Overview of Business Valuation

Present Value of Cash Flows & Terminal Value

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 3(b) (Syllabus 2022).

The Discounted Cash Flow (DCF) technique is a widely used method for business valuation. It estimates the present value of a company’s projected future cash flows, taking into account the time value of money. The DCF technique involves the following steps:

1.Project Future Cash Flows: Forecast the future cash flows of the business over a specific period. Cash flows typically include operating cash flows, capital expenditures, working capital changes, and any other significant cash flow components.

2.Determine the Discount Rate: Select an appropriate discount rate, often the company’s Weighted Average Cost of Capital (WACC). The discount rate represents the required rate of return expected by an investor considering the risk associated with the investment. It reflects the opportunity cost of investing in the company rather than alternative investments.

3.Discount Cash Flows: Apply the discount rate to each projected period’s cash flow to calculate the present value of the cash flows. This involves dividing each projected cash flow by (1 +discount rate) raised to the power of the respective period.

4.Calculate Terminal Value: Estimate the value of the company beyond the projected period, usually based on a perpetuity or exit multiple. The terminal value represents the value of the business’s cash flows beyond the projection period.

5.Sum the Present Values: Sum up the present values of the projected cash flows and the terminal value to obtain the total present value of the future cash flows. This represents the estimated value of the business.

6.Sensitivity Analysis: Perform sensitivity analysis by varying key assumptions such as cash flow projections, discount rate, and terminal value to assess the impact on the estimated value.

7.Compare to Market and Comparable Companies: Consider market conditions, industry trends, and comparable company valuations to evaluate the reasonableness of the estimated value.

It’s important to note that the accuracy of the valuation heavily depends on the quality of cash flow projections, appropriate selection of the discount rate, and other assumptions made during the process. The DCF technique requires careful consideration and professional expertise in financial analysis to ensure a comprehensive and accurate valuation of the business.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(b) (Syllabus 2022).

Step 1:

Step 2:

PV Terminal Value in year of exit

( ₹ ) 1800000* 0.401 =721800

Step 3:

Total Present Value of cash flow of ABC Limited= Sum of PV Cash Flows + PV Terminal Value

= 3071600 + 721800

= ( ₹ ) 3793400

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(c) (Syllabus 2017).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2A(iii) (Syllabus 2017).

Start-up Valuation Methods are as under:

1.Venture Capital Method : is used to arrive, at the preliminary valuations for starts up which are yet to generate revenues.

Formulas:

-Return of Investment = Terminal Value / Post Money Valuation

-Post Money Valuation = Terminal Value / Anticipated ROI.

2.Berkus Method assigns a range of value to the valuation of the start-up based on the progress that the start-up owners have achieved in getting the start-up off to a start.

3.Scorecard Valuation Method : The average pre money valuation of other starts up on the same vertical arrived at and this valuation is then used to value the start-up that is looking for investment.

4.Risk Factor Summation Method : The value is to be adjusted for 12 risk factors inherent to the startup.

5.Cost to Duplicate Method : Start up value is based on the cost that it would take to duplicate the starts up assets elsewhere. It does not consider future earnings.

It is conservative valuation method.

6.Valuation by stages : When start-up is in the advanced stage, lesser risk that an investor in taking. This method is used by venture capitalist and angel investors.

7.Comparable Method : Valuation is based on precedent transactions, and key ratios within a particular sector.

8.The Book Value Method : Net worth is considered.

9.First Chicago Method : This method recognizes the fact that start up is a highrisk investment and there is a high probability that they may grow beyond expectation and equal chances that they may fail badly. Under this method, three valuations are provided

I.Worst-cause scenario

II. Normal cause scenario

III. Best cause scenario.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 2(b) (Syllabus 2017).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 4(a) (Old syllabus).

(i)Market comparable method is generally adopted for valuing unlisted entities. This method envisages valuation based on market multiples of comparable companies.

(ii)The following metrics can be adopted as a basis for such relative valuation:

a.Enterprise Value / Sales

b.Enterprise Value / EBIDTA

c.Enterprise Value / EBIT

d.Price to Earnings Ratio

e.Price to Book

f.Enterprise Value / Cash Flow

(iii)For banking companies, book value multiples viz.: price to book metric is widely followed.

(iv)For steel companies, industry specific multiples would be the most appropriate. For instance, price cost per ton capacity of steel can be the appropriate metric adopted for valuation.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 4(b) (Old syllabus).

