Valuation of Business and Assets for Corporate Restructuring

Capital Employed = Rs. 10,00,000

Expected Profit = Capital Employed × Expected Rate of Return

= ₹ 10,00,000 × 10%

= ₹ 1,00,000

Here, total profit of last four years: 1,19,500 + 1,17,000 + 1,22,000 + 1,23,500

= ₹ 4,82,000.

So, Average Profit = ₹ 4,82,000/ 4 = ₹ 1,20,500

Future Maintainable Profit = Average Profit – Fair remuneration of partner

= ₹ 1,20,500 – ₹ 8,000

= ₹ 1,12,500

Super Profit = Future Maintainable Profit – Expected Profit

= ₹ 1,12,500 – ₹ 1,00,000

= ₹ 12,500

Goodwill = Super Profit × No. of purchasing years’

= ₹ 12,500 × 5

= ₹ 62,500

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(e) (Syllabus 2017).

Particulars Cost of Debt (K ) = Interest × (1-tax rate) = 10% × (1-0.3) =7.00% d Cost of Equity (K ) = Risk free rate + (Beta × Market Risk Premium) = 6% +1.05(16%-6%) =16.5% e Debt equity ratio (as given in the question) = 2000: (500+7500) = 20% & 80%

WACC= [(K ) × Debt% + (K ) × Equity %] = (7.00 × 20%) + (16.5 × 80%) = 14.60% d e Operating Profit after tax = Rs. 1,800 crores

EVA = NOPAT – Cost of Capital Employed

= [(Rs. 1,800 cr.) – (14.60%) × Rs.10, 000 cr.]

= Rs.1, 800 cr. – Rs.1460 cr.

= Rs.340 cr.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(a) (Syllabus 2017).

(i)

Return on equity investment =

[Cash Flow (dividend) + closing market price - opening market price] / opening market price

Cash dividend on September 15, 2024 @ 40% = 40% of Rs. 10/- = Rs. 4/-;

Cash dividend on March 15, 2025 @ 50% = 50% of Rs. 10/- = Rs. 5/-;

Closing Price = 1000/-; Opening Price = Rs.750/-

So, return on equity investment = [{4+5} + {1000 – 750}] / 750 = 34.53%

(ii)

Generation of Valuation Report Identification Number for valuation conducted by Register Valuer under Insolvency and Bankruptcy Code, 2016. (IBBI circular dated 12th August, 2024)

•In exercise of the powers conferred under the provisions of section 196 of the Insolvency and Bankruptcy Code, 2016, Regulations made thereunder, and the Valuation Rules and IBBI issued circular for Generation of Valuation Report Identification Number for valuation conducted by Register Valuer under Insolvency and Bankruptcy Code, 2016.

•In order to ensure authenticity and to have a unique reference number of the valuation reports, it has been decided to provide a Valuation Report Identification Number (VRIN) for each valuation conducted under the Code.

•Accordingly, an online module, in consultation with Registered Valuers Organisations, has been developed by IBBI. The module has been hosted on the IBBI website at https://www. ibbi.gov.in . The RV/RVE shall access the module with the login credentials already provided by the IBBI. Before the submission of valuation report, the respective RV/RVEs shall generate a unique VRIN for each valuation report. The RV/RVE shall mention the VRIN on the front page of the valuation report.

•A facility is also being provided on the IBBI website to allow stakeholders to verify the authenticity of the report by using VRIN.

•The circular shall be applicable to all the cases where the date of valuation report is on or after the date of this circular. The IPs shall not accept any valuation reports without VRIN in all such cases.

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

Yes, I do agree with the given statement. A business valuation involves analytical and logical application/analysis of historical/future tangible and intangible attributes of business.

•Valuation is a process to assess the worth of an enterprise or a business.

•In case of corporate restructuring through mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price.

•Valuation plays a vital role in deriving the share exchange (swap) ratio.

•Determining the value of company/business/share is a complicated, elaborative process.

•Valuation shall be exercised judiciously and diligently. However, it is a more a subjective than objective process, and depends on the skills and perceptions of the valuer/expert.

•It is an application of facts, figures, skills and insight of valuer. It is more an art than science.

•Business valuation involves analytical and logical application/analysis of past as well as future tangible and intangible aspects of business.

