Presentation for ICSI Certificate Course of Valuation (Oct 2013) given by Mr. Chander Sawhney, Vice President, Corporate Professionals: This presentation elaborately deals with Theoretical, Procedural and Regulatory aspects of Business Valuation in India.

1. Due Diligence, Legal and
Regulatory Valuation aspects
ICSI
Certificate
Course of
Valuation
Oct 2013
Chander Sawhney
FCA, ACS, Certified Valuer (ICAI)
Vice President, Corporate Professionals

2. Contents
Particulars
What and Why
Pg. No.
3
How
10
When and Who
22
Tricky Issues
54

3. WHAT & WHY

4. Value & Valuation
Value is*
An Economic concept;
An Estimate of likely prices to be concluded by the buyer and seller of a good or service
that is available for purchase;
Not a fact.
Valuation is the process of determining the “Economic Worth” of an Asset or
Company under certain assumptions and limiting conditions and subject to the data
available on the valuation date.
* Source -International Valuation Standard Council

5. Key Facts
PRICE IS NOT THE SAME AS VALUE
VALUE VARIES WITH PERSON, PURPOSE AND TIME
TRANSACTION CONCLUDES AT NEGOTIATED PRICES
VALUATION IS HYBRID OF ART & SCIENCE

6. S Standard of Valuation
T Thesis of Valuation
E Economics of Valuation
M Methodologies of Valuation

7. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Standard of Value is the hypothetical conditions under which a business is valued.
While selecting the Standard of Value following points is to be taken care of
Subject matter of Valuation;
Purpose of Valuation;
Statute;
Case Laws;
Circumstances.
Types of Standard of Value:
FAIR MARKET VALUE
INVESTMENT VALUE
INTRINSIC VALUE
FAIR VALUE

8. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Thesis of Value is Premise of value which relates to the assumptions upon which
the valuation is based.
Premise of Value
Going Concern – Value as an ongoing operating business enterprise.
Liquidation
– Value when business is terminated . It could be ‘forced’ or ‘orderly’.
Value-in-use
Value-in-exchange

9. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Valuation across business cycle follow the law of
economics
Turnover/Profits: Drops


Declining
Cos.
`



Mature
Cos.





sti f or P / r ev onr uT
High Growth
Cos.


Growing
Cos.
Start Up
Cos.








Proven Track Record: Substantial
Operating History
Method of Valuation: Entirely
from Existing Assets
Cost of Capital: N.A.
Turnover/Profits: Saturated
Proven Track Record: Widely Available
Method of Valuation: More from Existing Assets
Cost of Capital: May be High
Turnover/Profits : Good
Proven Track Record: Available
Valuation Methodology: Business Model with Asset
Base
Cost of Capital: Reasonable
Turnover/Profits: Increasing still Low
Proven Track Record: Limited
Valuation Methodology: Substantially on Business Model
Cost of Capital: Quite High
Turnover/Profits: Negligible
Proven Track Record: None
Valuation Methodology: Entirely on Business Model
Cost of Capital: Very High
Time

10. HOW

11. Enterprise / Business Value
Intangibles
Equity#
Net Current
Assets
Net Debt
#
Stakeholders
# Based on Market Values
Fixed
Assets
Assets

12. Standard of
Valuation
Thesis of Valuation Economics of
Valuation
Methodologies of
Valuation
Valuation Approaches
Income Based
Method
Market Based
Method
Asset Based
Method
Other Methods

13. Need of several valuation methods?
Each has strengths and weaknesses
Different methods useful in different situations
Each gives a different “take” on the value of the
company’s stock
Provides a range of valuations instead of point
estimates
Helps in Sanity Check
While concluding Value, all the methodologies must be considered and then weights applied
as per the facts of the case. In other words, Value conclusion should be based on the
Professional Judgement and Simple Average should best be avoided while concluding
Value.

