When Is Valuation Required Under the Companies Act, 2013?

Many companies discover they need a valuation only when a transaction is already in motion. The Companies Act, 2013 does not ask for a valuation every year. It asks for one at specific moments, mostly where shares, assets or businesses change hands and someone's interests could be affected. Knowing these triggers early saves time and avoids filings that are rejected for want of a proper report.

The Rule That Frames It All

Section 247 of the Act says that where a valuation of any property, stock, shares, debentures, securities or goodwill, or any other assets or net worth of a company, is required under the Act, it must be made by a person registered as a valuer. The valuer is appointed by the audit committee or, if there is none, by the board of directors. The valuer must be independent and follow the prescribed valuation standards.

In short, the Act sets out the occasions for a valuation, and Section 247 decides who must carry it out. The valuer is a Registered Valuer under the Companies (Registered Valuers and Valuation) Rules, 2017.

Common Situations That Call for a Valuation

1. Preferential allotment and private placement. When an unlisted company issues shares to selected investors, the price must be supported by a valuation report from a Registered Valuer. This is one of the most frequent triggers, because every funding round that is not a rights issue falls near it. The rules under the Act spell out the valuation and disclosure requirements.

2. Conversion of loans or debt into equity. If a company converts a loan or other liability into shares, the issue price is typically supported by a valuation.

3. Sweat equity shares. When shares are issued to directors or employees for know-how or intellectual property rather than cash, the rules require valuation of the consideration by a Registered Valuer.

4. Mergers, demergers and schemes of arrangement. Sections 230 to 232 deal with compromises, arrangements and amalgamations. A valuation report supports the share exchange ratio, and the Tribunal and shareholders rely on it. These reports are closely examined.

5. Buying out minority shareholders. Where an acquirer holds 90% or more of the shares after an amalgamation or similar event, and must offer to buy out the minority, the price is determined with a valuation by a Registered Valuer.

6. Winding up and liquidation. Valuation of a company's assets is required by Registered Valuers in the winding-up process under the Act. Insolvency proceedings under the Insolvency and Bankruptcy Code have their own valuation requirements.

What About Buybacks, ESOPs and Rights Issues?

These are common questions.

• Buybacks: The Act sets conditions and limits on the buyback price and amount, but does not itself mandate a Registered Valuer in the same way as a preferential issue. Companies often obtain a valuation anyway, to support the price.
• ESOPs: Employee stock options do not need a Registered Valuer under the Companies Act, though valuations may be needed for tax and accounting purposes.
• Rights issues: These are offered to existing shareholders in proportion to their holdings and generally do not need a Companies Act valuation, though the price should still be reasonable.

The specific rule matters, so check the provision that applies to your transaction.

How the Process Typically Works

1. Identify the trigger. Confirm which provision applies and what the valuation must cover, such as share price, exchange ratio or asset value.
2. Appoint the valuer. The audit committee or board appoints a Registered Valuer in the right asset class, after checking independence and registration.
3. Fix the valuation date. The date should be close to the transaction, since an old report may not be accepted. Many companies plan the date backwards from the allotment or filing deadline.
4. Share complete information. Provide financials, projections, the cap table and details of the transaction. The valuer can only be as accurate as the information supplied.
5. Review the draft. Management should check facts, not push the number. The valuer's independence is the whole point of the exercise.
6. Use the report for the stated purpose. The report is normally tied to a specific transaction. Using it for another purpose can undermine it.

Keep the report and working papers on file. Regulators, auditors and the Tribunal may ask for them later.

Conclusion

Treat the Companies Act as a trigger list. If your transaction involves a preferential issue, conversion of debt, sweat equity, a scheme of arrangement, a minority buyout or a winding up, plan on a valuation by a Registered Valuer. Appoint the valuer through the board or audit committee, confirm their registration and asset class, and make sure the report date works for your timeline. Provisions and rules are amended from time to time, so confirm the current position with a professional.