Preliminary study to valuation includes:

1.Purpose of valuation,

2.Goodwill/Brand name in the market,

3.Business environment of the entity to be valued,

4.Estimation/forecast of future cash flows as accurately as possible,

5.Is company listed on any stock exchange,

6.If listed, whether shares of the company are traded frequently?

7.The industry to which the concerned entity belongs to,

8.The industry P/E ratio, past and future growth rate,

9.Who are the competitors locally and globally?

10.Whether any similar valuation has been done recently?

11.The technology concerning the enterprise and its probability of obsolescence,

12.The accepted discounting rates,

13.Market capitalization aspects,

14.Identification of hidden liabilities through analysis of material contracts,

15.Last years audited balance sheets.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2A(i) (Syllabus 2017).

(a)Calculation of EBITA (Rs.in Lakhs)

(b)Calculation of PAT (Rs. in lakhs)

(c)Computation of Super Profit

(i)Future Maintainable Profit (Rs. in lakhs)

(ii)Super Profit (R in lakhs)

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2A(i) (Syllabus 2022).

Valuation Report preparation exercise is based on the observation, inspection, analysis, and calculation. Considering the shareholder’s interest and the need for transparency and upholding corporate governance principles and after taking into view aspects of minority interest, transparency and corporate governance the Expert Group of Ministry of Corporate Affairs recommended that the following matters should compulsorily be covered in the Valuation Report, in a clear, unambiguous and non-misleading manner, consistent with the need to maintain confidentiality: Contents of summarised report are as under-

1.Background Information

2.Purpose of Valuation and Appointing Authority

3.Identity of the valuer and any other experts involved in the valuation

4.Disclosure of valuer Interest/Conflict, if any

5.Date of Appointment, Valuation Date and Date of Report

6.Sources of Information

7.Procedures adopted in carrying out the Valuation

8.Valuation Methodology

9.Major Factors influencing the Valuation

10.Conclusion

11.Caveats, Limitations and Disclaimers.

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

( a)Calculation of EBITA

(b)Calculation of PAT

(c)Computation of Super Profit

(i)Future Maintainable Profit

(ii)Super Profit

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

There are various methods for valuation of intangible assets such as human resources, technical know- how, patents, copyright, brands etc. The commonly used methods are:

•Historical cost method

•Replacement cost method

•Present value of future cash flows method

•The Lev and Schwartz method

Under the historical cost method, cost incurred in recruitment, training and development, cost of retaining, cost of attrition, etc. of human resources is considered in calculation. For other intangible assets, the cost incurred in bringing the intangible asset to its present state is taken.

Under the replacement cost method, the value of intangible asset is calculated based on the current cost which will need to be incurred to create the intangible asset. This method is more reasonable in the sense that it takes into consideration all the changes in the cost components.

Under the present value method, the future cash flows from the economic benefits of the intangible asset is estimated and discounted at the rate of cost of capital to arrive at the present value which is taken as the value of intangible asset.

The Lev and Schwartz method is used for human resources accounting. As per this model, the value of human capital of a person who is y’ years old is the present value of his future earnings from employment. The following formula is used to calculate the present value:

 (Vy) =  Py (t + 1)  I(t) / (1 + r) t - y

Where:

 (Vy) = expected value of a y year old person’s human capital

t = the person’s retirement age

Py (t) = probability of the person leaving the organisation

I(t)= expected earnings of the person in period

r = discount rate

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

The weighted average cost of debt and equity is known as the cost of capital. An enterprise invests this capital for business purpose and earns returns for the investors. The financial performance can be determined by excess earnings of the enterprise over and above the cost of capital. This is known as the “economic value added” (EVA).

EVA = NOPAT – (Invested Capital x WACC) NOPAT - Net operating profit after tax WACC - Weighted average cost of capital NOPAT = EBIT (1-Tax Rate) EBIT = Earnings before interest and tax Invested Capital = (Total Assets - non interest bearing liabilities)

Basically, EVA reflects the profitability of the enterprise. If positive, means that the enterprise generates true economic profit. The purpose of a business enterprise is creation of wealth to investors. Unless the EVA is positive, the investors do not get any return on their investment.

Therefore, it can be said that the company is destroying the value since the EVA is negative.

