FEMA Valuation Aspects(FDI & ODI) and Registered Valuation

Due Diligence, Legal and
Regulatory Valuation aspects
“In the business world, the rearview mirror is
always clearer than the windshield”
Warren Buffett
FEMA – Valuation aspect (FDI & ODI)
and
Registered Valuer under Companies Act – 2013
To know how we can assist you with our Valuation services, please contact
Mr. Chander Sawhney
Vice President
M: +91 9810557353
E: chander@indiacp.com
Mr. Maneesh Srivastava
Senior Manager
M: +91 9871026040
E: maneesh@indiacp.com

Particulars Pg. No.
What and Why 3
How 10
When and Who 22
FEMA Valuation Guidelines 25
Registered Valuer 40
Tricky Issues 46
EOK Study Circle - ICAI22/11/2013

WHAT & WHY

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

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

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

FAIR MARKET VALUE
INTRINSIC VALUE FAIR VALUE
INVESTMENT VALUE
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:

Standard of
Valuation
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

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
Valuation across business cycle follow the law of
economics
Standard of
Valuation
Valuation
Methodologies of
Valuation

HOW

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

Standard of
Valuation
Valuation
Methodologies of
Valuation
Valuation Approaches
Income Based
Method
Asset Based
Method
Capitalization of
Earning Method
(Historical)
Discounted Cash
Flow Method
(Projected
Time Value)
Market Based
Method
Comparable
Companies Market
Multiples Method
(Listed Peers)
Comparable
Transaction Multiples
Method
(Unlisted Peers)
Market Value Method
(For Quoted
Securities)
Book Value Method
Liquidation Value
Method
Replacement Value
Method
Contingent Claim
Valuation
(Option Pricing)
Price of Recent
Investment Method
Rule of Thumb
(Multiples:
Customers, Rooms,
Seats, No. of visitors
etc.) - Depends
upon Industry
Fundamental Method Relative Method
Other Method

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.
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

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

CASH FLOW
Investor assign value based on the cash flow they expect to receive in the
future
- Dividends / distributions
- Sale of liquidation proceeds
Value of a cash flow stream is a function of
- Timing of cash Receipt
- Risk associated with the cashflow
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
Key drivers of valuation
That’s why DCF is most
prominent valuation
method
Need for Restructuring

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

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;

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;

Company Specific Factors
• Management, Promoter Group
It is the alignment of
Company’s value via-a-
vis to its external
environment
• 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

Industry Risk Analysis
• 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
Following factors are required to
be considered:

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
EOK Study Circle - ICAI
22/11/2013

WHEN & WHO

Valuation in Indian Regulatory
Environment

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

FEMA Valuation Guidelines

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.

Particulars Valuation before April 21, 2010 Valuation after April 21, 2010
Guidelines in Force CCI Guidelines 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
Methods Prescribed Net Assets Value (NAV)
Profit Earning Capacity
Value(PECV)
Market Value (in case of Listed
Company)
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
in Value Conclusion
As valuation is more Formulae
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.
FEMA Guidelines to Valuation
Note: Valuation guidelines do not apply to SEBI registered venture capital

Discounted Free Cash Flow Method (DFCF)
Approaches to FDI Valuation
 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
future cash earnings capacity. In this method, the appraiser estimates the
cash flows of any business after all operating expenses, taxes, and necessary
investments in working capital and capital expenditure is being met. Valuing
equity using the free cash flow to stockholders requires estimating only free
cash flow to equity holders, after debt holders have been paid off.

 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
Major Characteristics of DFCF Valuation

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

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.

Free cash flows to firm (FCFF) is calculated as
EBITDA
Taxes
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).
FREE CASH FLOWS
Free Cash Flow calculation

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

DISCOUNT RATE - COST OF EQUITY
Where:
Rf = Risk free rate of return (Generally taken as 10-year Government Bond
Yield)
B = Beta Value (Sensitivity of the stock returns to market returns)
Ke = Cost of Equity
Rm= Market Rate of Return (Generally taken as Long Term average return
of
Stock Market)
SCRP = Small Company Risk Premium
CSRP= Company specific Risk premium
Mod. CAPM Model
ke = Rf + B ( Rm-Rf) + SCRP + CSRP
The Cost of Equity (Ke) is computed by using Modified Capital Asset Pricing
Model (Mod. CAPM)
Cost of Equity 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
Flows by applying the last year cash flows as a multiple of
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
(1 + g)
(WACC – g)
IMPORTANT TIP- It is advised to do Sanity check by applying Relative Valuation
Multiples to the Terminal Year Financials and also doing Scenario Analysis.
Terminal value calculation

