The document discusses professional opportunities for Chartered Accountants in business valuation in India. It provides an overview of the history of business valuation in India, from early methods prescribed under tax laws to current standards and regulations. Key developments include the implementation of registered valuer provisions in the Companies Act 2013 and valuation rules in 2017. The valuation process involves understanding the purpose, analyzing financials, industry trends, forecasting performance, selecting appropriate methods, and documenting the report. Common valuation approaches include income, market and asset-based methods. Discounts and premiums are also considered.

1. “Professional Opportunities for
CA’s as Business Valuers”
CIRC of ICAI
22nd Jan, 2021
Jaipur Branch
Chander Sawhney
FCA, FCS, Registered Valuer (IBBI)

2. I. Overview of Valuation
II. New Era of Valuation in India
III. Valuation Process
IV. Judicial Pronouncements
V. Valuation Standards
Agenda

3. I. Overview of Valuation

4. (Start Up)
Wealth Tax Act,1957
Valuation of
unquoted shares
on adjusted Book
Value Method as
per Balance
Sheet (repealed
w.e.f. 1.4.1989)
Fixed Pricing
Guidelines for
valuation of shares
erstwhile Controller
of Capital Issue
(CCI) guidelines as
per NAV, PECV and
Market Value
method.
Since SEBI Act came
into force in 1992,
companies are free to
price their issues in
consultation with the
Merchant Bankers
DCF Method
prescribed by RBI
in 2010 for all FDI
Valuations (later
changed to any
Internationally
accepted method)
Registered Valuer
provisions of Companies
Act, 2013 Implemented
Companies (Registered
Valuers and Valuation)
Rules, 2017
2010
2012
Income Tax prescribed
Valuation for Transfer
of Shares in 2009
ESOP FBT of 2007
changed to Perquisite
Tax in 2009
From 2016, “FAIR VALUE
Standard” came into
force (Ind AS 113)
2016
Income Tax prescribed
Valuation for Issue of
Shares in 2012
ICAI issued
Valuation
Guide on
Share
Valuation
in 1994 and
1999
SEBI brought
Fairness Opinion
on Valuation in
scheme of
Arrangement of
Listed Cos in
2008
2009
Liquidation Value and Fair
Value of “Assets” came in
“IBC” w.e.f Dec 2016.
2020
CG appointed Committee
of Experts submitted
report with Draft Valuer
Bill, 2020
History of Business Valuation in India
ICAI issued ICAI Valuation
Standards in 2018

5. Why Valuation
Transactions
• Mergers / Acquisitions
• Investment
• Fund Raising
• Sale of Businesses
• Voluntary Assessment
• Dispute Resolution
Regulatory
• RBI
• Income Tax
• SEBI
• Companies Act
• IBC
Financial
Reporting
• ESOP
• Purchase Price Allocation
• Impairment / Diminution
• Fair Value (Ind AS)

6. Requirement of
business/share
valuation in India
under different
laws Observation : Valuation Standards permit Departures in order to
comply with Legislative, Regulatory and Authoritative requirements.
Hence knowledge of applicable Laws and valuation requirements is
necessary.

7. Valuation across business cycle follow the
LAW of ECONOMICS
Growing
Cos.
 Turnover/Profits: Increasing still Low
 Proven Track Record: Limited
 Valuation Methodology: Substantially on Business Model
 Cost of Capital: Quite High
High Growth
Cos.
 Turnover/Profits : Good
 Proven Track Record: Available
 Valuation Methodology: Business Model with Asset Base
 Cost of Capital: Reasonable
Mature
Cos.
 Turnover/Profits: Saturated
 Proven Track Record: Widely Available
 Method of Valuation: More from Existing Assets
 Cost of Capital: May be High
Declining
Cos.
`
 Turnover/Profits: Drops
 Proven Track Record: Substantial Operating History
 Method of Valuation: Entirely from Existing Assets
 Cost of Capital: N.A.
 Turnover/Profits: Negligible
 Proven Track Record: None
 Valuation Methodology: Entirely on Business Model
 Cost of Capital: Very High
Start Up
Cos.
Turnover
/
Profits
Time

8. Skills Required for Performing Valuations
Revenue Ruling 59-60 (Internal Revenue Service of USA)
Revenue Ruling (RR) 59-60 is one of the oldest guidance available on Valuation in the world but still most
relevant for Tax Valuations specifically for valuing closely held equity shares. 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 company engaged in the same or a similar line of business