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

The Supreme Court followed the principle laid down in the case of Dr. Renuka Dutta vs. B.V. Solvay Pharmaceuticals and held that the valuation of shares is not only a question of fact, but also raised technical and complex issues which may be appropriately left to the wisdom of the experts, having regard to the many imponderables which enter the process of valuation of shares. If the valuer adopts the method of valuation prescribed, or in the absence of any prescribed method, adopts any recognized method of valuation, his valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter. Where a method of valuation is prescribed the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation.

In Duncans Industries Ltd. vs. State of U.P. and others , the Hon’ble Court held that the question of valuation is basically a question of fact and this Court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record. Similarly in Miheer H. Mafatlal vs. Mafatlal Industries Ltd. the Hon’ble Court sounded a note of caution observing that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy.

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

A practice of joint valuation report is more prevalent in Merger and Amalgamation transaction involving one or more listed company. The following efficient processes would reduce complexities in delivery the final report:

(a)Issue independent appointment letters to the valuer from the company on whose behalf the valuation work is to be carried out.

(b)Joint introductory meeting or call of all the parties and to provide understanding of the business of the companies to be valued, purpose of valuation and timelines.

(c)Subsequently valuer can independently meet respective company's management for further understanding and clarifications.

(d)Understand the business rational for the purpose of transaction.

(e)Obtain financial information from management of the entities.

(f)Discussion among the Joint valuers on valuation methods

(g)Arrive at consensus on the valuation methods to be used for valuation of each of the companies formally part of the transaction. Board valuation assumptions, reconciliation of input date for the valuation exercise, value derived by using selected approach.

(h)Convergence on value/share swap independently arrived by the valuers.

(i)Draft of joint valuation report to be prepared, reviewed and confirmed by the joint valuers.

(j)Final joint valuation report, to be signed by joint valuers and issued to the clients.

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

(a)Calculation of EBITA

(Rs. in lakhs)

(b)PAT

(Rs. in lakhs)

(c)Computation of Super Profit

(i)Future Maintainable Profit

(Rs. in lakhs)

(ii)Super Profit

(Rs. in lakhs)

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

Offer price is the price at which the acquirer announces to acquire shares from the public shareholders under the open offer. The offer price shall not be less than the price as calculated under Regulation 8 of the SEBI (SAST) Regulations, 2011 for frequently or infrequently traded shares. If the target company’s shares are frequently traded then the open offer price for acquisition of shares under the minimum open offer shall be highest of the following:

a.Highest negotiated price per share under the share purchase agreement (“SPA”) triggering the offer;

b.Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the public announcement (“PA”);

c.Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;

d.Volume weighted average market price for sixty trading days preceding the PA.

Workings:

a.Highest negotiated price per share under the share purchase agreement (“SPA”) triggering the offer: Given ₹ 265 per share

b.Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the public announcement: 1,57,00,000/60,000 = ₹ 260

c.Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA: ₹ 270 (Paid on 20.12.2019)

d.Volume weighted average market price for sixty trading days preceding the PA: ₹ 272

Hence the minimum offer price should be ₹ 272 per share (Highest amount a, b, c, d)

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

General Principles of Business Valuation are as under:

1.Value is determined at a specific point in time.

2.Value is prospective. It is equivalent to the present value, or economic worth, of all future benefits anticipated to accrue from ownership.

3.The market determines the required rate of return.

4.Value is influenced by liquidity.

5.Principle of alternative

5.The higher the underlying net tangible asset value base, higher the going concern value.

Preliminary Steps in Valuation:

A business/corporate valuation involves analytical and logical application/analysis of historical/future tangible and intangible attributes of business. The preliminary study to valuation involves the following aspects:

1.Purpose of Valuation

2.Analysis of business history

3.Profit trends

4.Goodwill/Brand name in the market

5.Identifying economic factors directly affecting business

6.Study of exchange risk involved

7.Study of employee morale

8.Study of market capitalization aspects

9.Identification of hidden liabilities through analysis of material contracts.

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

Normally, a strategic buyer adopts market based approach for the purpose of valuation. In case the shares in the company are listed in a stock exchange, market price method helps in evaluating the price in the secondary market. However, there are circumstances in which market based approach is neither suitable nor could be adopted. Valuation of a division of a company, if shares are not listed or thinly traded, if the object is to liquidate the company does not suit market based approach. Results will also be erratic if there are significant or unusual fluctuations. At times the valuer ignores the market price, if he is of opinion that the market price is not a fair reflection of the Company's underlying assets or profitability status. Market based approach is not at all suitable in cases of unlisted companies and private companies. Valuation of start-up companies are also beyond market based approach.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 4(a) (Old syllabus).