 Pre Money or Post Money: If the effect of the money coming in Company is
taken in Projections, the Expanded capital base should be considered or else the
Equity Value should be reduced by the inflow amount to reconcile with the existing
capital base.
 Terminal growth rate: Since it is tough to estimate the perpetual growth rate of a
company, it is preferred to take the perpetuity growth rate factoring in long term
estimated GDP of the Country and Historical/Projection Inflation of the Country.
 Projection Validation via-a-vis Industry: Need to have Sanity check of the
projections with the trend of the industry.
 Beta of Unlisted Company: It is calculated on relative basis by adjusting the
average beta of its comparable companies for differences in Capital Structure of the
unlisted company with the listed peers.
 Risk Free Rate: Yield of a Zero Coupon Bond or Long Term government Bond yield
should be taken as the risk free rate since it does not have any reinvestment risk .
Tricky issues in DFCF

 Adjustment of Company Specific Risk Premium or Small Company Risk
Premium: Small Companies are generally more risky than big companies. CAPM
model does not take into consideration the size risk and specific company risk as
Beta measures only systematic risk and Market Risk Premium (generally
pertaining to Sensex Companies). These risks should also be taken into account
while computing the cost of equity.
 Length of Projections: The Projected Cash Flows should factor in the entire
Business Cycle of a Company.
 Notional/Actual Tax: Actual Tax Liability may be worked out and replaced for the
Notional Tax Liability
 Investments: Investments should be valued separately based on their
Independent Cash Flows
 Surplus Assets: The Value of Surplus Assets (not being utilized for Business
purposes) should be added separately and their cash flows should be ignored
while computing the Free Cash Flows.
Tricky issues in DFCF (Cont.)

Registered Valuer
Companies Act, 2013

Registered Valuers
Registered Valuers
Financial Valuer Technical Valuer
• A Chartered Accountant,
Company Secretary or Cost
Accountant in whole time
practice or retired member
of Indian Corporate law
Service or any other person
as prescribed.
• A Merchant Banker
registered with SEBI and
which has in employment
under it CA/CS/CWA for
carrying out (signing)
Valuation by such qualified
persons.
• Member of the Institute
of Engineers or Member
of the Institute of
Architects in whole time
practice.
• A person or firm or LLP or
Merchant Banker
possessing both
qualifications may act in
dual capacity.
Shall have 5 Years
of Continuous
Experience, Post
Qualification
Shall have 5
Years of
Continues
Experience,
Post
Qualification
Stock, Shares,
Debentures,
Securities,
Goodwill
Property
Persons eligible to apply for being Registered as Valuer
Registered
Valuer to be
appointed by
Audit Committee
or in its absence
by the Board of
Directors.22/11/2013

Registered Valuers
Registered
Valuer
Further Issue
of Shares
Compromise
and
Arrangements
Winding up /
Liquidation
Non Cash
Transactions
with
Directors
Exit to
Minority
Shareholders
Corporate
Debt
Restructuring
Registered Valuers
(Financial
Valuation)
Value
Responsibilities
• Valuer to make impartial, true and fair
valuation
• Not undertake valuation if directly or
indirectly interested
• Exercise due diligence
• Valuation to be done as per rules
Upon contravention
• Fine – 25,000 to 100,000
With intention to defraud
• Imprisonment upto 1 year and
• Fine- 1,00,000 to 5,00,000
Additionally upon contravention, to
refund remuneration received and also
liable for damages.

Section wise Requirement of Registered Valuers
Section 62(1)(c) – For Valuing further Issue of Shares
Section 192(2) – For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors
Section 230(2)(c)(v) – For Valuing Shares, Property and Assets of the company under a Scheme of
Corporate Debt Restructuring
Section 230(3) and 232(2)(d) – For Valuation including Share swap ratio under a Scheme of
Compromise/Arrangement, a copy of Valuation Report by Expert, if any shall be accompanied
Section 232(3)(h) - Where under a Scheme of Compromise/Arrangement the transferor company is a listed
company and the transferee company is an unlisted company, for exit opportunity to the shareholders of
transferor company, valuation may be required to be made by the Tribunal
Section 236(2) – For Valuing Equity Shares held by Minority Shareholders
Section 260(2)(c) – For preparing Valuation report in respect of Shares and Assets to arrive at the Reserve
Price or Lease rent or Share Exchange Ratio for Company Administrator
Section 281(1)(a) – For Valuing Assets for submission of report by Company Liquidator
Section 305(2)(d) – For report on the Assets of the company for preparation of declaration of solvency
under voluntary winding up
Section 319(3)(b) – For Valuing the interest of any dissenting member of the transferor company who did
not vote in favour of the special resolution, as may be required by the Company Liquidator
Section 325(1)(b) – For valuation of annuities and future and contingent liabilities in winding up of
insolvent company