Calculation of Value of Santosh Limited:

Step -I (Rate of return of similar Listed Company)

Rate of Return required by shareholders

Step -II (Unlisted Company -Santosh Limited)

Share Price = {Current Dividend (1 + rate of growth in dividend)} / {Rate of Return required by shareholders - rate of growth in dividend}

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(iii) (Syllabus 2017).

Cost of capital should be used for discounting the cash flows of the firm value of the firm and per share be calculated as follows:

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 4(a) (Old syllabus).

Financial performance of any business depends on many factors. The needs of the customer with respect to the product or service are a major factor. Market competition is another factor. Government policies may change cost and hence the price. The product may face obsolescence due to new technologies. Cheaper alternatives may affect the customer preference.

Thus, the profitability of any business may be sensitive to any of the factors. If we take these factors as independent variables, then given a change in or more of the variables affect the profitability. This technique is known as "Sensitivity Analysis”.

This technique can also be used to test the validity of any model. For example, in business valuation, there are variables such as discount rate, future growth rate, market share, beta value, required rate of return, etc. Each of these factors can be varied to test the business valuation model.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2(b) (Syllabus 2017).

1800 = => r = 0.12 or 12%. (r (cid:63) 0.09)

0.12 = [X * 0.20 + (1 -X) * 0.10]

X = 0.20

X is the weight assigned to equity i.e. = 0.20

So, debt / equity = 0.8/0.2 = 4

Since the market value of equity is thrice its book value and the market value of debt is nine-tenths of its book value, the market value weights of equity and debt are:

0.2*3 / and 0.8 *0.9 = 0.6 and 0.72

Hence the WACC is:

[(0.6 / 1.32) * 0.20 + (0.72 / 1.32) * 0.10] = 0.1454 or 14.54 %

Hence the value of the firm is:

[54 / (0.1454 - 0.09)] = 974.7 million.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2A(iii) (Syllabus 2017).

Gordon Growth model provides as under:

P = D (1 + g) /(r – g) 0 0 e Where:

P = share price

D = current dividend

g = rate of growth of dividend

r = rate of return required by the equity shareholders (student may also use k e e instead of r ) e

Computation of Rate of return required by shareholder of Sun Ltd. (listed company)

By using the following formula rearranged as: r = D (1+ g)/P +g

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2A(i) (Syllabus 2017).

Market Comparables : This method of valuation is generally applied in case of unlisted entities. This method estimates value by relating the same to underlying elements of similar companies for past years. It is based on market multiples of 'comparable companies'. For example:

— Earnings / Revenue Multiples (Valuation of Pharmaceutical Brands)

— Book Value Multiples (Valuation of Financial Institution or Banks)

— Industry Specific Multiples (Valuation of steel companies based on production capacities like price per ton capacity of steel, per store value in the days of retail boom, price per click in e-commerce)

— Multiples from recent M&A Transactions

Following steps are involved in this method of valuation:

1.Comparable assets are identified and their market values are obtained

2.Market values are converted into standardized values, since the absolute price cannot be compared

3.Standardised value or multiple for the asset being analysed are compared with the standardised value of the comparable asset, controlling for any difference between the firms that might affect the multiple, to judge whether the asset is under or over-valued.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 4(c) (Old syllabus).

Calculation of possible value of brand

(Rs. in lakh)

Hence, value of the brand = Rs.400 lakh

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 5(a) (Old syllabus).

The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. This approach tends to determine the business value on the basis of value of assets of the business.

It is specifically useful for valuing business that are not worth more than their overall net tangible value e.g.

•asset intensive firms, e.g. physical assets (e.g., real estate, machinery) dominate value. Examples: manufacturing, infrastructure

•holding companies - when the company’s value is derived from its investments and subsidiaries, not operations.

•distressed entities.- when the business is no longer a going concern and liquidation or net asset value is more relevant.

The cost approach should be applied and afforded significant weight under the following circumstances:

(a)participants would be able to recreate an asset with substantially the same utility as the subject asset, without regulatory or legal restrictions, and the asset could be recreated quickly enough that a participant would not be willing to pay a significant premium for the ability to use the subject asset immediately (nothing special in the assets).

(b)the asset is not directly income-generating and the not in unique nature of the asset makes using an income approach or market approach unfeasible.

(c)The value lies primarily in tangible assets

The methodologies adopted under cost approach are as under:

(a)Replacement Cost Method

(b)Reproduction Cost Method

(c)Summation Method-Sum of part Method.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 4(a) (Syllabus 2022).

Average P/E ratio using the market comparables is = (18+20+22+21) / 4= 20.25

Earnings per share = 20,00,000 / 50,000 = ₹ 40/- per share

Market value per share = Average P/E ratio * EPS

= 20.25* 40

= ₹ 810/- per share

Value of the Newrotechnologies Limited= MP Per share * No. of shares

= 810 * 50,000

= ₹ 4,05,00,000

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(a) (Syllabus 2022).