Brand valuation is the process used to calculate the value of brands. Strong brands create loyalty, help companies attract and retain talent, drive competitive advantage, and even reduce business risk. Brand valuation is a way to quantify all of these benefits.

There are various ways to calculate the valuation of a Brand:

1.Cost-Based Brand Valuation

The brand is valued using the sum of individual costs or values of brand assets and liabilities. It's the accumulation of the costs that have been incurred to build the brand since inception. Items included when evaluating costs include advertising, promotion expenditures, the cost of campaign creation, licensing and registration costs.

One drawback of this method is that while costs can be collected and used, the figure doesn't necessarily represent the current value of a brand.

2.Market-Based Brand valuation

This method uses one or more valuation methods by comparing similar brands which have been sold. This method uses comparable market transactions like the specific sale of a brand, comparable company transactions, and/or stock market quotations. Market-based brand valuation is what a brand can be sold for. The brand value using this method is equal to a market transaction price, bid, or offer for identical or reasonably similar brands. In real estate terms, it's like researching the sales prices of similar homes in the same neighbourhood before putting a price on your own home.

3.Income-Approach Brand Valuation

This method is often referred to as the “in-use” approach. It considers the valuation of future net earnings that can be attributed directly to the brand to determine the value of the brand in its current use. The brand value using this method is equal to the present value of income, cash flows, or cost savings actually or hypothetically due to the asset.

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

Branding a product involves ascertaining product sustainability in the market. In order to protect the brands registration is done under several classes as per Trade Marks Law. For a moment, think as to how much investment one has to make by means of money and other resources to adopt, develop and popularize a brand or a mark during the course of one’s business. They create a value premium for the products and other services. Without a brand or mark, products and services are ‘address less’. Brands connect markets with products and services and thereby they create value. Brands do not command any value unless they are able to bring cash flows to the company that has adopted the same. With increase in incremental cash flows, value of brand increases proportionately. Brands have to be constantly associated with good quality products and services. They require proper showcasing and servicing and they should remain active in appropriate markets.

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

Yes, the statement is true and agreeable.

The preliminary study to valuation involves the following aspects:

1.Purpose of valuation.

2.Goodwill/Brand name in the market.

3.Business environment of the entity to be valued.

4.Estimation/forecast of future cash flows as accurately as possible.

5.Is company listed on any stock exchange?

6.If listed, whether shares of the company are traded frequently?

7.The industry to which the concerned entity belongs to.

8.The industry P/E ratio, past and future growth rate.

9.Who are the competitors locally and globally?

10.Whether any similar valuation has been done recently

11.The technology concerning the enterprise and its probability of obsolescence.

12.The accepted discounting rate.

13.Market capitalization aspects.

14.Identification of hidden liabilities through analysis of material contracts.

15.Last years audited balance sheets.

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

The valuer shall cover the following in the Valuation Report:

a)Background information of the assets being valued

b)Purpose of valuation and appointing authority

c)Identity of the valuer and any other experts involved in the valuation

d)Disclosure of valuers interest or conflict, if any

e)Date of appointment, valuation date and date of report

f)Inspections and/or investigations undertaken

g)Nature and sources of the information used or relied upon

h)Procedures adopted in carrying out the valuation and valuation standards followed; restrictions on use of the report, if any

i)Major factors that were taken into account during the valuation

j)Conclusion; and

k)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.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 6(c) (Old syllabus).

Valuation is guessing with tact and intelligence. Different methods are adopted to record the price as near as possible on actual disposal. Certain principles need to be borne in mind before finalising Valuation Report. Report may be required for specific assets or may be for whole business or undertaking. In case of whole business or undertaking the past data on segment performance is required to be commented and taken into consideration. Valuation as per the report is taken as successful when the fair market value is arrived at the satisfaction of the seller company and the buyer company is willing to pay if it is beneficial to owners.