9. Business
Valuation is
“beyond the
numbers”
Knowledge of
prescribed
Valuation
requirements
under different
Laws
Knowledge of Taxation
aspects (Tax on Asset
Sale, Profits, Tax shield on
Accumulated Losses etc.)
Understanding
Industry
Classification,
Financial
Performance
and Valuation
Trends
Strong
understanding of
Valuation principles
and Valuation
Standards
Knowledge of
Finance, Risk
and Return
concepts and
Accounting
Standards
Macro and Micro
Assessment of Valuation
Inputs including Validation
of Business Model,
Selection of Comparable,
choice of Valuation
methods, value
adjustments and
conclusion for Company
and Shareholders…

10. II. New Era of Valuation in
India

11. • Legal Recognition
• Regulated Profession
• Uniform Practice (Valuation Standards)
• Requires Skill set / Capacity Building
• Code of Conduct
Registered Valuers

12. Registered Valuer
• Starting Point – Section 247 of Companies Act, 2013
• Applicable Rules – Companies (Registered Valuers and Valuation)Rules 2017
• Regulating the profession of Valuation in India for Standardization and Transparency
• As of now, covers Companies Act and Insolvency and Bankruptcy Code (IBC)
Section 247 of the Companies Act, 2013 states that a Registered Valuer would carry out valuation in respect of any
property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its
liabilities and that the valuer shall have such qualifications and experience and being a member of an organisation
recognised, on such terms and conditions as may be prescribed.
The Registered Valuer shall be appointed by the Audit Committee or in its absence by the Board of Directors of that
company.
Regarding the functioning and duties of the Registered Valuer, it is stated that the registered valuer shall:
• make an impartial, true and fair valuation of any assets that may be required to be valued;
• exercise due diligence while performing the functions as valuer;
• make the valuation in accordance with such rules as may be prescribed; and
• not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any
time during 3 years prior to his appointment as valuer or 3 years after valuation of assets was conducted by him.

13. Companies (Registered Valuers and Valuation)Rules 2017
• Applicable w.e.f. 18th October, 2017
• Defines ‘Eligibility’, ‘Educational’ and ‘Exam’ requirements
• Made 3 Asset classes – “Securities or Financial Assets”, “Land & Building” and “Plant & Machinery”
• Brought in concept of RVO’s for education, training and monitoring of Valuers
• Need to comply with International Valuation Standards until Indian Valuation Standards come in force
• Prescribed Contents of Valuation Report
• Maintenance of Records for 3+ years
• Professional competence, Due Care and Independence of valuer
• Model Code of Conduct for Registered Valuers and RVO’s

14. Contents of Valuation Report
The valuer shall in his report state the following:
• Background information of the asset being valued;
• Purpose of valuation and appointing authority
• Identity of valuer and any other experts involved in valuation;
• Disclosure of valuer interest/conflict, if any;
• Date of appointment, valuation date and date of report;
• Inspections and/or investigations undertaken;
• Nature and sources of the information used or relied upon;
• Procedures adopted in carrying out the valuation and the valuation standards followed;
• Restrictions on use of the report, if any;
• Major factors that were taken into account during the valuation;
• Conclusion; and
• Caveats, Limitations and Disclaimers to the extent they explain or elucidate the limitations faced by valuer, which
shall not be for the purpose of limiting his responsibility for the valuation report.
Companies (Registered Valuers and Valuation)Rules 2017

15. Financial Reporting Valuations
• Ind AS 113 - Dedicated Standard on “Fair Value” Measurement – in line with global equivalents – IFRS 13 and
ASC 820 (US GAAP) covers Financial Reporting.
• Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current market conditions
• Fair Value is based on Willing Buyer; Willing Seller concept
• Known or Knowable at the measurement date
• Orderly means with Adequate Marketing
• Fair Value is a market-based measurement, NOT an entity-specific measurement
• Gives more preference to valuation methods relying on “Observable Inputs” than unobservable inputs as per
Fair Value Hierarchy
IND AS

16. Regulations on Financial Reporting
• Specific Standards for specific aspects
• Ind AS - 109, 107 and 32 : Financial Instruments
• Ind AS - 102 : Share based payment
• Ind AS - 103 : Business Combination
• Ind AS - 38 : Intangible Assets
• Ind AS - 16 : Property Plant & Equipment
• Ind AS - 36 : Impairment of Assets
IND AS

17. Fair Value
Hierarchy
prescribed
in IND AS -
113

18. III. Valuation Process

19. Understanding Purpose
of Valuation
Information requisition
from the Company
Financial Analysis and
Normalisation
Adjustments
Understanding Industry
Characteristics and
Trends
Forecasting and
reviewing Company
Performance
Considering and
Applying appropriate
Valuation
Methodologies
Performing Value
adjustments, Value
Conclusion,
Documentation and
Reporting
Valuation Process