Registered Valuers (Draft Rules) – Methods of Valuation
I. Before adopting methods, decide Valuation Approach-
• Asset Approach
• Income Approach
• Market Approach
II. Valuer to consider following points while undertaking Valuation-
• 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
• Contingent Liabilities or substantial legal issues, within India and Abroad, impacting business
• Nature of Instrument proposed to be issued, and nature of transaction contemplated by parties
Relates to IRS Revenue Ruling (1959-60),USA

Registered Valuers (Draft Rules) – Methods of Valuation
III. Registered Valuer shall make valuation of any asset in accordance with any one or more of the
following methods-
a. Net Asset Value Method (NAV)
b. Market Price Method
c. Yield Method / PECV Method
d. Discounted Cash Flow Method (DCF)
e. Comparable Companies Multiples Method (CCM)
f. Comparable Transaction Multiples Method (CTM)
g. Price of Recent Investment Method (PORI)
h. Sum of the parts Valuation Method (SOTP)
i. Liquidation Value
j. Weighted Average Method
k. Any other method accepted or notified by RBI, SEBI or Income Tax Authorities
l. Any other method that valuer may deem fit provided adequate justification for use of suh method (and not
any of the above methods) is provided
IV. Registered Valuer shall make valuation of any asset as on the Valuation date and in accordance
with applicable standards, if any stipulated for this purpose.
V. Contents of Valuation report shall contain information as contained in Form 17.3

Registered Valuers (Forms) – Contents of Valuation report
1) Description of valuation engagement
(a) Name of the client:
(b) Other intended users:
(c) Purpose for valuation:
(2) Description of business/ asset / liability being valued
(a) Nature of business or asset / liability
(b) Legal background
(c) Financial aspects
(d) Tax matters
(3) Description of the information underlying the valuation
(a) Analysis of past results
(b) Budgets, with underlying assumptions
(c) Availability and quality of underlying data
(d) Review of budgets for plausibility
(e) Statement of responsibility for information received

Registered Valuers (Forms) – Contents of Valuation report
(4) Description of specific valuation of assets used in the business:
(a)Basis or bases of value
(b) Valuation Date
(c) Description of the procedures carried out
(d) Principles used in the valuation
(e) The valuation method used and reasoning
(f) Nature, scope and quality of underlying data and
(g) The extent of estimates and assumptions together with considerations underlying them
(5) Confirmation that the valuation has been undertaken in accordance with these Rules
(6) Further it is certified that valuation has been undertaken after taking into account relevant
conditions/regulations/rules/notifications, if any, issued by the Central/State Government(s) from time to time.
(i) The valuation report must clearly state the significant assumptions upon which the value is based.
When reporting there may be instances, where there are confidential figures, these must be
summarized in a separate exhibit
(ii) In his valuation report, the registered valuer must set out a clear value or range of values along with
the reasoning
(ii) In case the valuer has been involved in valuing any part of the subject matter of valuation in the
past, the past valuation report(s) should be attached and referred to herein. In case a different
basis has been adopted for valuation (than adopted in the past), the valuer should justify the
reason for such differences

Some Specific Tricky Issues

Discounts
• Discount for Entity Level
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
 Key Person Discount
 Discount for Contingent Liability
 Discount for diversified company
 Discount for Holding Company
• Discount for Shareholders Level – Impact on specific ownership interest
 Discount Lack of Control (DLOC)
 Discount Lack of Marketability (DLOM)
• Size of distribution or dividends
• Dispute
• Revenue / Earning – Growth / Stability
• Private Company
 Tax Payout
• % stake & special rights
• Shareholders Agreement caveats
Global Studies over the years on diversified
companies and holding companies has shown
that companies trade at a discount in the range
of 20%. to 40% each.
DLOM: As per CCI Guidelines, 15%
discount has been prescribed; however
practically DLOM and DLOC depends upon
following factors:

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.