Broadly following principles are to be kept in mind for valuation:

Principle of Time Value of Money : This principle suggests that the value can be measured by calculating the present value of future cash flows discounted at the appropriate discount rate. Principle of Risk and Return : This principle believes that the investors are basically risk averse and on the other hand expects higher amount of wealth. Higher the risk, higher may be possibility of return and vice versa . Principle of Substitution : This principle believes that understanding the market with competitive forces is very important in order to decide the price consideration. The risk averse investor will not pay more than that of the substitute available in the market. Principle of Alternatives : This principle suggests that one should explore the various alternatives available in the market and should not rest only on one option. The benefits of vetting of various alternatives will give a comparative valuation and a prudent investor will choose the most beneficial alternative to his portfolio. Principle of Expectation : Cash flows are based on the expectations about the performance in future and not the past. In the case of mature companies, we may assume that the growth from today or after some certain period would be constant. Principle of Reasonableness : In valuation the principle of reasonableness is most important. It takes into consideration various aspects viz. nature of business, historical background, brand image, book value of the stock, earning capacity, dividend track record, etc.

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

Merger/Amalgamation/Takeover is backed by the aspect of valuation. Appropriate method of valuation of a business depends to a great extent on the acquisition motives. The reasons for valuation could be to achieve the objectives of the top management i.e. either purely financial aspects relating to taxation, assets stripping, financial restructuring or business related such as expansion or diversification.

However, behavioural reasons have more to do than personal ambitions or objectives of the top management. Normally, top management has desire to expand and diversify the needs to be chosen between Make or Buy decision. A criterion adopted to arrive at a decision is to evaluate present value of the differential cash flows. Acquisitions are not only normally market driven but also influenced by non-financial considerations. Thus the value of a target gets affected not only by the motive of the acquirer, but also by the target company’s objectives. The price could be affected by the motives of the other bidders as well.

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

As per Managing Director's policy:

(i)The value of the share at the end of 20 years = 30/ 0.10 = Rs.300

(ii)The present value of share = 300 x (0.1468) = Rs.44.04

As per current status of company:

(iii)If the company could pay dividends of Rs.5 per share forever from the beginning, the current price of share would be = 5/0.10 = Rs.50.00

(iv)Thus, the loss to each shareholder is the difference of two prices : Rs.50 – Rs.44.04 = Rs. 5.96 per share

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

(i)Buying a small lot of shares : For this purpose dividend yield method is most appropriate for valuation of shares. For calculation of average dividend, weighted average will be more appropriate since dividend rate is rising :

Average dividend = 211/10 = 21.10%

Value of a share on the basis of dividend for buying a small lot =

(Average dividend rate / Market expectation) x 100

= (21.10 / 15) x 100 = Rs.140.67 per share

(ii)Buying a controlling interest in the company : For this purpose, total profit will be relevant to determine the value of shares as the shareholders have the capacity to influence the decision of distribution of profit. As the profit is displaying a rising trend, weighted average will be more appropriate for calculation purposes:

Average yield = 101/10 = 10.10 %

Average value per share = (10.10/15) x 100 = Rs.67.33

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

End to end valuation process typically involves the following steps:

1.Gather financial information: Collect the financial statements and relevant information of the companies involved, including their assets, liabilities, revenues and expenses.

2.Select Valuation Method: Determine the appropriate valuation method or combination of methods based on the nature of the business, industry standards and regulatory requirements. Common methods include the market approach, income approach and asset-based approach.

3.Determine Exchange Ratio: Once the values of the companies are determined, the exchange ratio or share swap ratio is calculated. The ratio determines how many shares of the acquiring company will be issued for each share of the target company.

4.Consider other factors: Apart from valuation, other factors such as strategic fit, synergies, and management considerations are also considered during the amalgamation process.

5.Obtain Approvals: The valuation results and exchange ratio are presented to the board of directors and shareholders of the companies involved. They must approve the terms of the amalgamation, including the valuation methodology and the exchange ratio.

It is important to note that the specific details and requirements of amalgamation and valuation can vary depending on the jurisdiction, industry and individual circumstances of the companies involved. Consulting with financial advisors, valuation experts and legal professionals is recommended to ensure compliance with applicable laws and regulations and to obtain fair and accurate valuation in the context of an amalgamation.

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

Adjusted Net Asset Value (NAV): Revalued Assets - Liabilities

₹ 150 Lakhs - ₹ 40 Lakhs = ₹ 110 Lakhs

Minimum Sale Consideration: The base valuation is ₹ 110 Lakhs, but to include synergy, the final price is often negotiated higher (e.g., ₹ 110 Lakhs + Synergy gains = ₹ 120 Lakhs).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(a) (Syllabus 2022).

