Parth Shah
on
Parth Shah
Register Valuer | CA | CPA | 15+ Years of Experiance
Parth Shah is the Founder and Team Leader of the company, bringing extensive expertise in business valuation and financial advisory.
Security valuation is the process of determining the fair market value of financial instruments such as shares, bonds, debentures, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCDs), and other hybrid securities. For Indian businesses, this process is not optional: multiple statutes including the Companies Act 2013, SEBI ICDR Regulations 2018, FEMA, and the Income Tax Act mandate certified valuations at specific corporate events.
Whether you are a startup founder raising a Series A round, a CFO managing a preferential allotment, or an AIF fund manager preparing periodic portfolio reports, understanding how securities are valued and which regulatory standard applies to your transaction is critical. This guide covers every major dimension of security valuation in the Indian context, from foundational concepts to advanced methodologies used for complex instruments like CCPS and CCDs.
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Key Takeaways
- Security valuation is the process of determining the fair market value of financial instruments including equity shares, preference shares, debentures, bonds, and hybrid instruments such as CCPS and CCDs.
- Under Section 247 of the Companies Act 2013, valuations of securities must be conducted by an IBBI (Insolvency and Bankruptcy Board of India) Registered Valuer; general CAs or consultants without IBBI registration cannot sign these reports.
- The primary valuation methods for Indian securities include the Discounted Cash Flow (DCF) method, the Net Asset Value (NAV) method, the Option Pricing Model (OPM), and the Probability Weighted Expected Return Method (PWERM), each suited to specific instruments and stages.
- SEBI, FEMA, the Income Tax Act (Rule 11UA), and Ind AS 113 each impose distinct valuation standards depending on the nature of the transaction, making it essential to identify the applicable regulatory framework before choosing a method.
- Complex hybrid instruments like CCPS and CCDs cannot be valued using simple equity share valuation formulas; their liquidation preferences, conversion ratios, and anti-dilution rights require specialized models such as OPM or Waterfall Analysis.
- A common mistake is assuming that the abolition of Angel Tax (Section 56(2)(viib), effective FY 2025-26) eliminates the need for a valuation certificate; FEMA floor pricing requirements and SEBI norms continue to make certified valuations mandatory for most capital-raising transactions.
- My Valuation’s team of IBBI-registered valuers and CPAs delivers securities valuation reports accepted by 95% of VCs and PE firms without major revision, typically within 5 to 7 business days.
Are you raising funds, issuing ESOPs, or managing a preferential allotment?
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Book a Free ConsultationWhat is the Security Valuation?
Security valuation is the systematic process of estimating the fair market value of a financial instrument at a specific point in time. It covers all categories of capital market instruments including equity shares, preference shares, bonds, debentures, convertible notes, warrants, and derivatives.
The process involves analyzing financial statements, projected cash flows, market comparables, economic conditions, and the specific rights attached to each class of security. Because different share classes carry different rights (for example, CCPS holders typically hold a liquidation preference over common equity shareholders), the same enterprise value can produce very different per-share values for each class.
Think of it like valuing different floors of the same building. The gross value of the building is one number, but the value of each floor depends on its lease terms, view, and access. Security valuation performs the same exercise for a company’s capital structure.
Why Does Security Valuation Matter for Indian Businesses?
Security valuation serves three distinct functions for Indian companies, each driven by a different stakeholder need.
For Investors and Portfolio Managers
For investors, valuation is the core of every buy, hold, or sell decision. A security trading below its fair market value presents a potential buying opportunity; one trading above its intrinsic value warrants caution. Portfolio managers at AIFs and PE funds use periodic security valuations to report accurate NAV (Net Asset Value) to their limited partners (LPs), as mandated by Regulation 23 of the SEBI (AIF) Regulations 2012.
For Startups and Companies Raising Capital
For startups and private companies, security valuation determines how much equity a founder gives up in exchange for investor capital. An accurately valued company allows founders to negotiate from a position of strength. An undervalued company means unnecessary dilution; an overvalued one risks investor pushback or regulatory scrutiny.
Under Section 62(1)(c) of the Companies Act 2013, any company issuing shares through a preferential allotment to a select group of investors must obtain a valuation from an IBBI Registered Valuer. This includes most venture capital and private equity investment transactions in India.
