Section 232 Merger Valuation: Methods and Key Considerations
When two Indian companies merge under Section 232 of the Companies Act, 2013, the National Company Law Tribunal (NCLT) sanctions the scheme. Before that, one number has to be settled: the share exchange ratio, which decides how many shares in the merged company each set of shareholders receives. It comes from a valuation, and it is the part of the scheme most likely to be questioned.
Who Does the Valuation
Under Section 247 and the Companies (Registered Valuers and Valuation) Rules, 2017, valuations required under the Act must be carried out by a registered valuer. The report supports the exchange ratio and is typically filed with the scheme and shared with members and creditors.
For listed companies, SEBI's rules on schemes of arrangement add a second layer: a fairness opinion from a SEBI-registered Category I merchant banker, independent of the valuer, confirming the ratio is fair from a financial point of view. Unlisted companies are not subject to that requirement, but the NCLT will still expect a supportable ratio.
The Core Principle: Relative Value, Not Absolute Value
A merger valuation does not try to find what each company is worth in isolation. It finds what each is worth relative to the other, using the same approach and assumptions for both. If one company is valued on projections and the other on book value, the ratio between them means little.
The Three Approaches and How They Are Combined
Asset approach. Net asset value, based on the fair value of assets less liabilities, suits asset-heavy companies, holding companies and businesses with limited earnings history.
Income approach. DCF values a company on its projected cash flows and suits operating businesses with reliable forecasts. Its weakness is its sensitivity to growth and discount rate assumptions, so the projections behind it need to be tested for reasonableness rather than accepted as given.
Market approach. Comparable company multiples, and for listed companies the traded share price, reflect what investors currently pay. Thin trading can make a listed price unreliable, and comparables must be genuinely similar.
Most reports apply more than one approach and assign weights. Good practice is to explain why each approach was used or rejected and why the weights were chosen. A fairness range with sensitivity analysis is more persuasive than a single point estimate.
Key Considerations That Shape the Ratio
Valuation date and appointed date. The scheme fixes an appointed date from which the merger takes effect, and the valuation should be anchored to a date consistent with it, using financials that are current enough to be relied upon.
Dilutive instruments. ESOPs, convertible instruments and other rights that could become shares must be reflected, or the ratio will misstate each side's true ownership.
Standalone versus synergy value. The ratio is normally built on standalone values of each company, with synergies reflected in the combined entity rather than credited to one side. Valuers should say clearly which basis they used.
Accounting treatment. The scheme must be accompanied by the auditor's certificate that the proposed accounting treatment conforms to the accounting standards under Section 133. Where the merging companies are under common control, Ind AS 103 Appendix C generally requires the transaction to be accounted for at carrying values rather than fair values, which affects how the deal is presented even though the ratio itself is still valued.
Common Mistakes
Using different methods or dates for the two companies, which breaks the relative comparison.
Accepting management projections without testing them against history and the market.
Leaving out dilutive securities or contingent liabilities such as pending litigation.
Unexplained weightings across methods.
Weak independence. A conflicted valuer or fairness opinion provider weakens the whole scheme.
A Section 232 valuation is about fairness between two sets of shareholders, so the test is consistency, transparency and independence rather than a single clever method. Use the same approaches and dates for both companies, show how the weights were chosen, test the projections, and for listed companies plan for the separate fairness opinion from the start. The Section 233 fast-track route for certain companies has its own conditions and is not covered here.