Step 1: Calculation of exchange ratio on the basis Net Asset Value (NAV) per Share

Company A: NAV = ₹ 60,00,000/10,00,000= 6 A Company B: NAV = ₹ 30,00,000/5,00,000= 6 B Exchange Ratio (NAV): 6/6 = 1

Step 2: Calculation of exchange ratio on the basis Earnings per Share

Company A: EPS = ₹ 10,00,000/10,00,000= 1 A Company B: EPS = ₹ 4,00,000/5,00,000= 0.80 B Exchange Ratio (EPS): 0.80/1 = 0.80

Step 3: Calculation of fair exchange ratio: -

Fair exchange ratio = (1+0.80)/2 = 0.90 (as no weights are given in the question therefore, equal weight is being given to both the methods in valuation).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(b) (Syllabus 2022).

Consideration paid by A Ltd. = Cash offer per share * number of shares

= ₹ 17/- * ₹ 70 lakh = ₹ 1190 lakh

Pre-merger value of B Limited= ₹ 15/-* 70 lakh= ₹ 1050 lakh

Acquisition premium (Gain to B Ltd. shareholder) = Consideration paid – pre-merger value

= ₹ 1190 lakh – ₹ 1050 lakh

= ₹ 140 lakh

Alternatively

Acquisition Premium (Gain to B Ltd. Shareholders) can be calculated as follows also:

₹ 17 - ₹ 15= ₹ 2 per share

= 70 lakhs shares * ₹ 2= ₹ 140 lakhs

Acquirer’s gain = Value of synergy - Acquisition premium paid

= ₹ 220 lakh - ₹ 140 lakh = ₹ 80 lakh

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

The transaction between Company X and Company Y is a slump sale transaction.

A slump sale refers to the transfer of an undertaking, business, or division of a company as a going concern, where all assets and liabilities are transferred as a package to another entity. In a slump sale, the business is sold as a whole, and individual assets and liabilities are not separately identified or valued. The consideration for the slump sale is usually a lump sum amount.

Rationale for Slump Sale: The key reasons for pursuing a slump sale were as follows:

a.Strategic Focus : The slump sale aimed to enable company X to concentrate its resources and efforts on its core business activities. By divesting non-core assets, the company could redirect its attention to areas where it held a competitive advantage and maximize growth opportunities.

b.Cost Rationalization : The non-core business segments were associated with additional costs, such as separate management teams, infrastructure, and overhead expenses. Through the slump sale, the company could eliminate these costs and achieve operational efficiencies.

c.Debt Reduction : In some cases, non-core business segments might have been burdened with significant debt. The proceeds from the slump sale could be utilized to repay debt, thereby strengthening the company’s financial position and reducing interest obligations.

Slump Sale Process: The slump sale process involved the following steps:

a.Identification of Non-Core Assets: The management conducted a thorough evaluation of the company’s businesses and identified the non-core assets that would be divested. This assessment involved analyzing financial performance, growth prospects, and strategic alignment with the company’s long-term objectives.

b.Valuation and Pricing: The non-core assets were valued based on their fair market value, taking into account factors such as asset condition, market demand, and future cash flows.

The pricing of the slump sale was determined through negotiations with potential buyers or investors.

c.Due Diligence: The potential buyers or investors performed due diligence on the non-core assets to assess their financial, operational, and legal aspects. This step ensured transparency and minimized risks associated with the slump sale.

d.Agreement and Execution : Once the negotiations and due diligence were completed, a formal agreement was drafted, outlining the terms and conditions of the slump sale. The execution of the agreement involved the transfer of ownership and assets, including tangible and intangible assets, contracts, and employees.

e.Approval and Registration : The slump sale transaction may require approval from regulatory authorities and compliance with statutory requirements. The transfer documents are registered with the appropriate authorities.

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

To determine the swap ratio, we need to calculate the relative value of Sub Co Y compared to Company X.

Market capitalization of Company X = Number of shares * Market price per share

= 10 crore * 60 = 600 crores

Market capitalization of Sub Co Y =Number of shares * Market price per share

= 6 crore * 30 = 180 crores

Calculation of the swap ratio:

Swap ratio = Market capitalization of Sub Co Y/ Market capitalization of Company X

= 180 crore / 600 crores = 0.3

This means that for every 0.3 shares of Sub Co Y, shareholders of Company X will receive one share of Y New.