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 ?
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.
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.
What is an asset is not yielding adequate returns ?

Cross Holding and Investments
Holdings in other firms can be categorized into:
Types of Cross Holding Meaning
Minority, Passive Investments 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
Investment Value
Ways to value Cross Holding and Investments:
Dividend Yield Capitalization or DCF based on expected dividends
Seperate Valuation (Preferred)
By way of Shareholders
Agreement even less %
holding may command
control value

Accounting Practices and Tax issues
Most of the information that is used in
valuation comes from financial statements.
which in turn are made on certain
Accounting practices considered
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

Valuation Methodologies and 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

About
Corporate Professionals
Offering varied legal & financial services, 'Corporate Professionals' has emerged as an innovative leader in
delivering corporate advisory & solutions. Aiming to become a one-stop-shop offering integrated legal and
financial solutions, the Group has successfully completed a high number of corporate transactions in the last
couple of years. We have successfully engaged in and executed over 3000 assignments of more than 1200
corporate houses, domestic as well as international, across several Industries.
The Group has distinctively positioned itself as Merchant Banker (SEBI Cat-I license) with Boutique
Investment Banking & Transaction Advisory services and as Legal Advisors with high quality comprehensive
Corporate Laws, Tax & Regulatory services. With an endeavor to satisfy our clients' stated as well as
unstated needs, we adopt the most feasible and legally viable approach to execute assignments in a
seamless, cost effective and time bound manner. High Integrity and Confidentiality in dealing with clients
and assignments undertaken is deeply inculcated in our team.
The Group prestigiously owns a strong skill set that comes from its research oriented, multi-disciplinary,
young and dynamic team. With right blend of legal and financial skills, continuous focus on research and
effective use of Information Technology, Corporate Professionals is creating customized products, for
different class of clients. Innovative flair of executing assignments with problem solving zeal and use of
Technology has enabled us to offer path breaking solutions. Not just for executing Clients' Assignments but
also in internal management, the Group adheres to a system driven approach.
The Group dedicates around 30% working time of its professional team on continuous research in the
dynamic legal and financial fields, with an object of creating a knowledge hub, extensive knowledge
dissemination and to develop skills of its team to deliver high quality services.
“Corporate Professionals” refers to one or more of group companies and its network of firms and other
entities, each of which is a separate legal, independent entity. For more details, please visit
www.corporateprofessionals.com.

Mr. Chander Sawhney
Vice President
M: +91 9810557353
D: +91 11 40622252
E: chander@indiacp.com
Mr. Maneesh Srivastava
Senior Manager
M: +91 9871026040
D: +91 11 40622255
E: maneesh@indiacp.com
Mr. Gaurav Kumar Barick
Assistant Manager
M: +91 8130141874
D: +91 11 40622241
E: gaurav@indiacp.com
Mr. Sameer Verma
Assistant Manager
M: +91 9911945607
D: +91 11 40622216
E: sameer@indiacp.com
Our Valuation Team

As Close As You Need
As Far As You Go……
Delhi Office
D-28, South Ex., Part-I, New Delhi-110049,
D-38, South Ex., Part-I, New Delhi-110049,
T: +91 11 40622255
M:+ 91 9871026040,
E: info@indiacp.com
Mumbai Office
520, Mastermind- I, Royal Palms Estate, Aarey
Colony,
Goregaon East, Mumbai -400065
T: +91 2267109044
M:+ 91 9820079664
E: mahipal@indiacp.com
Indian Offices
Overseas Offices
Our Associates
India
Ahmedabad, Allahabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Chennai, Coimbatore, Goa, Guwahati, Gwalior,
Hyderabad, Indore, Jaipur, Jammu, Kanpur, Kochi, Kolkata, Lucknow, Ludhiana, Patna, Pune.
Overseas
Bulgaria, Belgium, British Virgin Islands, Canada, China, Costa Rica, Cyprus, European Union, Germany, Hongkong, Ireland,
Japan, Kenya, Malaysia, Mauritius, Singapore, Sri Lanka, Switzerland, The Netherlands, Turkey, United Arab Emirates, United
Kingdom, United States.
Bedford Office (United Kingdom)
2-4 Mill Street, MK40 3HD, Bedford
Switchboard: +44 (0) 2030063240,
E: ukoffice@indiacp.com

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