Valuation of Shares in India: Understanding Regulatory Overlaps under Companies Act, FEMA, Income Tax, and IBC

Valuation is a fundamental concept in business and finance, especially when it comes to corporate transactions such as mergers, acquisitions, fundraising, and restructuring. In India, the valuation of shares and companies is governed by multiple laws including the Companies Act, 2013, Foreign Exchange Management Act, 1999 (FEMA), Income Tax Act, 1961, and the Insolvency and Bankruptcy Code, 2016 (IBC). With each statute prescribing its own methodology and compliance framework, professionals and businesses must navigate these requirements with care to ensure regulatory adherence and tax neutrality.

This article decodes the concept of share valuation and its statutory mandates under various Indian laws, with special focus on Rule 11UA, Section 56, FEMA pricing guidelines, and valuation by IBBI Registered Valuer.

What is Valuation of Shares?

Valuation of shares refers to the process of determining the fair market value (FMV) of a company’s equity instruments—equity shares, preference shares, or other securities. It can be carried out using:

● Net Asset Value (NAV) method

● Discounted Cash Flow (DCF) method

● Comparable Company Multiple (CCM) method

● Book value or Asset-based approach

Depending on the context, different valuation methods may be preferred. For example, income-based methods like DCF are used for startups, while asset-based methods are used for investment companies.

Who Can Perform Share Valuation in India?

Depending on the applicable law, valuation must be performed by specific professionals:

Law Who Can Value?

Companies Act, 2013 Registered Valuer (under Section 247)

Income Tax Act, 1961 Merchant Banker or Chartered Accountant

FEMA, 1999 Merchant Banker / Chartered Accountant / Cost Accountant

IBC, 2016 IBBI Registered Valuer (RV)

Valuation under the Companies Act, 2013

The Companies Act, 2013, through Section 247, mandates that any valuation required under the Act must be conducted by a Registered Valuer registered with the Insolvency and Bankruptcy Board of India (IBBI).

Key Provisions Requiring Valuation:

● Section 62(1)(c): Valuation for further issue of shares to persons other than existing shareholders.

● Rule 8 & Rule 13 of Share Capital Rules: Valuation for sweat equity and preferential allotments.

● Section 192: Non-cash transactions with directors.

● Section 230-232: Schemes of arrangement, mergers and demergers.

● Section 236: Purchase of minority shareholding.

● Section 281: Report by company liquidator must include valuation.

Registered Valuer Requirement

A valuation report from a Registered Valuer (RV) is mandatory in the above cases. The RV must follow the Valuation Standards prescribed by IBBI and must be independent of the company or interested parties.

● r DCF method

● Preference shares – Adjusted NAV method

● Other property or assets – Book value or indexed cost

Key takeaway: DCF can only be used when certified by a Merchant Banker, not by a Chartered Accountant.

Valuation under the Insolvency and Bankruptcy Code, 2016 (IBC)

Valuation plays a critical role in the Corporate Insolvency Resolution Process (CIRP) under IBC. Two types of valuations are required:

• Fair Value: Estimate of realizable value in an orderly transaction.

• Liquidation Value: Likely realizable value if the company were to be liquidated.

Appointment of Valuers under IBC:

● The Resolution Professional (RP) appoints two Registered Valuers.

● These valuers must be IBBI-registered, independent, and provide estimates as per IBBI Valuation Standards.

● Averaged value is used to determine final numbers.

Overlap of Valuation Requirements

Due to multi-regulatory applicability, overlaps are common. For example:

Scenario Applicable Laws

Issue of shares to foreign investor Companies Act, FEMA, Income Tax

Share swap in merger Companies Act, FEMA, IBC

Transfer of shares between residents and non-residents FEMA, Income Tax

Fundraising by private companies Income Tax (Sec 56), Companies Act (Sec 62)

Insolvency resolution IBC, Companies Act

How to Manage Valuation Overlaps?

To avoid inconsistency and compliance risks:

● Use a harmonized valuation methodology across laws (preferably DCF or Market Multiple).

● Engage professionals eligible under all applicable statutes.

● Avoid reusing a valuation report prepared for one statute in filings under another, unless compliant with all requirements.

● Maintain documentation of assumptions, projections, and justification.

● Ensure the valuation date remains consistent across statutes (as on cutoff date).

Valuation and RBI Regulations

RBI guidelines under FEMA insist on pricing guidelines for both FDI and ODI:

● For FDI, the issue or transfer must be at or above FMV.

● For ODI, investment must be at or below FMV.

No specific valuation methodology is prescribed for ODI, but industry practice suggests using NAV or market comparable, certified by a CA or Merchant Banker.

Case Example: Start-up Raising Funds from a Foreign Investor

A start-up issuing shares to a Singapore-based VC must comply with:

● Companies Act: Valuation by Registered Valuer

● FEMA: Pricing as per internationally accepted method certified by MB/CA

● Income Tax: Valuation as per Rule 11UA to avoid Sec 56(2)(viib)

In such a case, it is advised to engage both an IBBI Registered Valuer and Merchant Banker, or a CA with FEMA experience, and maintain multiple valuation reports for separate filings.

Challenges in Valuation Practice

● Lack of uniform valuation standards across laws.

● Multiple professionals required for a single transaction.

● Different valuation methods under different laws (e.g., DCF for Companies Act, NAV for Income Tax).

● No clear guidance for harmonization in overlapping cases.

Toward a Unified Valuation Framework

To bring consistency:

● MCA and IBBI must create interoperable valuation standards.

● Promote standard templates for valuation reports with disclosure norms.

● Cross-training of valuers on tax, FEMA, IBC requirements is essential.

● Establish a Valuation Regulatory Board to monitor quality and conflicts.

Conclusion

Valuation is not just about numbers—it determines the legal, financial, and tax consequences of corporate actions. As multiple Indian laws impose varying valuation requirements, it is critical to approach share valuation with precision, clarity, and professional guidance. Businesses must assess the applicable laws based on the nature of the transaction and stakeholder involved, and prepare separate valuation reports if needed.

A Registered Valuer under IBBI, Merchant Banker, or a seasoned Chartered Accountant must be chosen based on the specific compliance need. In the long term, a unified valuation framework is essential to reduce regulatory friction and promote ease of doing business in India.