For Regulatory Compliance in India
Indian regulations require certified security valuations across at least five major frameworks. SEBI mandates valuations for preferential issues, rights issues, and open offers. FEMA requires FMV certification before shares can be issued to non-resident investors. The Income Tax Act (Rule 11UA) requires valuation for certain tax compliance filings. The Companies Act 2013 mandates IBBI-registered valuations for a wide range of corporate events. Ind AS 113 governs fair value measurement for financial reporting purposes.
Each of these frameworks may apply to the same transaction simultaneously, which is why working with a single expert who understands all four frameworks is significantly more efficient than engaging with multiple consultants.
What Are the Main Types of Securities That Require Valuation in India?
Different categories of securities have distinct risk profiles, cash flow structures, and embedded rights. Each requires a different valuation approach.
Equity Shares (Listed and Unlisted)
Equity shares represent residual ownership in a company. For listed companies, the market price provides a reference point; however, even listed share valuations require professional judgment when shares are infrequently traded. As per SEBI ICDR Regulations 2018, the floor price for listed company preferential allotments is calculated using a weighted average of the preceding 26 or 2 weeks of trading prices, whichever is higher.
For unlisted companies, the absence of a market price makes valuation more complex. Analysts use DCF, comparable company analysis, or the backsolve method (deriving value from the most recent arm’s-length funding round) to arrive at a fair value estimate.
Preference Shares: CCPS and OCPS
Compulsorily Convertible Preference Shares (CCPS) are the most common investment instrument used by VCs and PE funds in India. Unlike ordinary preference shares, CCPS must convert into equity after a defined period or event. Valuing CCPS requires accounting for the liquidation preference (typically 1x or 2x the invested amount), participation rights (whether the investor also shares in upside after recovering their preference), and anti-dilution provisions.
Simply dividing the enterprise value by the total number of shares on an as-converted basis does not capture these rights accurately. Specialized models are required.
Debt Securities: Bonds, Debentures, and CCDs
Bonds and debentures are valued by discounting the expected coupon payments and principal repayment back to their present value using an appropriate discount rate. The standard bond valuation formula is:
Bond Value = Sum of [ C / (1 + r)^t ] + F / (1 + r)^n
Where C is the periodic coupon, r is the yield to maturity (discount rate), t is each time period, F is the face value, and n is the total number of periods to maturity.
Compulsorily Convertible Debentures (CCDs), however, are hybrid instruments. They combine a debt component (the interest-bearing portion, if any) and an equity option (the conversion right). Zero-coupon CCDs, which are increasingly common in bridge rounds, carry no interest but offer a conversion at a discount. Valuing a CCD requires bifurcating the debt and equity components and applying distinct models to each.
Complex Hybrid Instruments: Warrants, SAR, and SAFE
Warrants give the holder the right to purchase equity at a fixed price within a defined period. Stock Appreciation Rights (SARs) entitle employees to a cash payment equal to the increase in share price. SAFEs (Simple Agreements for Future Equity) convert into equity at a discount or valuation cap in the next qualified round. Each of these instruments has a non-linear payoff structure that requires option-pricing models rather than simple equity multiples.
What Are the Key Methods Used in Security Valuation in India?
The choice of method depends on the type of security, the purpose of valuation, and the applicable regulatory framework.
Discounted Cash Flow (DCF) Method
The DCF method determines the present value of a security by discounting the expected future cash flows (dividends for equity, coupons and principal for debt) at an appropriate risk-adjusted rate. It is the most rigorous method for companies with predictable revenue streams.
Under Rule 11UA of the Income Tax Rules 1962, the DCF method is a recognized approach for determining the FMV of equity shares of an unlisted company. For DCF under the Income Tax Act, a Merchant Banker certification was historically required; the exact certification requirement varies based on the type of transaction and investor residency status.
Illustrative Example: A Bengaluru-based SaaS company projects free cash flows of Rs. 2 crore in Year 1, growing at 25% annually for 5 years, with a terminal growth rate of 5%. Using a discount rate of 18%, the DCF-derived enterprise value would be approximately Rs. 15 to 18 crore (depending on assumptions), which a valuer would then allocate across share classes based on their respective rights.
Comparable Company Analysis (CCA)
The CCA method values a security by benchmarking the subject company against publicly listed or recently transacted private companies in the same sector. Key multiples include EV/Revenue, EV/EBITDA, and P/E. For SaaS companies, ARR multiples are the standard metric.
In the Indian context, finding exact comparables can be challenging. Valuers often use a blend of Indian listed companies and global comparables, adjusting for a country risk premium and the discount for lack of marketability (DLOM) applicable to unlisted shares.