For valuing a business, a detailed, comprehensive analysis and the ability to develop accurate projections and assumptions are necessities. Business valuation also requires the application of finance theory in the appropriate places and using professional judgment. Some of the most common hindrances include:

1.Value, as a concept, is ambiguous. An asset has different values depending on the purpose or context. Thus an asset has several values: market value (amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing); fair value (amount that will fairly compensate an owner who was involuntarily deprived of the economic enjoyment of a property where there is neither a willing buyer nor a willing seller); liquidation or forced sale value (amount which may reasonably be expected to be obtained from the sale of a property within a time-frame too short to obtain a value under open market conditions); going concern value (amount ascribed to an established business, not to its constituent parts); investment value (value of a property to a particular investor, or a class of investors for specified investment objectives).

2.Everyone has an opinion of value about a business, a tangible asset, or an intangible asset but actually, the term ‘value’ means different things to different people. The problems faced by the valuers are enormous. They have to bring forward an appropriate definition of value for a specific valuation. The Webster’s dictionary puts value as:

“A fair return or equivalent in goods, services, or money for something exchanged: the monetary worth of something: marketable price; relative worth, utility, or importance: something intrinsically valuable or desirable.”

3.Mathematical certainty or certainty of one output based on specific set of inputs is neither demanded, nor possible in valuation discipline. Being context specific, the value keeps on fluctuating. It is for the valuers to express the value attributed by them to the asset, which is estimated on the basis of the facts drawn from the evidence before them. Valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is a procedure, essentially, a bringing together of the economic concept of value and the legal concept of property. Valuation discipline is neither science nor an art; it is a craft, i.e., a skill that one learns by doing. The more one does it, the better one gets at it.

4.Valuation may be considered a science but, to a large extent, valuation variables require inherent subjectivity. In other words, valuation is not a precise science as there is always imperfection in the market. Even in rare instances, where the valuer has perfect knowledge of the market, the market does not have the perfect knowledge of value as well as the valuation methodology and process. On every occasion, there may not be a definitive valuation method or a definitive value conclusion, but every valuation is based only on its circumstances. Right valuation requires logical and methodical approach and careful application of the basic principles. This means that there may not be a prescribed format or a preferred methodology, which is to be adopted always.

5.Any business valuation activity is based on the hypothetical consideration that there is an arm’s length sale of a business between a willing buyer and a willing seller, usually for cash. Any valuation theory attempts to search for truth and relates to the practice in order to understand valuation theory.

6.One of the frequent sources of legal confusion between cost and value is the tendency of courts, in common with other persons, to think of value as something inherent in the thing being valued, rather than an attitude of persons toward that thing in view of its estimated capacity to perform a service. Whether or not, as a matter of abstract philosophy, a thing has value except to people to when it has value, is a question that need not be answered for the sake of appraisal theory. Certainly, for the purpose of a monetary valuation, property has no value unless there is a prospect that it can be exploited by human beings.

7.In a business valuation, the value of an interest in business is typically considered to be equal to the future benefits that are to be received from the business, discounted to the present value, at an appropriate discount rate. However, this simple definition of value raises the following issues to be addressed:

(i)How to define ‘benefits?

(ii)Future projections may be extremely difficult to make and also very difficult to get interested parties to agree to.

(iii)What is an appropriate discount rate that reflects the risk inherent in the subject entity

8.Developing reasonable assumptions for projections based on historical trends and expected future occurrences and documenting the reasoning behind those assumption choices.

9.Gathering the appropriate market comparable (both public and private) and documenting the reasoning behind the market comparable choices.

10.Choice of Valuation Standards to be followed.

11.Drafting a comprehensive valuation report.

12.Remaining compliant with International Valuation Standards (IVS) or ICAI Valuation

Standards IRS guidelines and other industry standards.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 3(b) (Syllabus 2022).

Core Principles of Valuation: -

•Ethics- Valuers must follow the ethical principles of integrity, objectivity, impartiality, confidentiality, competence and professionalism to promote and preserve the public trust.

•Competency- At the time the valuation is submitted, valuers must have the technical skills and knowledge required to appropriately complete the valuation assignment.

•Compliance- Valuers must disclose or report the published valuation standards used for the assignment and comply with those standards.

•Basis (i.e., Type or Standard) of Value- Valuers must select the basis (or bases) of value appropriate for the assignment and follow all applicable requirements. The basis of value (or bases) must be either defined or cited.