If the shareholder of Company X owns 20,000 shares.

Based on the swap ratio, he would receive:

Number of Y New shares = Number of Company X shares * Swap ratio

=20,000 * 0.3 = 6000 shares of Y New

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

Calculation of total earnings after merger:

(i)Calculation of EPS after amalgamation when exchange ratio is in proportion to the relative earnings per share of the two companies-

Total Number of shares after merger

= 5,00,000 + 2, 50,000 X 4/5

= 5,00,000 + 2,00,000

= 7,00,000

Calculation of EPS when Exchange ratio is 1:2-

Total earnings after merger = Rs. 35,00,000

Total number of shares after merger = 5,00,000 + (2,50,000 * ½)

= 5,00,000 + 1,25,000

= 6,25,000

EPS after merger = 35,00,000 / 6,25,000

= Rs. 5.60

(ii)Impact of merger for the shareholders of the two companies under both options:

Under first option, when share exchange ratio is in proportion to relative earnings per share of the two companies, pre and post-merger EPS of shareholders of both the companies remain same.

Impact on shareholders of Soham Limited:

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(b) (Syllabus 2017).

(i)Market value of the companies

Zen Ltd.= PAT* P/E = 14*12= ₹ 168 cr

Ken Ltd. = 9.8*10= ₹ 98 cr

(ii)Value of original shareholders

(iii)No. of shares after merger

Price per share after merger

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2A(ii) (Syllabus 2017).

(i)Calculation of New EPS of Hunny Ltd

(ii)Exchange Ratio with Earning Assurance:

If the exchange ratio is decided with a view to maintain the pre-merger EPS of the Transferor Company, shareholders of both the companies should get the same share in earnings as they were getting before the merger.

Pre-merger EPS:

Hunny Ltd Rs. 17,00,000/3,40,000 shares = Rs. 5 per share

Bunny Ltd Rs. 6,00,000/ 80,000 shares = Rs 75 per share

Exchange Ratio: 7.5/5 = 1.5 or 3 shares in Hunny Ltd. for every 2 shares held in Bunny Ltd

Or 80,000 x 3 / 2 = 1, 20,000 shares

Total number of Shares after merger 3, 40,000 + 1, 20,000 = 4, 60,000 shares

EPS = Rs 23,00,000/4,60,000 shares = Rs. 5 per share

Earnings for Shareholders of Bunny Ltd. after Merger = 1, 20,000 * 5 = Rs 6,00,000 that confirms to premerger earnings of Bunny Ltd.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 2(b) (Syllabus 2017).

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

1.

= ₹ 5

2.Number of Shares Jyoti

3.Jyoti Industries Ltd. wants to retain the EPS of mergers at the pre-merger level

EPS of members of Jyoti Industries post merger should be 5

3/5

i.e for 5 shares in Jyoti Industries Ltd. member will get: 3 shares of Ruchi Industries Ltd.

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

(i)EPS and Market Price Per Share:

(ii)Revised EPS of Merged Entity

Exchange Ratio = 60/75=0.80 or 4 shares for 5 shares held

Number of shares to be issued to shareholders of Cherry ltd.

1,00,000 x 60/75 = 80,000

Revised EPS = (20,00,000 + 6,000,000) / (4,00,000 + 80,000) = 5.42

(iii)The present earning per share of Cherry ltd. Is ₹ 6/- and that of Olive Ltd. ₹ 5/- if Cherry Ltd. wants to ensure that, even after merger, the earning per share of its shareholders should remain unaffected, then the exchange ratio will be 6 share for every 5 share (In the ratio EPS) Number of shares to be issued to shareholders of Cherry ltd. 1,00,000 x 6/5 = 1,20,000 Revised EPS = (26,00,000)/ (4,00,000 + 1,20,000) = 5 Total Earning Per Share for Cherry Ltd.’s shareholders = 1,20,000 x 5 = 6,00,000

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

Premium available to shareholders of Ring Ltd as per market value

Combined Profit after Tax = 58 +12 = 70 Crores

(i)Combined EPS (70/14.4) = ₹ 4.86

(ii)Combined P/E Ratio = 6.21 x (58/70) + 5 x (12/70) = ₹ 6

(iii)Market Value Per Share i, e., P/E Ratio x EPS or 6 x 4.86 = ₹ 29.16

(iv)Number of shares in the Resultant Company = 12 + 2.4 = 14.4 Crores

(v)Total Capitalisation of Resultant Company = Market Value Per Share x Number of shares or 29.16 x 14.4 = ₹ 419.90 Crores

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 4(b) (Old syllabus).