14. Sources of Information for Valuation
Historical financial results –
Income Statement, Balance
Sheets and Cash Flows
Sources of
Information
Data available in Public
Domain – Stock Exchange /
MCA/SEBI/Independent Report
Data on comparable
companies – SALES/EVEBITDA/ PAT/BV
Promoters and Management
background
Discussion and
Representation with/by
the management of the
Company
Data on projects
planned/under
implementation
including future
projection
Industry and Regulatory
trends

15. Key drivers of valuation
CASH FLOW
Investor assign value based on the cash flow they expect to receive in the
future
- Dividends / distributions
That’s why DCF is most
- Sale of liquidation proceeds
Value of a cash flow stream is a function of
- Timing of cash Receipt
- Risk associated with the cashflow
prominent
valuation
method
ASSETS
Operating Assets
- Assets used in the operation of the business including working capital, Property, Plant &
Equipment & Intangible assets
- Valuing of operating assets is generally reflected in the cash flow generated by the
business
Non - Operating Assets
- Assets not used in the operations including excess cash balances, and assets held for
investment purposes, such as vacant land & Securities
- Investors generally do not give much value to such assets and Structure modification
may be necessary
Need for Restructuring

16. Valuation depends upon
Purpose
• Mergers
• IPO
• Acquisitions /
Investment
• Voluntary
Assessment
Regulatory
Accounting
• RBI
• ESOP
• Income Tax
• Purchase Price
Allocation
• SEBI
• Impairment /
• Stock Exchange Diminution
• Companies Act
Dispute
Resolution
Value
Creation
• Company Law • Equity Research
Board/ Courts •
Credit Rating
• Arbitration
• Corporate
• Mediation
Planning

17. Choice of Valuation Approaches
“Value in Valuation is a question,
and
Your choice of Method is the first step
towards answer”
Applicability of a particular approach depends upon:
On whose behalf? – one buyer vs another buyer, buyer vs seller;
For what purpose? – independent strategic acquisition, group company consolidation, cross
border transaction;
When? – distress situation, industry downturn, boom etc;

18. Choice of Valuation Approaches
•
In General, Income Approach is preferred;
The dominance of profits for valuation of share was emphasised in “McCathies case”
(Taxation, 69 CLR 1) where it was said that “the real value of shares in a company will depend more on
the profits which the company has been making and should be capable of making, having regard to
the nature of its business, than upon the amount which the shares would realise on liquidation”.
This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s
case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.)
(122 ITR 38).
• However, Asset Approach is preferred in case of Asset heavy companies
and on liquidation;
• Market Approach is preferred in case of listed entity and to evaluate the
value of unlisted company by comparing it with its listed peers;

19. Company Specific Factors
It is the alignment of
Company’s value via-avis to its external
environment
• Management, Promoter Group
• Operating, Capital and Corporate Finance Strategies
• Competitive advantages and cost position
• Product / Service offering / differentiation / pricing power
•Scale & Diversification
•Customer / Supplier concentration
•Corporate Governance
•Future prospects / Growth potential
•Industry peer group
•Regulatory environment

20. Industry Risk Analysis
Following factors are required to
be considered:
• Good vs. Difficult industry
• Porter’s 5 forces
• Industry life cycle (growth)
• Industry cyclicality (earnings quality)
• Leading indicators
• Competition (ROIC)
• Pricing dynamics; Demand vs. Supply (ROIC)
• Changing business environments
• Regulation (ROIC)
• Product characteristics (earnings quality)
• Capital intensity and cost base (ROIC)
• Event risk

21. Rule of Thumb
A rule of thumb or benchmark indicator is used as a
reasonableness check against the values determined by the
use of other valuation approaches.
Industry
Valuation Parameters
Hospital
EV/Room
Engineering
Mcap/Order Book
Mutual Fund
Asset under management
OIL
EV/ Barrel of equivalent
Print Media
EV/Subscriber
Power
EV/MW, EBITDA/Per Unit
Entertainment & Media
EV/Per screen
Metals
EBITDA/Ton, EV/Metric ton
Textiles
EBITDA depend upon capacity utilization Percentage & per spindle value
Pharma Bulk Drugs
New Drug Approvals , Patents
Airlines
EV/Plane or EV/passenger
Shipping
EV/Order Book, Mcap/Order Book
Cement
EV/Per ton & EBITDA/Per ton
Banks
Non performing Assets , Current Account & Saving Account per Branch
However, Exclusive use of Rule of Thumb is not recommended