•Date of Value-Effective Date/Date of Valuation - Valuers must disclose or report the date of value that is the basis of their analyses, opinions or conclusions. Valuers must also state the date they disclose or report their valuation

•Assumptions and Conditions - Valuers must disclose significant assumptions and conditions specific to the assignment that may affect the assignment result.

•Intended Use- Valuers must disclose or report a clear and accurate description of the intended use of the valuation.

•Intended User(s)- Valuers must disclose or report a clear and accurate description of the intended user(s) of the valuation

•Scope of Work- Valuers must determine, perform, and disclose or report a scope of work that is appropriate for the assignment that will result in a credible valuation

•Identification of Subject of Valuation- Valuers must clearly identify what is being valued.

•Data- Valuers must use appropriate information and data inputs in a clear and transparent manner so as to provide a credible valuation.

•Valuation Methodology - Valuers must properly use the appropriate valuation methodology

(ies)to develop a credible valuation.

•Communication of Valuation- Valuers must clearly communicate the analyses, opinions and conclusions of the valuation to the intended user(s).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(a) (Syllabus 2022).

Factors Influencing Valuation

Determining the-value of a business is a complicated and intricate process. Valuing a business requires determination of its future earnings potential and the risks inherent to those future earnings. The process arriving at this value includes a detailed analysis of its mix of physical and intangible assets, and the economic and industry conditions. Major factors influencing the valuation of a business include:

•debt equity ratio

•nature of business and its growth history

•customer base

•areas of operations

•audited financial statements

•management team and its competency

•litigation and disputes

•Related Party Transactions, etc.

The other salient factors include:

1.The stock exchange price of the shares of the two companies before the commencement of negotiations or the announcement of the bid.

2.Dividends paid on the shares.

3.Relative growth prospects of the two companies.

4.In case of equity shares, the relative gearing of the shares of the two companies.

5.Voting strength in the merged (amalgamated) enterprise of the shareholders of the two companies

6.Past history of the prices of shares of the two companies.

7.Merger and amalgamation deals can take a number of months to complete during which time valuations can fluctuate substantially. Hence provisions must be made to protect against swings.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 4(a) (Syllabus 2022).

(i)Cost of Merger, when Merger is financed by cash = (Cash - MVY) + (MVY - PVY)

Where, MVY = Market Value of Y Ltd

PVY = True/Intrinsic Value of Y Ltd.

Then, = (1,40,00,000 - 1,08,00,000) + (1,08,00,000 - 1,08,00,000) = Rs. 32,00,000

If cost of merger becomes negative, then shareholders of X Ltd. will get benefited by acquiring Y Ltd. in terms of market value.

(ii)Cost of Merger when Merger is financed by Exchange of Shares in X Ltd. to the shareholders of Y Ltd.

Cost of merger = PVXY – PVY

Where,

PVXY = Value in X Ltd. that Y Ltd.'s shareholders get.

PVY = True/intrinsic value of Y Ltd.

Here X Ltd. agrees to exchange 5,00,000 shares in exchange of shares in Y Ltd.

Then the cost of merger is calculated as below:

= (5,00,000 * Rs. 30) – Rs. 1,08,00,000 = Rs. 42,00,000 PVXY = PVX + PVY = 3,00,00,000 + 1,08,00,000 = Rs. 4,08,00,000 Proportion that Y Ltd.'s shareholders get in X Ltd.'s Capital structure will be: 5,00,000

The cost of merger i.e., Rs. 42,00,000 as calculated above is much higher than the true cost of merger Rs. 27,98,640 or Rs. 28,00,000 with this proposal, the shareholders of Y Ltd. will get benefited.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 2(c) (Syllabus 2017).

In a demerger, a company splits into two different entities. So the valuation of each entity is estimated on a standalone basis and the relative value as a ratio is arrived at. The following are the approaches in practice to find out value of shares of each entity post de-merger:

(i)Asset based approach

(a)Net asset value

(ii)Income based approach

(a)Discounted cash flow method

(b)Earnings capitalisation

(c)Excess earnings method

(d)Incremental cash flows method

(iii)Market based approach

(a)Market price

(b)Comparable transaction multiple

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(d) (Syllabus 2017).

Price of shares issued to persons resident outside India under the Foreign Direct Investment Policy, shall not be less than –

Listed Shares : The price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company are listed on any recognised stock exchange in India;

Unlisted Shares : The fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis, where the shares of the company are not listed on any recognised stock exchange in India; and

Preferential Allotment : The price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

Subscription to MOA : However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, as applicable, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 5(c) (Old syllabus).