20. Time horizon: Short
term versus long term
Transaction,
regulatory or
financial reporting
purposes
Time horizon:
Short term versus
long term
Type of
shareholders:
Minority versus
control
Enterprise Value
vs. Equity Value
Understanding Purpose of Valuation

21. Information requisition depends upon -
• Nature of the valuation engagement
• Scope of the valuation engagement
• Valuation date
• Intended use of the valuation
• Applicable standard and premise of value
• Assumptions and limiting conditions; and
• Applicable laws, regulations and professional standards
Such information includes:
 Non-financial information (Promoters, Management, Products, Industry, Competition, Strategy)
 Shareholders information (Equity Shares v. Preferred Shares, Minority v. Control)
 Financial information (Historical Annual Reports, Future Projections, Non Operating Assets)
Information requisition from Company

22. Analysis of the past financial performance of a company is necessary for forecasting its future performance.
Besides financial statements, the annual report of a company includes a lot of information considered
important for analysis of the company. This includes -
• Management discussion and analysis report (MDA)
• Independent auditor’s report
• Accounting policies and disclosures
• Related party transactions
• Segment reporting and
• other aspects.
Closely held companies require significant adjustments to estimate the normalised earnings of the company
(Related party transactions)
The non-recurring and non-operating items also need segregation from the financial statements
Financial Analysis and Normalisation Adjustments

23. Knowledge of industry is necessary and essential for preparation and review of financial forecasts of any company
Different Industries have different risk and return characteristics and competitive advantages
Basic economic factors— supply and demand—provide a fundamental framework for understanding an industry.
While forecasting, past data does provide a basis. However, newer technology and changing government regulations
have an impact on changing the business models of companies, significantly.
Understanding basis of classification of industries is important
- The National Industrial Classification, 2008 (NIC) in India based on the United Nations International Standard
Industrial Classification (ISIC) - economic activity wise data
- Internationally, for industry classification reliance is given upon Global Industry Classification Standard (GICS)
developed by Standard & Poor’s and Morgan Stanley - The GICS combines the companies in a sector, industry
group, industry and sub-industry based on the principal product and services of the companies and their revenue
contribution.
- The Industry classification of BSE can be referred to. Databases like Capitaline, Capital IQ, Damodaran provide
useful insights.
Understanding Industry Characteristics and Trends

24. Industry and competitive analysis, together with an analysis of the company’s financial performance, provide a
basis for forecasting performance. Forecasts of sales, expenses, profits (EBIT, EBITDA and PAT), capex and working
capital provide the inputs for most valuation models.
IT IS THE WORK AND RESPONSIBILITY OF A COMPANY’S MANAGEMENT TO MAKE FINANCIAL PROJECTIONS OF
ITS BUSINESS. THE ROLE OF A VALUER IS TO REVIEW THESE PROJECTIONS FOR REASONABLENESS.
Guidance under IVS on reasonableness of Assumptions and information received from Management
As required by IVS 105 Valuation Approaches and Methods, para 10.7, a valuer must assess the reasonableness
of information received from management, representatives of management or other experts and evaluate
whether it is appropriate to rely on that information for the valuation purpose.
Guidance under IVS on Investigations and Compliance
As per IVS 102 (Para 20.2), Sufficient evidence must be assembled by means such as inspection, inquiry,
computation and analysis to ensure that the valuation is properly supported, adequate for the purpose of the
valuation.
Forecasting and Validating Company Performance

25. Valuation
Approaches &
Methodologies

26. Choice of Valuation
approaches
In General, for Business Valuation on going concern basis, 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; The liquidated value of the Net Assets is also considered the minimum
value of the whole company and will prevail even if Earning capacity is low or
negative subject to any discounting in appropriate circumstances (like Reluctance
to wind up, Ability to control, Tax adjustments etc.)
 Market Approach is preferred in case of listed entity and also to evaluate the value
of unlisted company by comparing it with its peers;
In selecting a model, data availability and
quality/accuracy of data can be limiting
factors and require suitable adjustments
considering industry trends and valuer’s
experience.