22. WHEN & WHO

23. Valuation in Indian Regulatory
Environment

24. SNAPSHOT OF REGULATORY VALUATIONS IN INDIA
Transactions
Mandate to be done by
Inbound Investment
Inbound Investment
DFCF
DFCF
CA // MB
CA MB
Valuer Discretion
Valuer Discretion
>5Mn$ - MB, otherwise CA/MB
>5Mn$ - MB, otherwise CA/MB
Gift of Unquoted Equity
Gift of Unquoted Equity
Shares (Min)
Shares (Min)
Reserve Bank of
India
Prescribed Methodologies
NAV
NAV
-
Gift of Unquoted Equity
Gift of Unquoted Equity
Shares from Resident
Shares from Resident
(Max)
(Max)
DCF (Valuation Based on
DCF (Valuation Based on
Assets, Business &
Assets, Business &
Intangibles is also
Intangibles is also
acceptable)
acceptable)
FCA // MB
FCA MB
Price it would fetch if sold in
Price it would fetch if sold in
open market
open market
MB
MB
Valuer Discretion
Valuer Discretion
MB
MB
Outbound Investment
Outbound Investment
Income Tax
Gift of Unquoted Shares
Gift of Unquoted Shares
other than Equity Shares
other than Equity Shares
ESOP Tax
ESOP Tax
ESOP Accounting
ESOP Accounting
Option – Pricing Model
Option – Pricing Model
-
CA/MB
CA/MB
Based on Market Price
Based on Market Price
-
Preferential Allotment to
Preferential Allotment to
Others
Others
Stock Exchanges
Only Parameters Prescribed
Only Parameters Prescribed
– Return on Net Worth, EPS,
– Return on Net Worth, EPS,
NAV vis-a vis Industry
NAV vis-a vis Industry
Average
Average
Takeover Code/ Delisting Takeover Code/ Delisting Frequently Traded
Frequently Traded
SEBI
Takeover Code/ Delisting Takeover Code/ Delisting Infrequently Traded
Infrequently Traded
Based on 26 weeks // 2
Based on 26 weeks 2
weeks Market Price
weeks Market Price
-
Preferential Allotment to
Preferential Allotment to
promoters / their relatives for
promoters / their relatives for
consideration other than cash
consideration other than cash
Valuer Discretion
Valuer Discretion
CA // MB
CA MB
Companies Act,
1956
Sweat Equity
Sweat Equity
Companies Act,
2013
any property, stock, shares,
any property, stock, shares,
debentures, securities or
debentures, securities or
goodwill or any other assets
goodwill or any other assets
or the net worth of the
or the net worth of the
Company or its liabilities
Company or its liabilities
Valuer Discretion
Valuer Discretion
To be prescribed
To be prescribed
-
REGISTERED VALUER
REGISTERED VALUER

25. RBI Valuation Guidelines

26. FDI
VALUATION
• Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time deals
with Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000.
•In terms of Schedule 1 of the Notification, an Indian company may issue equity
shares/compulsorily convertible preference shares and compulsorily convertible debentures
(equity instruments) to a person resident outside India under the FDI policy, subject to inter alia,
compliance with the pricing guidelines.
•The price/ conversion formula of convertible capital instruments should be determined upfront
at the time of issue of the instruments.

27. FEMA Guidelines to Valuation
Particulars
Valuation before April 21, 2010
Guidelines in Force
CCI Guidelines
Methods Prescribed
Net Assets Value (NAV)
Profit Earning Capacity
Value(PECV)
Market Value (in case of Listed
Company)
Valuation after April 21, 2010
In case of FDI Transactions:
Listed Company: Market Value
as per SEBI Preferential
Allotment Guidelines
Unlisted Company: DFCF
In case of ODI Transactions:
No method has been prescribed
Discount
15% Discount has been
prescribed on account of Lack of
Marketability
No such Discount has been
prescribed
Historical / Futuristic
It is based on Historical Values
It is based on Future Projections
Possibility of variation As valuation is more Formulae
in Value Conclusion
based, final values came
standardized
As valuation is more dependent
on Assumptions and choice of
factors like Growth Rate, Cost of
Capital etc, value conclusion
may vary significantly.
Note: Valuation guidelines do not apply to SEBI registered venture capital