Liquidation value is the total worth of a company's physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as real estate, fixtures, equipment and inventory. Intangible assets are not included in a company's liquidation value.

Liquidation value is usually lower than book value but greater than salvage value. The assets continue to have value but, due to a limited time frame, must be sold at a loss to book value. Liquidation value does not include intangible assets. Intangible assets include a business's intellectual property, goodwill, and brand recognition. Value investors look at the difference between a company's market capitalization and its going concern value to determine whether the company's stock is currently a good buy.

The liquidation value is calculated as follows:

I.Net Realisable valuation method is generally used in case of liquidation.

II. From the balance sheet of the company calculate the assets and liabilities of the company. III. The assets have to be valued as if they are individually sold and not as a going concern value. IV. The intangible assets are not considered for liquidation value Total Assets minus total liabilities constitute the liquidation.

V.Some liabilities which arise on closure should also be considered like retrenchment compensation.

VI. Tax consequences have also to be taken into consideration. VII. Any distribution to the shareholders of the company on its liquidation, to the extent of accumulated profits of the company is regarded as deemed dividend. Dividend Distribution tax will have to be captured for such valuation.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 5(b) (Old syllabus).

Valuation is a complex task that requires several inputs not only tangible but also intangible data. There cannot be any method or formula to calculate fair value though it is possible to calculate book value, market value averaging quoted prices for certain period. However, efforts are made to ascertain fair value just like extension of play time in Hockey or Football in case of tie even in extra time. Resort to such valuation is done in case market value is independent of its profitability. Dividing the aggregate of values obtained through net assets method and yield method is the process to arrive at fair value. In another way the following well-known methods are applied to get fair value:

(a)The manageable profits basis method or the earning per share method;

(b)The net worth method or the break-up value method; and

(c)The market value method.

In nutshell, the methods most suitable to arrive at a reasonably fair conclusion is attempted.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 4(a) (Old syllabus).

Fund raising is an important exercise for any business activity. Raising money is a complicated multi-stage process. Valuation of business is one of the most important steps before going for fund raising. A business valuation requires a working knowledge of a variety of factors, and professional judgment and experience. This includes recognizing the purpose of the valuation, the value drivers impacting the subject company, and an understanding of industry, competitive and economic factors, as well as the selection and application of the appropriate valuation approach (es) and method(s). Business valuation is a process that follows a number of key steps. The five steps are:

1.Planning and preparation

2.Analysing the financial statements

3.Choosing the business valuation methods

4.Applying the selected valuation method

5.Reaching the business value conclusion

The important parameters to be kept in mind while doing valuation of a business for fund raising are as under:

1.To work out how much money you want to raise. The short answer is that one should raise enough money to get to the next valuation milestone and then have time left to go out and find the next round.

2.The practical thing to do is to put oneself inside the mind of the target venture capitalist and think like the investor. If one can guess how they would value the business then it can be ensured that the amount being raised is consistent with the 10-25% dilution guideline and structure the pitch accordingly.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 4(a) (Old syllabus).

Valuation is generally done on the basis of fair value when market value of a company is independent of its profitability.

The fair value of shares is arrived at after consideration of different modes of valuation and diverse factors. There is no mathematically accurate formula of valuation. An element of guesswork or arbitrariness is involved in valuation.

The following four factors have to be kept in mind in the valuation of shares:

(i)Capital cover

(ii)Yield

(iii)Earning capacity; and

(iv)Marketability

For arriving at the fair value of shares, three well known methods applied are:

(a)the manageable profit basis (earnings per share method)

(b)the net worth method or break-up value method

(c)the market value method.

The fair value of a share is the average of the value obtained by the net assets method and the one obtained by the yield method. This is, in fact, not a valuation, but a compromise formula for bringing the prices to an agreement. Thus, the valuation of shares is more of an art than science due to the mix of qualitative and quantitative factors involved in valuation process.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 5(c) (Old syllabus).

Determining the value of a business is a complicated and intrinsic process. Valuing a business requires the determination of its future earnings potential, the risks inherent in those future earnings. Strictly speaking, a company's fair market value is the price at which the business would change hands between a willing buyer and willing seller when neither is under any compulsion to buy or sell and both parties have knowledge of relevant facts.

The other salient factors influencing valuation are:

–The stock exchange price of the shares of the two companies before the commencement of negotiations or the announcement of the bid.

–Dividends paid on the shares.

–Relative growth prospects of the two companies.

–In case of equity shares, the relative gearing of the shares of the two companies.

–Debenture stock to the amount of issued ordinary share capital.

–Net assets of the two companies.

