VALUATION FOR TRANSFER OF SHARES FROM RESIDENT TO NON-RESIDENT

Valuation refers to the process of determining the present value of the asset being valued. The need for valuation of shares arises while performing certain transactions such as issue of further shares in the form of Right shares, merger and acquisitions, transfer of undertaking, etc.

Valuation is usually performed by Chartered Accountant, Cost Accountant, SEBI registered Merchant Banker, Registered Valuer or any other person as may be authorized by various laws. To derive the price of shares, various methodologies are used taking into consideration, the size of the Company and purpose of the valuation. For publicly traded shares of listed Companies, the company valuation is typically referred to as the market capitalization whereby, the value of the Company equals the total number of outstanding shares multiplied by the price of the shares.

Generally, various laws demand different valuation methods and the person who is authorized to perform the valuation. For a transaction with respect to transfer of unquoted equity shares from Indian resident to non-resident or Corporate, following laws shall be complied in terms of valuation:

1.       Section 247 of Companies Act, 2013.

Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, such valuation shall be performed by a registered valuer who is qualified and experienced member of registered valuers’ organization. Such registered valuer shall make an impartial, true and fair valuation in accordance with internationally accepted valuation standards.

2.       Section 50CA, Section 56(2)(x) and Rule 11UA(1)(c)(b) of the Income-tax Rules, 1962.

Section 50 CA:

The consideration received by the transferor as part of the proposed transaction by the company shall not be less than the fair market value (FMV) as prescribed under rule 11UAA of the Income Tax Rules, 1962, which makes reference to methodology as stated in Rule 11UA (1)(c) as on the date of transfer.

Section 56(2)(x):

The consideration paid by transferee shall not be less than the FMV. If such consideration paid by transferee is less than the FMV then the difference shall be chargeable as other income to the extent of difference between the FMV and Consideration.

Rule 11UA(1)(c)(b):

Any transfer of unquoted (unlisted) shares shall be subject to determination of Fair market value calculated in accordance with the method (formula) as prescribed in the above-mentioned rule which shall not be less than book value of shares which has to be certified by a Category-I Merchant banker or Chartered Accountant and if the Valuation is done by DCF method it is compulsorily to be done by Category – I Merchant Banker.

3.       Pricing guidelines on valuation of capital instruments by Reserve Bank of India under FEMA Regulations.

When shares of an unlisted Company are transferred from a resident to non-resident, price shall not be less than the fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.

In order to make valuation of shares in line with global business valuation practices, Reserve Bank of India (RBI) has introduced revised valuation guidelines for FDI allowing use of any internationally accepted pricing methodology which until few years back was based on Discounted Cash Flow (DCF) method only.  The Discounted Cash Flow (DCF) method is a prominent method based on the Income Approach of valuation, which is entirely based on the ‘future cash earning capacity’ of any business and thus, often leads to an optimum value scenario. While performing valuation on Discounted Cash Flow (DCF) method, the fair value is obtained while considering appropriate future growth potential and cash earning capacity. 

These guidelines emphasize on applying the revised pricing guidelines on an arm’s length basis, which helps Indian companies to comply with not only the RBI but also with transfer pricing regulations.