Valuation under the Companies Act, 2013

In the corporate world, valuation plays a crucial role in determining the fair worth of a company's assets, securities, or business. It ensures transparency, protects stakeholders, and helps businesses make informed financial decisions. Recognizing its importance, the Companies Act, 2013, has introduced specific provisions governing valuation in India.

What is Valuation?

Valuation is the process of determining the fair value of an asset, security, liability, or a business entity. It is essential for corporate transactions like mergers, acquisitions, share issuances, and buybacks. A fair valuation ensures that transactions are conducted at arm’s length, avoiding financial misstatements and fraud.

Key Provision: Section 247 – Valuation by Registered Valuers

Under Section 247 of the Companies Act, 2013, the following regulations apply to valuation:

• Valuation must be conducted by a Registered Valuer recognized by the Insolvency and Bankruptcy Board of India (IBBI).
• The valuer must comply with the prescribed valuation standards and methods.
• The valuation report must be transparent, unbiased, and well-documented.
• Registered valuers must maintain high professional integrity and follow ethical practices.

When is Valuation Required?

Valuation is required in several corporate transactions under the Companies Act, 2013. Some key scenarios include:

1. Issue of Shares (Section 62 & 54)

• When companies issue shares at a premium or discount.
• When issuing sweat equity shares (shares allotted to employees/directors for their contributions).

2. Mergers, Acquisitions & Corporate Restructuring (Sections 230-232)

• During mergers, demergers, and acquisitions, valuation determines the fair share exchange ratio.
• It ensures that no party is at a disadvantage during corporate restructuring.

3. Transfer or Sale of Shares (Section 56 & 192)

• When shares are transferred at a price different from market value.
• If a company buys/sells assets from its directors or related parties, valuation prevents unfair transactions.

4. Buyback of Shares (Section 68)

• Companies buying back their own shares need valuation to determine the buyback price fairly.

5. Insolvency & Liquidation (IBC, 2016)

• During insolvency resolution proceedings, assets must be valued to determine their fair market worth.
• Two independent valuers are appointed for companies with assets exceeding a prescribed limit.

6. Other Instances

• Valuation of goodwill, intangible assets, stock options, and investments.
• Valuation in case of slump sales or business transfers.

Who Can Be a Registered Valuer?

To ensure that valuations are conducted professionally, the Companies (Registered Valuers and Valuation) Rules, 2017 lay down the eligibility criteria for becoming a Registered Valuer.

A Registered Valuer must:

1. Be a member of a Registered Valuer Organization (RVO). 2.Be registered with IBBI.

3.Have the necessary educational qualifications and experience.

4. Follow the prescribed valuation standards and guidelines.

Conclusion

Valuation under the Companies Act, 2013 is a vital process ensuring transparency, fairness, and compliance in business transactions. By mandating valuation by Registered Valuers, the Act aims to prevent manipulation and protect stakeholders’ interests. Whether for issuing shares, mergers, buybacks, or insolvency proceedings, proper valuation plays a crucial role in maintaining corporate integrity.

Understanding these valuation requirements is essential for businesses, investors, and professionals dealing with corporate finance. Staying compliant with valuation laws ensures smooth financial operations and regulatory adherence.