–Voting strength in the merged enterprise of the shareholders of the two companies.

–Past history of the prices of shares of the two companies.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 5(c) (Old syllabus).

The Companies (Registered Valuers and Valuation) Rules 2017 provides that:

Rule 3(2)- No partnership entity or company shall be eligible to be a registered valuer if-

(a)it has been set up for objects other than for rendering professional or financial services,

including valuation services and that in the case of a company, it is a subsidiary, joint venture or associate of another company or body corporate.

In this circumstance, ABC Private Limited is the subsidiary of XYZ limited (having 50% voting power of ABC Private Limited and controlling composition of it’s Board of Directors), and hence it cannot be registered as a valuer.

Rule 3(2) (d)- three or all the partners or directors, whichever is lower, of the partnership entity or company, as the case may be, are not registered valuers.

In this circumstance, ABC Private Limited has two directors and all the directors are registered valuers, and hence it can be registered as a valuer.

Rule 3(1) (k)- is a fit and proper person: -

Explanation – For determining whether an individual is a fit and proper person under these rules, the authority may take account of any relevant consideration, including but not limited to the following criteria-

(i)Integrity, reputation and character,

(ii)Absence of convictions and restraint orders, and

(iii)Competence and financial solvency.

Rule 3(2) (c)- all the partners or directors, as the case may be, are not ineligible under clauses

(c), (d), (e), (f), (g), (h), (i), (j) and (k) of sub-rule (1).

Ethical track record, honesty, and trustworthiness of A, one of directors, of the ABC Private Limited, are not good, in other words, it hits the provisions of Integrity, reputation and character, and hence it cannot be registered as a valuer.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 3(b) (Syllabus 2022).

Section 247(2) of the Companies Act, 2013 states that

The valuer appointed under sub-section ( 1 ) shall, —

(d )not undertake valuation of any assets in which he has a direct or indirect interest or becomes

so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him.

( 3 )If a valuer contravenes the provisions of this section or the rules made thereunder, the valuer

shall be liable to a penalty of fifty thousand rupees

Provided that if the valuer has contravened such provisions with the intention to defraud the company or its members, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

( 4 )Where a valuer has been convicted under sub-section ( 3 ), he shall be liable to—

( i )refund the remuneration received by him to the company; and

( ii )pay for damages to the company or to any other person for loss arising out of incorrect or misleading statements of particulars made in his report.

Therefore, in the given case, action can be taken against the registered valuer for penalty, fine, refund of fees, payment of damages as stated above.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 3(a) (Syllabus 2022).

Rule 3 (2) of the Companies (Registered Valuers and Valuation) Rules, 2017 provides that no partnership entity or company shall be eligible to be a registered valuer if-

(a)it has been set up for objects other than for rendering professional or financial services, including valuation services and that in the case of a company, it is a subsidiary, joint venture or associate of another company or body corporate;

(b)it is undergoing an insolvency resolution or is an undischarged bankrupt

(c)all the partners or directors, as the case may be, are not ineligible under clauses (c), (d), (e),

(f), (g), (h),(i), (j) and (k) of sub-rule (1);

(d)three or all the partners or directors, whichever is lower, of the partnership entity or company, as the case may be, are not registered valuers; or

(e)none of its partners or directors, as the case may be, is a registered valuer for the asset class, for the valuation of which it seeks to be a registered valuer.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(a) (Syllabus 2022).

Rule 3(2) of the Companies (Registered Valuers and Valuation) Rules, 2017 provides that no partnership entity or company shall be eligible to be a registered valuer if-

(a)it has been set up for objects other than for rendering professional or financial services, including valuation services and that in the case of a company, it is a subsidiary, joint venture or associate of another company or body corporate;

(b)it is undergoing an insolvency resolution or is an undischarged bankrupt.

(c)all the partners or directors, as the case may be, are not ineligible under clauses (c), (d), (e),

(f), (g), (h), (i), (j) and (k) of sub-rule (1);

(d)three or all the partners or directors, whichever is lower, of the partnership entity or company, as the case may be, are not registered valuers; or

(e)none of its partners or directors, as the case may be, is a registered valuer for the asset class, for the valuation of which it seeks to be a registered valuer.

Therefore, from the above, it may be concluded that the firm is eligible to appoint itself as registered valuer.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2017).

Section 54 of the Companies Act, 2013 read with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 states that the:

(i)Valuation of Sweat Equity Shares:

The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation. The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with Justification for such valuation. A copy of gist along with critical elements of the valuation report obtained under clause (6) and clause (7) shall be sent to the shareholders with the notice of the general meeting.