Earning Before Merger

(2)Exchange Ratio

Total number of shares in the post-merger Company

Total earnings after merger

= 5, 00,000 + 1, 25, 000

Thus one share of Big Ltd. will be issued for every two shares of Small Ltd.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 4(c) (Old syllabus).

Combined profit after tax = 150 + 30 = ₹ 180 Lakh Combined shares = 25 +0.5(8) = ₹ 29 lakh EPS = 180/29 = ₹ 6.21 Market price after merger = Revised P/E * EPS = 12 * 6.21 = ₹ 74.52 Premium to PQR Shareholder = {0.5 (74.52)-33.75}/33.75 = (37.26-33.75)/33.75 = 0.104 or 10.4% The merger is not beneficial to XYZ's shareholders because their price falls from ₹ 78 to ₹ 74.52 there is a loss of 4.46%.

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

(a)Calculation of New EPS of Ram Ltd.

Number of Equity shares to be issued to shareholders of Shyam Ltd: 40000 X 15/20 = 30000 Total Number of Shares in Ram Ltd after merger: 170000 + 30000 = 200000 Total EPS post-merger 850000 + 300000 = 1150000 Thus EPS post-merger is 1150000/200000 = ₹ 5.75

(b)Exchange Ratio with Earning Assurance:

If the exchange ratio is decided with a view to maintain pre-merger EPS of the Transferor Company, shareholders of both the companies should get the same share in earnings as they were getting before the merger.

Pre-merger EPS-

Ram Ltd. – 850000/ 170000 = 5

Shyam Ltd. – 300000/ 40000 = 7.5

Exchange Ratio: 7.5 /5 = 1.5 or 3 shares in Ram Ltd for every 2 shares held in Shyam Ltd.

Or 40000 x 3 /2 = 60000

Total number of Shares after merger: 170000+60000 = 230000

EPS =1150000/230000 = ₹ 5

Earnings for Shareholders of Shyam Ltd after Merger = 60000 x 5 = ₹ 3, 00,000 that confirms to pre-merger earnings of Shyam Ltd.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2A(i) (Syllabus 2017).

The statement is true since any undertaking being transferred, if held for more than 3 years prior to the date of the slump sale, the gains from such a sale would qualify as long-term capital gains, and the effective rate of tax would be 20%. If the undertaking had been held for 3 years or any period lesser than that, prior to the date of slump sale, then the income would be taxable as short-term capital gains, the effective rate of which is currently 30%. Also, any distribution by the company to its shareholders could attract dividend distribution tax. This did not however, prevent the acquisition of Formulation Business from Piramal Health Care Ltd. by Abbott Healthcare Private Limited in 2010.

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

Present value of tax gains

(Rs. in lakh)

Total tax savings = 109.39 + 139.47 + 37.38 = Rs.286.24 lakh

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

(i)Swap Ratio = 20/100 = 0.2 i.e. 1 share of FM Ltd. for every 5 shares of VM Ltd.

No. of shares to be issued = 100 x 0.2 = 20 lakh shares

(iii)Expected share price after merger when PE ratio remain unchanged:

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

Law on valuation of shares is well settled. Regarding valuations by expert and recognized firm of Chartered Accountants, the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996) held that if Share Exchange Ratio is fixed by Chartered Accountant upon consideration of various factors and approved by majority of shareholders in meeting, the Court will not disturb ratio once the exchange ratio of the shares of the transferee company to be allotted to the holders of shares of the transferor company has been worked out by a recognized firm of Chartered Accountants who are expert in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interests.

Further, in Re Maknam Investments Ltd. (1995)(LJ) the Calcutta High Court observed:

"Courts do not go into the matter of fixing of exchange ratios /in great details or to sit in appeal over the expert decision of concerned Chartered Accountants of repute. Courts only see whether there has been any manifest unreasonableness or manifest fraud involved in the matter."

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