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

28. Discounts and Premiums come into picture when there exists difference between the subject being valued and the methodologies applied. As this can
translate control value to non-control and vice-versa, so these should be judiciously applied.
Discount at Company Level
The company level discounts affect the equity value of the company and are applied before any apportionment is made to the shareholders. Major
types of company level discounts include the following:
• Key Person Discount
• Discount for Contingent Liabilities
• Diversified Company Discount
• Holding Company Discount
• Liquidation Discount (Tax Payout on Appreciation of Assets)
Discounts and Premium at Shareholder Level
The shareholder level discounts affect the value of specific shareholders and are applied after distribution of the equity value to the respective
shareholders. Major types of shareholder level discounts include the following:
• Discount for Lack of Control (DLOC)
• Discount for Lack of Marketability (DLOM)
• Control Premium
Performing Value Adjustments

29. Non Operating 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 (which
are not generating any operational income) are the non-operating assets.
• Investors generally do not give much value to such assets and Structure modification may be necessary
Treatment of Non-operating Assets
The value of such non-operating asset should be added separately to arrive at the enterprise value.
Performing Value Adjustments

30. IIV. Judicial Pronouncements
in India

31. Judicial
Pronouncements
(Valuation Case Laws)
Over the years, the courts in India have decided on various issues of
valuation but more so on the macro and logical aspects. So far, India
has not seen much of technical deliberations at court level and the
courts generally do not intervene in the valuation process if it is
done by experts and specifically when a well-defined process has
been followed.
Nonetheless, there have been cases wherein courts have accepted
the preference given to one approach compared to others. Like for
valuing a company undergoing concern assumption, in general
income and market approaches are preferred over the asset
approach. However, for valuing a holding company or a company
under liquidation, asset approach is preferred.
Recently, the Income Tax officers have started questioning the
achievement of projections, choice of a particular valuation
methodology for shares and basis for selection of comparable
based on the functions, assets and risks involved.

32. Valuation Case Laws
ROLE OF COURT
Miheer H. Mafatlal v Mafatlal Industries Ltd. AIR 1997 SC 506 : (1997) 1 SCC 579
In this case, it was held that if exchange ratio has been calculated by a recognised
firm of chartered accountants who are expert in field of valuation and the same
has not been objected by majority shareholders, it is not for the court to
substitute its exchange ratio. Thus, the appeal by minority shareholders for
unreasonable exchange ratio failed and was dismissed.
Brooke Bond Lipton India Ltd v Unknown (1999) 98 CompCas 496 (Cal)
In this case, it was held that if the ratio of exchange has been fixed by an
experienced and reputed firm of chartered accountants, then in the absence of
any charge of fraud against them the court will accept such valuation and ratio of
exchange. A mere allegation of fraud is not enough; it must be a proper charge of
fraud with full particulars. In the instant case, there is no charge made or
established.
Dinesh Vrajlal Lakhani v Parke Davis (India) Ltd. 2003 (4) ALL MR 496
It was held that while considering a Scheme of Amalgamation, the Court does not
exercise an appellate jurisdiction, but a jurisdiction founded on fairness. The Court
would not interfere with the swap ratio adopted on the advice of an expert unless
it was contrary to law. The Learned Judge held that it was not the case before him
that the swap ratio was contrary to law or that the experts who submitted the
valuation report were not independent. The objections were overruled.

33. Income Tax
Case Laws
Comparison of projected cash flows with actual cash flows by TPO
Hyderabad ITAT in the matter of “DQ Entertainment (International) Ltd.” emphasised that
the value at the time of making the business decision is important, opines,” when the values
are replaced subsequently, it is not valuation but evaluation i.e. moving the post of result
determined out of projections”; further held “for valuation of intangibles, only the future
projections can be adopted and such valuation cannot be reviewed with actuals after 3 or 4
years down the line”; relies on coordinate bench ruling in Social Media India Ltd and Bangalore
ITAT ruling in Tally Solutions (P) Ltd.
Rejection of Valuation Report
Delhi ITAT rejected a valuation report in the matter of “Agro Portfolio Pvt. Ltd.” obtained by
the taxpayer to defend the share premium amount on issue of shares. The grounds of rejection
was that no independent enquiry, even on test check basis, was made by the valuer to verify
the reasonableness of the figures furnished by the management.
Similar observation made by Bangalore ITAT in TUV Rheinland NIFE Academy and
Innoviti Payment Solutions
Taxability of Issue of Share Capital
Bombay High Court in the matter of “Vodafone India Services Pvt. Ltd.”(VISPL) wherein the
Bombay HC categorically held that issue of shares at a premium by the VISPL in favour of its
Associated Enterprise did not give rise to any “income” from an International Transaction, and
therefore, there was no need to invoke Transfer Pricing provisions. This judgement clearly
segregated issue of capital as a capital account transaction.

34. V. Valuation Standards

35. Valuation without Standards ?

36. • International Valuation Standards
• Indian Valuation Standards
• Ethical Standards
• Minimum Performance Framework
Need for Uniformity

37. Chander Sawhney
Chartered Accountant & Registered Valuer (IBBI)
FCA, FCS, B.Com (H)
M: +91 9810557353
E: chandersawhney@gmail.com