29. Approaches to FDI Valuation
Discounted Free Cash Flow Method (DFCF)
 RBI has prescribed DFCF as the only valuation method in case of FDI (excluding for
initial subscription); but has not provided any guidance on its technical aspects.
Though DFCF is one of the most acceptable Valuation methods used by Business
valuers worldwide; however DFCF for all FDI transactions-excluding for initial
subscription (like minority stake/start up valuation etc) may not yield Fair Value in
line with the Commercial understanding. However Law being such, suitable Logical
adjustments may be necessary on a case to case basis.
DFCF expresses the present value of the business as a function of its
DFCF expresses the present value of the business as a function of its
future cash earnings capacity. In this method, the appraiser estimates the
future cash earnings capacity. In this method, the appraiser estimates the
cash flows of any business after all operating expenses, taxes, and necessary
cash flows of any business after all operating expenses, taxes, and necessary
investments in working capital and capital expenditure is being met. Valuing
investments in working capital and capital expenditure is being met. Valuing
equity using the free cash flow to stockholders requires estimating only free
equity using the free cash flow to stockholders requires estimating only free
cash flow to equity holders, after debt holders have been paid off.
cash flow to equity holders, after debt holders have been paid off.

30. Major Characteristics of DFCF Valuation
 Forward Looking and focuses on cash generation
 Recognizes Time value of Money
 Allows operating strategy to be built into a model
 Incorporates value of Tangible and Intangible assets
 Only as accurate as assumptions and projections used
 Works best in producing a range of likely values
 It Represents the Control Value

31. DFCF Valuation Process
 Understand Business Model
 Identify Business Cycle
 Analyze Historical Financial Performance
 Review Industry and Regulatory Trends
 Understand Future Growth Plans (including Capex needs)
 Segregate Business and Other Cash Generating Assets
 Identify Surplus Assets (assets not utilized for Business say
Land/Investments)
 Create Business Projections (Profitability statement and Balance Sheets)
 Discount Business Projections to Present (Explicit Period and Perpetuity)
 Add Value of Surplus Assets and Subtract Value of Contingent Liabilities

32. Free Cash Flows- Value Trend
Terminal Value is calculated for the Perpetuity period based on the
Adjusted last year cash flows of the Projected period.

33. Free Cash Flow calculation
FREE CASH FLOWS
Free cash flows to firm (FCFF) is calculated as
Taxes
EBITDA
EBITDA
Change in Non Cash Working capital
Capital Expenditure
Free Cash
Flow to
Firm
Note that an alternate to above is following (FCFE) method in which
the value of Equity is directly valued in lieu of the value of Firm. Under
this approach, the Interest and Finance charges is also deducted to arrive at
the Free Cash Flows. Adjustment is also made for Debt (Inflows and
Outflows) over the definite period of Cash Flows and also in Perpetuity
workings.
Theoretically, the value conclusion should remain same irrespective of the
method followed (FCFF or FCFE), (Provided, assumptions are consistent).

34. Cost of Capital calculation
DISCOUNT RATE – WEIGHTED AVERAGE COST OF CAPITAL
WACC
(Kd x D) + (Ke x E)
(D + E)
Where:
D = Debt part of capital structure
E = Equity part of capital structure
Kd = Cost of Debt (Post tax)
Ke = Cost of Equity
In case of following FCFE, Discount Rate is Ke and Not WACC

35. Cost of Equity calculation
DISCOUNT RATE - COST OF EQUITY
The Cost of Equity (Ke) is computed by using Modified Capital Asset Pricing
Model (Mod. CAPM)
Mod. CAPM Model
ke = Rf + B ( Rm-Rf) + SCRP + CSRP
Where:
Rf =
Yield)
B =
Ke =
Rm=
of
Risk free rate of return (Generally taken as 10-year Government Bond
Beta Value (Sensitivity of the stock returns to market returns)
Cost of Equity
Market Rate of Return (Generally taken as Long Term average return
Stock Market)
SCRP = Small Company Risk Premium
CSRP= Company specific Risk premium

