We see an overlap of valuation requirements from multiple statutes in most cases now, often unnoticed by clients who may only be aware of one or two.
That’s because, for many companies, the transactions listed above are covered not just by the Companies Act but also by FEMA (Foreign Exchange Management Act, 1999), Income Tax Act 1961, SEBI guidelines, and/or international tax requirements. Multiple factors determine the applicability of these statutes, including the nature of the company, type of buyer and seller, the resident status of buyer/seller, and type of transaction.
For example, a fresh issue of shares by a private limited company to an overseas shareholder triggers valuation requirements under the Companies Act, FEMA, and Income Tax. A fresh issue to a domestic shareholder triggers valuation requirements under the Companies Act and Income Tax, and also creates additional requirements for the shareholder under Income Tax.
FEMA laws disallow purchase/sale/issue of shares to/from a non-resident entity if the transaction takes place above/below a certain price, determined by a valuer. Income tax laws also have provisions that tax a buyer or seller of shares for paying too low/too high a price. Further, while most laws allow ‘fair value’ as a basis of valuation (which usually means an income or market approach-based valuation), specific Income Tax provisions require a net-worth-based valuation, resulting in much lower values and a greater possibility of the buyer/seller being taxed.
FEMA laws require a Chartered Accountant or a CA firm to carry out valuations. Income Tax laws require CAs or merchant bankers (depending on the clause), as would SEBI guidelines. International tax requirements would usually be satisfied with a CA report. While it is expected that in the future, all of these will be expanded to allow Registered Valuers. That change has not taken place yet.