primary factors of value are considered. It is the real worth of the share as distinguished from the current market price of it. It is a subjective value since the analyst must apply her/his own individual background and skills to determine it. It is calculated by carefully considering the following fundamental factors, which affect equity share values.

Valuation of Preference Shares:

The preference shares are generally cumulative preference shares and for the purpose of their valuation, the paid up value of the shares is considered to be the market value. In case dividends on such preference shares are outstanding, it will be added on the paid up value for determining the value of the preference shares.

In case of participating preference shares, the preference shareholders are entitled to the surplus (if any) at the time of liquidation of the firm. Therefore, after return of paid up preference and equity capital, the surplus will be divided between preference equity capitals in the ratio of their paid up capital and returned accordingly. Alternatively. if the company has surplus resources, at the time of liquidation, the total money available after returning dues of all parties excepting the shareholders will be divided in the ratio of paid up capitals and the respective amounts will be divided by the equivalent number of shares and value of preference and equity shares determined. 

FEMA: Procedure to be followed after Investment in India is made under the Automatic Route or with Government approval

A two-stage reporting procedure has to be followed :.

• On receipt of share application money :

Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details :

• Name and address of the foreign investor/s;  
• Date of receipt of funds and the Rupee equivalent;
• Name and address of the authorised dealer through whom the funds have been received;
• Details of the Government approval, if any; and
• KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

• Upon issue of shares to non-resident investors :

Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the following documents should be filed with the Regional Office concerned of the Reserve Bank of India. 

• Certificate from the Company Secretary of the company accepting   investment from persons resident outside India certifying that:
  

  The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
  The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route, namely-
  

a) Non-resident entity/ies - (other than individuals), to whom it has issued shares have existing joint venture or technology transfer or trade mark agreement in India in the same field and Conditions stipulated at Paragraph 4.2 of the Consolidated FDI policy Circular of Government of India have been complied with.

OR

Non-resident entity/ ies - (other than individuals), to whom it has issued shares do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.

Note – For the purpose of the 'same' field, 4 digit NIC 1987 code would be relevant.

b) The company is not an Industrial Undertaking manufacturing items reserved for small sector.

OR

The company is an Industrial Undertaking manufacturing items reserved for the small sector and the investment limit of 24 per cent of paid-up capital has been observed/ requisite approvals have been obtained.

c) Shares issued on rights basis to non-residents are in conformity with Regulation 6 of the RBI Notification No FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.

OR

Shares issued are bonus shares.

OR

Shares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by way of de-merger or otherwise of an Indian company, duly approved by a court in India.

OR

Shares are issued under ESOP and the conditions regarding this issue have been satisfied.

• Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated -------------------- 

• Certificate from Statutory Auditors/ SEBI registered Category - I Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.