36. Terminal value calculation
PERPETUITY FORMULA
– Usually comprises a Large part of Total Value and is sensitive to small
changes
– Capitalizes FCF after definite forecast period as a growing perpetuity;
– Estimate Terminal Value using Terminal Value Multiplier applied on last
year cash flows
– Gordon Formula is often used to derive the Terminal Cash (1 + g)
Flows by applying the last year cash flows as a multiple of
(WACC – g)
the growth rate and discounting factor
– Estimated Terminal Value is then discounted to present day at company’s
cost of capital based on the discounting factor of last year projected cash
flows
IMPORTANT TIP- It is advised to do Sanity check by applying Relative Valuation
Multiples to the Terminal Year Financials and also doing Scenario Analysis.

37. An Insight of Valuationwww.CorporateValuations.in

38. SEBI / Stock Exchange
Valuation Guidelines

39. Takeover Regulations
APPLICABLE LAW:
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
FREQUENTLY TRADED
SHARES
Traded Turnover of Shares ≥ 10%
[In the Last Twelve Calendar Months preceding the Month of Public Announcement (P.A.)]
Method of Valuation
1.Highest Negotiated Price Per Share under agreement attracting the obligation to make P.A.
2.The volume weighted avg. price paid or payable by acquirer or PAC during the 52 Weeks;
3.The Highest Price paid or payable by acquirer or PAC in last 26 Weeks;
4.Volume weighted average Market Price of Shares for a period of 60 trading days
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE FOR P.A.
INFREQUENTLY TRADED
SHARES
Traded Turnover of Shares < 10%
[In the Last Twelve Calendar Months preceding the Month of Public Announcement (P.A.)]
Method of Valuation
1.Book value,
2.Comparable Trading Multiples;
Such other Parameters as are customary for valuation of shares of such companies

40. Preferential Issue (1 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Equity shares of issuer have been listed on recognized stock exchange for a period of 26
weeks or more as on relevant date
Method of Valuation
1.The average of the weekly high and low of the closing prices of the related equity shares quoted on the
recognised stock exchange during 26 weeks preceding the relevant date, or
2.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during 26 weeks preceding the relevant date.
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE

41. Preferential Issue ( 2 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Equity shares of issuer have been listed on recognized stock exchange for a period of less
than 26 weeks as on relevant date
Method of Valuation
1. The price at which equity shares were issued by the issuer in its IPO or value per share
arrived at in a scheme of arrangement under section 391 to 394 of the Companies Act, 1956,
pursuant to which the equity shares of the issuer were listed, as the case may be , or
2.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during the period shares have been listed
preceding the relevant date, or
3.The average of the weekly high and low of the closing prices of the related equity shares
quoted on the recognised stock exchange during 2 weeks preceding the relevant date.
HIGHEST PRICE AMONG ALL IS THE VALUE PER SHARE

42. Preferential Issue ( 3 of 3)
APPLICABLE LAW:
SEBI (ICDR) Regulations, 2009
Equity shares have been issued to promoters / their relatives for consideration other than
cash, The VALUATION OF ASSETS in consideration for which the equity shares are
issued shall be done by an independent valuer
Method of Valuation
No Method for Valuation has been prescribed.
Valuer
Chartered Accountant or a Merchant Banker

43. ESOP Accounting Valuation
APPLICABLE LAW:
SEBI (ESOS and ESPS) Guidelines, 1999
If a Company listed on recognised stock exchange in India and issued shares under an
ESOS / ESPS, the fair value of stock option shall be estimated using an option pricing model
(Black-Scholes or a binomial model) which shall be treated as employee compensation cost
for the Company.
Method of Valuation
Black-Scholes Model
Valuer
Not Prescribed

44. Income Tax Act-1961

45. Equity Shares Valuation
APPLICABLE LAW:
Income Tax Act – 1961 and Rule 11UA
If Individual, HUF, Firm or *closely held Company receives Equity shares of a closely held
Company – Valuation norms shall apply.
Method of Valuation
Minimum Valuation- Net Asset Value
Maximum Valuation- DCF and other methods factoring Tangible and Intangibles
Valuer
No specific Valuer prescribed for undertaking Minimum Value
FCA / Merchant Banker for determining Maximum Value
*If a Public Listed Company receives any shares or anyone receives
shares of a Public listed Company, valuation norms are not applicable if
transaction takes at market price.

