Methods of Valuation
6 For the purposes of clause (c) of sub-section (2) of section 247,
(i) Before adoption of the methods of valuation as detailed below, the registered valuer shall decide the approach to valuation based upon the purpose of valuation:
(a) Asset approach;
(b) Income approach;
(c) Market approach.
(ii) The valuer shall consider the following points while undertaking valuation:
(a)Nature of the business and the History of the Enterprise from its inception;
(b) Economic outlook in general and outlook of the specific industry in particular;
(c) Book value of the stock and the financial condition of the business;
(d) Earning capacity of the company;
(e) Dividend –paying capacity of the company;
(f) Goodwill or other intangible value;
(g) Sales of the stock and the size of the block of stock to be valued;
(h) Market prices of stock of corporations engaged in the same or a similar line of business;
(i) Contingent liabilities or substantial legal issues, within India or abroad, impacting the business;
(j) Nature of instrument proposed to be issued, and nature of transaction contemplated by the parties.
(iii) A registered valuer shall make a valuation of any asset as on valuation date, in accordance with any one or more of the following methods:
(a) Net asset value method representing the value of the business with reference to the asset base of the entity and the attached liabilities on the valuation date (represents the value of an entity’s assets less the value of its liabilities);
(b) Market Price method: Under this method the current price at which the subject of valuation is bought or sold in the market between unrelated third parties is taken into account;
(c) Yield method / Profit Earning Capacity Value (PECV): Under this method the value is calculated by capitalizing the average of the after tax profits for the preceding three years (or such other period. Provided adequate justification is available for choosing another period) at capitalisation rates specified in the report
(d) Discounted Cash Flow Method (DCF): This method expresses the present value of the business as a function of its future cash earnings capacity. This methodology works on the premise that the value of a business is measured in terms of future cash flow streams, discounted to the present time at an appropriate discount rate. The value of the firm is arrived at by estimating the Free Cash Flows (FCF) to Firm and discounting the same with Weighted Average cost of capital (WACC). In case FCF to equity or FCF to debt is used, the appropriate denominator (required return to equity or debt, as the case may be) shall be used.
(e) Comparable Companies Multiples Methodology (CCM): This Method uses the valuation ratios of a publicly traded company and applies that ratio to the company being valued (after applying appropriate discount or premium, as the context may require). The valuation ratio typically expresses the valuation as a function of a measure of financial performance or book value (e.g. total revenue/revenue from operations, EBITDA, EBIT, EPS, operating cash flows, book value or other suitable parameter, with reasons being recorded for choosing each relevant parameter). Multiples used, if not derived from financial statements, can also be based on certain business performance parameters, provided that such valuation is deemed to be more appropriate than valuation based on financial parameters, in the facts of the case (for instance, price/subscriber for an internet portal)
(f) Comparable Transaction Multiples Method (CTM) which entails valuation on the basis of similar transactions among unrelated parties in the peer group companies.
(g) Price of Recent Investment method (PORI) which entails valuation on the basis of recent investment received in the company from an independent investor.
(h) Sum of the parts valuation (SOTP) – where each part of the business is valued according to method(s) appropriate to that business, and the results are summed up to obtain total value of the business
(i) Liquidation value - if the value is being calculated in a liquidation scenario
(j) Weighted Average Method – Under this method the weights are assigned to the values calculated under different valuation approaches.
(k) Any other method accepted or notified by the Reserve Bank of India, Securities and Exchange Board or Income Tax Authorities.
(l) Any other method(s) that the valuer may deem fit to adopt in the given circumstances of the case, provided that adequate justification for use of such method(s) (and not any of the methods above) must be included in the report.
(iv) A registered valuer shall make a valuation of any asset as on valuation date, in accordance with the applicable standards, if any, as may be stipulated for this purpose.
Explanation: For the purposes of this rule, ‘valuation date’ means the date on which the estimate of value is applicable. It may be different from the date of the valuation report or the date on which the investigations were undertaken or completed. |