Option Pricing Model (OPM)
The OPM treats each class of shares as a call option on the company’s enterprise value, with a strike price defined by each class’s liquidation preference breakpoint. Using the Black-Scholes formula, the model allocates the total enterprise value across all security classes (common shares, Series A CCPS, Series B CCPS, warrants, and employee options) based on their respective claims in various exit scenarios.
The OPM is particularly powerful when a company has a complex capital structure with multiple rounds of preference shares. It is the most widely accepted method for allocating value in CCPS and multi-class capital structures, and it aligns with the guidance issued by the ICAI Registered Valuers Organization (ICAI RVO).
Probability Weighted Expected Return Method (PWERM)
The PWERM models multiple discrete future scenarios (typically IPO, strategic sale, and dissolution) and assigns a probability to each. For each scenario, it calculates the expected payout to every share class. The final value is the probability-weighted average across all scenarios.
Rule 11UA (as amended in 2023) explicitly recognizes PWERM as one of the five new valuation methods available for non-resident investors, alongside OPM, Comparable Company Multiple Method (CCM), Replacement Cost Method (RCM), and Comparable Transaction Multiple Method (CTM). This regulatory recognition has significantly increased the use of PWERM in cross-border funding transactions.
Net Asset Value (NAV) Method
The NAV method values a company’s securities based on the net value of its underlying assets (total assets minus total liabilities). It is most appropriate for asset-heavy companies (real estate, infrastructure), holding companies, and AIFs valuing their portfolio.
Under Rule 11UA, any IBBI Registered Valuer can conduct a NAV-based valuation. For DCF and more advanced methods, the regulatory qualification requirements vary.
How Are Complex Securities Like CCPS and CCDs Valued in Practice?
The valuation of complex hybrid instruments like CCPS and CCDs goes well beyond standard equity or debt valuation. Here is how a professional valuer approaches these instruments.
CCPS Valuation: A Step-by-Step Illustration
Consider a startup with an enterprise value of Rs. 50 crore. Its capital structure includes:
- Founders: 60 lakh equity shares (common stock)
- Series A investor: 20 lakh CCPS with a 1x non-participating liquidation preference of Rs. 10 crore
- ESOP pool: 10 lakh options at a Rs. 10 per share exercise price
Using the OPM, the valuer establishes breakpoints at the liquidation preference amount (Rs. 10 crore) and models the value that reaches common shareholders only after the preference is satisfied. If the company is liquidated at Rs. 12 crore, the Series A investor gets Rs. 10 crore (their preference) and the remaining Rs. 2 crore is shared among common shareholders. If the company exits at Rs. 80 crore, the dynamics shift entirely depending on whether the preference is participating or non-participating.
The final per-share values for common equity, CCPS, and options are all different numbers despite being derived from the same enterprise value. This is why a blanket Rs. 50 crore / total shares calculation is never appropriate for CCPS-heavy structures.
CCD Valuation: Bifurcating Debt and Equity
A Rs. 5 crore zero-coupon CCD converts at a 20% discount to the next equity round’s valuation. The valuer bifurcates this instrument into a debt component (the present value of the principal at a market interest rate) and an equity option (the present value of the conversion discount). Each component is valued separately and then summed. The interest component is recognised as a financial liability under Ind AS 32 and Ind AS 109, while the equity option may be treated as an equity component depending on the conversion terms.
Security Valuation Methods Compared: Which One Applies to Your Situation?
The table below summarizes when each major valuation method is most appropriate for Indian companies.
Valuation Method | Best For | Regulatory Acceptance | Key Requirement | Limitation |
DCF (Discounted Cash Flow) | Companies with predictable revenue; Series A and later | Rule 11UA, FEMA, Companies Act | Credible financial projections | Highly sensitive to growth and discount rate assumptions |
NAV (Net Asset Value) | Asset-heavy firms; AIFs; holding companies | Rule 11UA (all registered valuers) | Accurate asset and liability records | Not suitable for growth-stage startups with intangible value |
OPM (Option Pricing Model) | Multi-class capital structures; CCPS and warrant valuation | Accepted by SEBI, IBBI, ICAI RVO | Reliable enterprise value estimate; volatility inputs | Complex; requires specialised expertise |
PWERM (Probability Weighted Expected Return) | Late-stage startups; pre-IPO companies; cross-border rounds | Rule 11UA (new methods for NRIs); SEBI | Well-defined exit scenarios with probability estimates | Subjective scenario construction |
CCA (Comparable Company Analysis) | Listed company context; growth-stage companies | SEBI ICDR (as supporting method) | Availability of comparable companies or transactions | India-specific comparables often scarce |
Backsolve Method | Post-funding round ESOP pricing; 409A valuations | IBBI accepted; used for 409A | Recent arm’s-length financing round | Only valid shortly after the reference round |
For most Indian startups raising venture or PE capital, the OPM or PWERM combined with DCF provides the most defensible and regulator-accepted valuation. NAV alone is rarely sufficient for growth-stage companies.