46. Valuation of shares other than Equity Shares
APPLICABLE LAW:
Income Tax Act – 1961 and Rule 11UA
If Individual, HUF, Firm or *closely held Company receives shares other than Equity shares
of a closely held Company – Valuation norms shall apply.
Method of Valuation
Price at which such shares will fetch in the open market.
Valuer
Valuation report to be issued by Merchant Banker

47. ESOP Tax Valuation
APPLICABLE LAW:
Income Tax Act – 1961 and Notification no. 94/2009 dated 18.12.2009 issued by CBDT
To determine the value of perquisite taxable in hands of employees
Method of Valuation
No method has been prescribed
Valuer
SEBI registered category – I Merchant Banker

48. Companies Act- 2013

49. Registered Valuer – Sec 247
Registered Valuer
Stock, Shares,
Debentures,
Securities,
Goodwill
Shall have 5 Years
of Continues
Experience
Property
Financial Valuer
•
A
Chartered
Accountant,
Secretary
Technical Valuer
Company
or
Cost
Accountant
having in employment
under it, either a
chartered accountant
or company secretary
or cost accountant and
either of whom shall
have continuous
experience of five
years
•A
Banker
India
of
the
Institute of Engineers
or
Member
•A
of
Merchant
Board
the
registered
and
with
Securities
Exchange
Member
Shall have 5 Years of
Continues Experience
the
Institute of Architects
Merchant
registered
•
Securities
of
Exchange
Banker
India
with
the
and
Board
of
having in employment
under it, either a
member of Institute of
Engineers / Architects
and either of whom
shall have continuous
experience of five
years

50. Registered Valuer – Sec 247
Registered Valuer
(Financial
Valuation)
•
•
•
•
Values
Valuer not to be interested
Valuer to exercise due diligence
Valuation to be done as per rules
Valuer liable for damages on default

51. Accounting Valuation

52. Purchase Price Allocation
What is a Purchase Price Allocation?
-an acquiring entity must allocate the purchase price to the assets acquired
and liabilities assumed based on estimated fair values at the date of
acquisition;
-The excess of the cost of an acquired entity (including tangible and
intangible assets) over the net of the amounts assigned to assets acquired
and liabilities assumed is recorded as “Goodwill”;
Tangible Assets
Consideration
paid for
acquisition
Allocated to
In
Proportion
to Fair
Value
Intangible Assets
Goodwill
Balancing
Figure

53. Purchase Price Allocation
Why Purchase Price Allocation?
-Intangible assets recognized separately from goodwill must be valued
and amortized for financial reporting purposes, if appropriate
-This may result in better Tax planning for undertaking the
transactions of acquisition of assets and liabilities; Under Slump
sale transaction, specifically the Intangible Assets can be
separately accounted for by the Acquirer and Depreciation also
claimed under the provisions of Indian Income Tax Law.
-PPA is used to allocate the Business Value between Tangible and
Intangible Assets.

54. Tricky Issues

55. Discounts
Discounts & Premiums come into picture when there exist difference between the
subject being valued and the Methodologies applied. As this can translate control value
to non-control and vise versa , so these should be judiciously applied.
– Impact on entity as a whole
• Discount for Entity Level
Key Person Discount
Discount for Contingent Liability
Global Studies over the years on diversified
Discount for diversified company
Discount for Holding Company
that companies trade at a discount in the range
companies and holding companies has shown
of 20%. to 40% each.
Tax Payout
•Discount for Shareholders Level – Impact on specific ownership interest
Discount Lack of Control (DLOC)
Discount Lack of Marketability (DLOM)
•% stake & special rights
DLOM:
As
per
CCI
Guidelines,
15%
discount has been prescribed; however
practically DLOM and DLOC depends
upon following factors:
•Size of distribution or dividends
•Dispute
•Revenue / Earning – Growth / Stability
•Private Company
•Shareholders Agreement caveats

56. Premium
•Control Premium -
An investor seeking to acquire control of a company is typically
willing to pay more than the current market price of the
company. Control premium is an amount that a buyer is usually
willing to pay over the fair market value of a publicly traded
company to acquire controlling stake in a company
Research has shown that the control premium in
India has ranged from 20% to 37% in the past few
years.