(ii)Treatment of transaction in the books of PQR Limited: Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect there of obtained from the registered valuer, such noncash consideration shall be treated in the following manner in the books of account of the company-

(a)where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or

(b)where clause (a) is not applicable, it shall be expensed as provide in the accounting standards.

The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled, namely.-

(a)the sweat equity shares are issued to any director or manager; and

(b)they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

In respect of sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company, if the sweat equity shares are not issued pursuant to acquisition of an asset.

If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company.

Explanation.- For the purposes of this sub-rule, it is hereby clarified that the Accounting value shall be the fair value of the sweat equity shares as determined by a registered valuer under sub-rule (6)

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2022).

Section 247 of the Companies Act, 2013 and the Companies (Registered Valuers and Valuation) Rules, 2017 Valuation Rules) inter alia provides for (a) registration of valuers, who may be individuals or partnership firms or Companies, with the Central Government for conduct of valuation of different classes of assets under the Companies Act, 2013;

The Central Government delegated its powers and functions under section 247 of the Act to the Insolvency and Bankruptcy Board of India (IBBI) and specified it as the Authority under the said Rules. Only a person registered with the Authority as Registered Valuers can conduct valuations required under the Companies Act, 2013 and the Insolvency & Bankruptcy Code. Subject to meeting other requirements, an individual is eligible to be a Registered Valuer, if he:

(a)is a fit and proper person,

(b)has the necessary qualification and experience,

(c)is a valuer member of a Registered Valuers Organization (RVO),

(d)has completed a recognised educational course as member of an RVO,

(e)has passed the valuation examination conducted by the Authority within three years preceding the date of making the application for registration, and

(f)is recommended by the RVO for registration as a valuer. The individual is required to have either a post-graduate qualification in the specified discipline and three years’ experience, or a bachelor’s degree in the specified discipline and five years’ experience.

Mr. VG is neither qualified, as he has no required experience [ Passed in 2022 shows that 3-year experience is not possessed by Mr. VG], nor he is registered with IBBI. Objection of directors is justified/ tenable.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(b) (Syllabus 2022).

Specimen disclosures and its assumptions are given below:

S.No. Particulars Sample relevant disclosures

1.Total no. of shares to be issued as sweat equity 1,50,000 equity shares

2.The current market price of the shares of

issue of securities to be calculated in accordance with International Accounting Standards / standards specified by the Institute of Chartered Accountants of India

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 2A(iii) (Syllabus 2017).

DELS Trading Private Limited is not eligible to be registered as registered valuer organization.

(1)An organisation that meets requirements under rule 3(2) of the Companies (Registered Valuers and Valuation) Rules, 2017 may be recognized as a registered valuers organisation for valuation of a specific asset class or asset classes if –

I.it has been registered under section 25 of the Companies Act, 1956 or section 8 of the Companies Act, 2013 with the sole object of dealing with matters relating to regulation of valuers of an asset class or asset classes and has in its bye laws the requirements specified in Annexure-III;

II. it is professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession;

Provided that, subject to sub-rule (3), the following organisations may also be recognised as a registered valuers organisation for valuation of a specific asset class or asset classes, namely:

(a)an organisation registered as a society under the Societies Registration Act, 1860 or any relevant state law, or;

(b)an organisation set up as a trust governed by the Indian Trust Act, 1882.

(2)The organisation referred to in sub-rule (1) shall be recognised if it-

a.conducts educational courses in valuation, in accordance with the syllabus determined by the authority, under rule 5, for individuals who may be its valuers members, and delivered in class room or through distance education modules and which includes practical training;

b.grants membership or certificate of practice to individuals, who possess the qualifications and experience as specified in rule 4, in respect of valuation of asset class for which it is recognised as a registered valuers organisation;

c.conducts training for the individual members before a certificate of practice is issued to them;

d.lays down and enforces a code of conduct for valuers who are its members, which includes all the provisions specified in Annexure-I;

e.provides for continuing education of individuals who are its members;

f.monitors and reviews the functioning, including quality of service, of valuers who are its members; and

g.has a mechanism to address grievances and conduct disciplinary proceedings against valuers who are its members.

(3)A registered valuers organisation, being an entity under proviso to sub-rule (1), shall convert into or register itself as a company under section 8 of the Companies Act, 2013, and include in its bye laws the requirements specified in Annexure- III, within one year from the date of commencement of these rules.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 5(c) (Old syllabus).

An individual shall have the following qualifications and experience to be eligible for registration under Rule 4 of the Companies (Registered Valuer and Valuation) Rules 2017, namely:

(a)Post-Graduate Degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least three years of experience in the specified discipline thereafter; or

(b)A Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least

five years of experience in the specified discipline thereafter; or

(c)Membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession with at least three years’ experience after such membership.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 5(a) (Old syllabus).