Not sure which valuation method applies to your CCPS structure or cross-border funding round?
My Valuation’s IBBI-registered valuers and CPA-qualified experts can advise on the right approach. Schedule a discussion today.
Schedule a DiscussionWhat Does India’s Regulatory Framework Say About Security Valuation?
India has one of the most layered regulatory environments for securities valuation globally. Four major frameworks apply, often simultaneously.
SEBI (Securities and Exchange Board of India)
Under SEBI ICDR Regulations 2018, listed companies must value shares at a floor price derived from market trading data before any preferential allotment. For infrequently traded shares, the SEBI-prescribed formula uses book value, comparable trading multiples, and customary industry parameters.
For AIF fund managers, Regulation 23 of the SEBI (AIF) Regulations 2012 mandates independent fair value assessments of portfolio holdings at least semi-annually or annually, in line with the fund’s constituent documents. These valuations must comply with internationally accepted standards such as IPEV Guidelines.
Companies Act 2013 and IBBI Registered Valuers
Section 247 of the Companies Act 2013, read with the IBBI (Registered Valuers) Rules 2017, makes IBBI registration mandatory for any person conducting valuations under the Act. As of January 31, 2019, only registered valuers under the Securities or Financial Assets (SFA) category are authorized to sign valuation certificates for shares, debentures, and other financial securities.
This matters practically: a valuation report signed by a CA who is not also an IBBI Registered Valuer is not legally valid for filing with the Registrar of Companies (MCA) or for presentation to the income tax authorities in the context of a shares transaction.
FEMA (Foreign Exchange Management Act)
Under the Foreign Exchange Management (Non-debt Instruments) Rules 2019, any issuance of shares to a non-resident investor must be at a price not lower than the Fair Market Value (FMV). The valuation report establishes a floor price: the transaction can occur at or above that floor, but never below it.
The certifying authority for FEMA valuations is typically a Chartered Accountant or a SEBI Category I Merchant Banker. The methodology must be internationally accepted and conducted on an arm’s-length basis. With the abolition of Angel Tax for shares issued on or after April 1, 2025, the scrutiny has shifted from tax compliance to FEMA compliance, making FMV certification even more central to foreign-funded transactions.
Income Tax Act (Rule 11UA and Rule 11UAA)
Rule 11UA of the Income Tax Rules 1962 prescribes the methods for determining the FMV of equity shares of an unlisted company. The permissible methods are NAV and DCF for resident investors. For non-resident investors, the CBDT amended Rule 11UA in September 2023 to introduce five additional methods: PWERM, OPM, Comparable Company Multiple Method (CCM), Replacement Cost Method (RCM), and Comparable Transaction Multiple Method (CTM).
Rule 11UAA applies to the valuation of CCPS specifically for the purposes of the former Angel Tax provisions. Even with the abolition of Angel Tax, these rules continue to govern the methodology for FMV determination in other tax contexts such as capital gains under Section 50CA.
Ind AS 113: Fair Value Measurement
Ind AS 113, which is India’s adoption of IFRS 13, establishes the framework for fair value measurement in financial reporting. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Under Ind AS 32 and Ind AS 109, companies must classify and measure financial instruments at fair value or amortized cost. Hybrid instruments like CCDs must be bifurcated into their debt and equity components, each measured under the relevant standard. For ESOP accounting, Ind AS 102 requires companies to expense the fair value of options at the grant date using the Black-Scholes-Merton model.
When is Security Valuation Mandatory in India?