57. Excess Cash and Non Operating Assets
Excess cash is defined as ‘total cash (in balance
sheet) – operating cash (i.e. minimum required
cash) to sustain operations (working capital) and
manage contingencies
Key Issue: Estimation of Excess Cash ?
One of the solutions is to estimate average
cash/sales or total balance sheet size of the
company’s relevant Industry and then estimate if the
company being valued has cash in excess of the
industry’s average.
Non operating Assets are the Surplus assets which are not used in operations of the business and does not
reflect its value in the operating earnings of the company. Therefore the fair market value of such Assets should
be separately added to the value derived through valuation methodologies to arrive at the value of the company.
What is an asset is not yielding adequate returns ?

58. Cross Holding and Investments
Holdings in other firms can be categorized into:
Types of Cross Holding
Minority, Passive Investments
Meaning
If the securities or assets owned in another firm represent less
than 20% of the overall ownership of that firm
Minority, Active Investments
If the securities or assets owned in another firm represent
between 20% and 50% of the overall ownership of that firm
Majority, Active Investments
If the securities or assets owned in another firm represent more
than 50% of the overall ownership of that firm
Ways to value Cross Holding and Investments:
Investment Value
By way of
Dividend Yield Capitalization or DCF based on expected
Agreement
dividends
Seperate Valuation (Preferred)
holding
Shareholders
even
may
control value
less
%
command

59. Accounting Practices and Tax issues
Most of the information that is used in
valuation comes from financial statements.
which
in
turn
Accounting
are
made
practices
appropriate.
•Cash Accounting v/s Accrual Accounting
•Operating Lease v/s Financial Lease
•Capitalization of Expenses
•Notional Tax vs. Actual Tax
•Treatment of Intangible Assets
•Companies Paying MAT
•Treatment of Tax benefits and Losses
on
certain
considered

60. Valuation Methodologies and Value Impact
Major Valuation Methodologies
Ideal for
Result
Net Asset Value
Net Asset Value (Book Value)
Minority Value
Net Asset Value (Fair Value)
Control Value
Equity Value
Comparable Companies Multiples (CCM) Method
Price to Earning , Book Value Multiple
EBIT , EBITDA Multiple
Minority Value
Equity Value
Enterprise Value
Comparable Transaction Multiples (CTM) Method
Price to Earning , Book Value Multiple
EBIT , EBITDA Multiple
Control Value
Equity Value
Enterprise Value
Discounted Cash Flow (DCF)
Equity
Firm
Control Value
Equity Value
Enterprise Value

61. IRS Revenue Ruling (1959-60),USA
•
Revenue Ruling (RR) 1959-60 is one of the oldest guidance available on Valuation in the
world but still most relevant for Tax Valuations specifically for Valuing closely held
common stock. It is the most widely referenced revenue ruling, also often referenced for
Non Tax Valuations.
•
While Valuing , it gives primary guidance on eight basic factors to consider-
•
Nature of the Business and the History of the Enterprise from its inception
•
Economic outlook in general and outlook of the specific industry in particular
•
Book Value of the stock and the Financial condition of the business
•
Earning Capacity of the company
•
Dividend-Paying Capacity of the company.
•
Goodwill or other Intangible value
•
Sales of the stock and the Size of the block of stock to be valued
•
Market prices of stock of corporations engaged in the same or a similar line of business

62. Chander Sawhney, Vice President
Corporate Professionals Capital Pvt. Ltd.
SEBI registered merchant banker
Email : chander@indiacp.com
Mobile: 9810557353; Direct: 40622252
www.corporatevaluations.in;
D-28, South Extention, Part-I, New Delhi-110049
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