Sweat equity shares are issued for consideration other than cash such as technical know-how, brand equity, design, patent or any other intangible asset. The intangible asset could come from promoters or director or even employees of the company.

Section 54 of the Companies Act, 2013, specifies the conditions under which sweat equity shares may be issued. The issue is to be authorised by a special resolution, the number of shares to be issued, the recipients, and at least one year must have passed after the company had been incorporated.

Valuation of shares involves two steps -

1.Valuation of the share price; and

2.Valuation of the intangible assets,

The valuation of the share price shall be done by a registered valuer and the intangible asset also be valued by a registered valuer (say the intellectual property right i.e. the human resource value needs to be evaluated and added or considered).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(c) (Syllabus 2017).

The problem stated in question has two scenarios – one is when the company is not a defaulter as per Insolvency and Bankruptcy Code, 2016 and the other is when it is in the Corporate Insolvency Resolution Process (CIRP). In case of former, offer price is determined through book building as per Securities Exchange Board of India (Delisting of Equity Shares) Regulations, 2009. Final offer price shall be the price at which the maximum number of shares are tendered by equity holders. In case of latter, regulations were amended in 2018, the price shall be as per Tribunal approved Resolution Plan subject to that the price shall not be less than the liquidation value as determined by the Registered Valuer.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 5(a) (Old syllabus).

Regulation 20 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 dealing with discovered price.

Regulation 20 (1) provides that after fixation of the floor price under 19 in terms of regulation 19A of these regulations, the discovered price shall be determined through the reverse book building process in the manner specified in Schedule II of these regulations and shall be disclosed in the detailed public announcement and the letter of offer by the Manager of the offer.

The acquirer shall have the option to provide an indicative price in respect of the delisting offer, which shall be higher than the floor price calculated in terms of regulation 19A of these regulations.

The acquirer shall also have the option to revise the indicative price upwards before the start of the bidding period and the same shall be duly disclosed to the shareholders. (6) The acquirer may, if it deems fit, pay a price higher than the discovered price determined in terms of sub-regulation (1).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 5(e) (Syllabus 2017).

Regulation 20 of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 deals with discovered Price. It states that:

(1)After fixation of the floor price under sub-regulation (2), the discovered price shall be determined through

the reverse book building process in the manner specified in Schedule II of these regulations, and the Manager to the offer shall disclose the same in the detailed public announcement and the letter of offer.

(2)The floor price shall be determined in terms of Regulation 8 of SEBI Takeover Regulations as may be

applicable.

(3)The reference date for computing the floor price would be the date on which the recognized stock

exchange(s) was required to be notified of the board meeting in which the delisting proposal was considered and approved.

(4)The acquirer shall have the option to provide an indicative price in respect of the delisting offer, which

shall be higher than the floor price calculated in terms of sub-regulation (2).

(5)The acquirer shall also have the option to revise the indicative price upwards before the start of the

bidding period and the same shall be duly disclosed to the shareholders.

(6)The acquirer may, if it deems fit, pay a price higher than the discovered price determined in terms of

sub regulation (1).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 1(a) (Syllabus 2017).

Under SEBI (Delisting of Equity Shares) Regulations, 2009, if the price discovered through reverse book building process is not agreeable to the promoter, the only option available to him was to reject the delisting process and withdraw from delisting.

However, the Regulations have been amended on November 14, 2018 through SEBI (Delisting of Equity Shares) (Second Amendment) Regulations, 2018 under which if the price discovered is not acceptable, promoter may make a counter offer to the public shareholders within two working days of the price discovered. However, such counter offer price shall not be less than the book value of the company as certified by the merchant banker.

Hence, the promoter of ABC Ltd can explore the newly available counter offer option to pursue his delisting process.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 4(c) (Old syllabus).

Board needs to be advised on the following precautions in fixing price or price band:

(a)In case of book building process, floor price or price band need to be stated in a red-herring prospectus and to determine later the price, before filing with ROC;

(b)Announce the price or price band at least five working days before opening the bid in case of IPO but in case of FPO at least one working day in all newspapers in which pre-issue advertisements got released as well as websites of stock exchanges in which listed;

(c)Announcements to specify financial ratios computed for upper and lower price band;

(d)The cap on price band shall be less than or equal to 120% of the floor price;

(e)The floor price or the final price shall not be less than the face value of specified securities involved in the Further Public Offer.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 4(c) (Old syllabus).