Security valuation is not just good practice; it is legally required in the following situations, among others:
- Preferential allotment of shares or CCPS to investors under Section 62(1)(c) of the Companies Act 2013
- Private placement of securities under Section 42
- Share issuance to non-residents under FEMA (Non-debt Instruments) Rules 2019
- Mergers, demergers, and amalgamations under Sections 230 to 232 of the Companies Act 2013 (swap ratio determination)
- ESOP grant date valuation for accounting and tax purposes (Ind AS 102 and the Income Tax Act)
- AIF portfolio valuation per SEBI AIF Regulations, Regulation 23
- Insolvency resolution proceedings under the IBC, where fair value and liquidation value must be separately determined by IBBI Registered Valuers
- 409A valuations for Indian startups with US parent companies or US employee equity compensation programmes
- Buy-back of shares, delisting offers, and open offers under SEBI Takeover Regulations
In each of these scenarios, the report must be prepared by a qualified professional. For Companies Act and SEBI-regulated transactions, this means an IBBI Registered Valuer in the SFA category.
Conclusion
Security valuation is far more than an academic exercise for Indian businesses. It is a legally mandated, technically complex process that sits at the intersection of investment, regulation, and corporate governance. From determining how much equity a startup founder gives up in a Series A round to ensuring that a foreign investor’s shares are priced correctly under FEMA, accurate and certified securities valuation underpins some of the most consequential financial decisions a company will make.
My Valuation is one of India’s leading IBBI-registered valuation firms, combining the credentials of a Fellow Chartered Accountant, a CPA (USA), and an IBBI Registered Valuer under one roof. Whether you need equity share valuation for a fundraising round, CCPS or CCD valuation for a complex capital structure, ESOP grant date valuation under Ind AS 102, or AIF portfolio valuations under SEBI regulations, our team delivers defensible, audit-ready reports in 5 to 7 business days. Get in touch with My Valuation today to discuss your valuation requirements.
Frequently Asked Questions (FAQs)
1. What is the difference between security valuation and business valuation?
Security valuation determines the fair market value of individual financial instruments such as shares, bonds, CCPS, or CCDs. Business valuation determines the overall worth of the entire enterprise. Security valuation typically occurs after the business value is established, allocating that enterprise value across each class of securities based on their specific rights and terms.
2. Is an IBBI Registered Valuer mandatory for security valuation in India?
Yes, for transactions governed by the Companies Act 2013 (such as preferential allotments, mergers, and private placements), an IBBI Registered Valuer in the Securities or Financial Assets (SFA) category is legally required to sign the valuation report. General CAs or consultants without this registration cannot produce legally valid valuation certificates for these purposes.
3. Can the same security have different values under different regulatory frameworks?
Yes, and this is common. A share may have one fair market value for FEMA compliance (using an internationally accepted pricing methodology), a different value for Income Tax purposes (using the Rule 11UA method), and yet another for Ind AS 113 financial reporting (using a level 3 fair value measurement). Companies should work with valuers who understand all applicable frameworks to ensure consistency and compliance.
4. What happens if a company issues shares below the fair market value to a non-resident?
If shares are issued to a non-resident investor below the FEMA-prescribed floor price, it is treated as a reportable violation under the Foreign Exchange Management Act. The company may face penalty proceedings by the Enforcement Directorate and is required to repatriate the shortfall or rectify the transaction. This is why FEMA valuation certificates are non-negotiable for foreign investment rounds.
5. How much does a securities valuation report cost in India?
The cost of a securities valuation report in India varies based on the complexity of the capital structure, the type of security, the number of instruments to be valued, and the regulatory framework involved. A straightforward equity share valuation for a simple cap table typically costs less than a CCPS-heavy multi-class valuation using OPM. Most IBBI-registered valuation firms, including My Valuation, offer a transparent fee estimate after an initial consultation, which is typically free of charge.
6. Does the abolition of Angel Tax remove the need for a valuation certificate?
No. The abolition of Angel Tax (Section 56(2)(viib), effective April 1, 2025) removes the income tax liability on excess share premium received by unlisted companies from certain investors. However, FEMA still requires FMV certification for all foreign investment transactions, SEBI still mandates valuations for preferential allotments, and the Companies Act still requires IBBI valuations for specific corporate events. The need for professional security valuations remains unchanged for most transactions.
7. What is the valuation standard used for complex instruments like CCPS in India?
CCPS valuation in India is typically conducted using the Option Pricing Model (OPM) or the Probability Weighted Expected Return Method (PWERM), both of which are recognized by the ICAI Registered Valuers Organization and are accepted by SEBI and IBBI. The appropriate method depends on the stage of the company, the complexity of the capital structure, and the specific exit scenarios being modelled. A simple NAV or earnings multiple is not considered defensible for CCPS-heavy structures.
