Topics Description

1 Management Accounting & Valuation – are they linked ? How ?

2 Valuation Overview
3 Purpose of Valuations – Why are they needed ?
4 Calculation of Enterprise Value
5 Valuation Principles & The Valuation Process Overview
6 Valuation Approaches, Bases & Premises

AGENDA 7
8
Some Unique Situations in Valuation
Valuations in India – The IBC Push, RVOs and Registered
Valuers
9 Valuation Standards – International Standards (IVS Series) &
Indian Standards VS Series by ICAI
10 Valuations in India – Companies’ Act, Income tax Act & FEMA
provisions at a glance
11 Valuations in India – The Road Ahead – a new / separate
profession ?
 Management Accounting is about Value
Creation
- We deploy the tools of our trade- to provide
hindsight, insight & foresight - enables timely
& effective managerial decision-making-
creates and enhances enterprise value
Manageme Tools such as – Costing, Budgeting,
nt Forecasting, CVP Analysis, Customer
Profitability / Product Profitability, Data
Accounting Analytics, MIS, Dashboards / Visualizations

& Valuation - Successful / effective – Management

Accounting (& management accountants) –
would end up creating a lot of value to the
firms that we work for !!
- Can we say Valuation (or Value) is a
measure of our success ?
- Should we not be knowing more about how
this is done ?
 VALUATION OVERVIEW

Nature of Valuation - Applied Science ? Art ?

T SUBBARAYUDU FOR ACVA DEC-2019
Purpose of Valuation
Purpose Examples
Valuation for Business purchase , Business sale, M&A (Mergers &
transactions Acquisition), Reverse merger, Recapitalization, Restructuring,
LBO (Leverage Buy Out), MBO (Management Buy Out), MBI
(Management Buy In), BSA (Buy Sell Agreement), IPO, ESOPs,
Buy back of shares, Project financing and others

Valuation for court cases Bankruptcy, Contractual disputes, Ownership disputes,

Dissenting and Oppressive shareholder cases, Divorces cases,
Intellectual property disputes and other

Valuation for Fair value accounting, Tax Issues

compliances

Valuation for planning Estate planning, Personal financial planning, M&A planning,
strategic planning
 i. Value is point in time specific
ii. Value depends on the ability of a
business to generate discretionary
Some cashflow (Free Cash Flows)
iii. Market forces have a great impact on
important the value
Principles iv. Principle of risk and return

In v. Principle of reasonableness and

reconciliation of value
Valuation vi. Value is influenced by underlying net
tangible assets
vii. Value is influenced by Liquidity
 Free Cash Flows Explained
FCFF, FCFE etc

FCFF - Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays its
costs of doing business, invests in short-term assets like inventory, and invests in long-term assets like
property, plants and equipment. The firm's investors include both bondholders and
stockholders.
Starting from EBIT
FCFF = EBIT X (1-t) + Depreciation & Amortization – Capex – Inc in WC
FCFE – Free cash Flow to the Equity-Holders - measures how much “cash” a firm can return to its
shareholders and is calculated after taking care of the taxes, capital expenditure and debt cash flows.

FCFE= Cash flow from operations – fixed capital expenditure – Net debt repayments
FCFE = FCFF – Interest (1-tax rate) - Net Borrowings
What is the Enterprise Value (EV) ?
The Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more
comprehensive alternative to equity market capitalization
Enterprise value is calculated as the market capitalization plus debt, minority interest and
preferred shares, minus total cash and cash equivalents that can be used to meet the liabilities

6
 HOW IS ENTERPRISE VALUE CACULATED ?
Understanding the components
• EV = Market Value of Equity + Market Value of
Preferred Stock + Market Value of Debt + Minority
Example of Calculating EV of a
Interest – Cash & Liquid Investments
company
• Important multiples of Enterprise Value
• EV / EBITDA
• where EBITDA is = recurring earnings from continuing
operations + interest + taxes + depreciation + amortization
• It is used to value capital intensive businesses
• Compare firms with different degrees of financial leverages
• Helps in comparing companies with different capital structures
• EV / Sales
• Lower the EV / Sales ratio, more attractive or undervalued the
company is.
• Market capitalization = value of the common shares
of the company
• Preferred shares = If they are redeemable then they
are treated as debt
• Debt = All inclusive of bank loans, bonds which are to
be dealt by the acquirer
• Minority Interest = It is defined as the portion of
subsidiaries that is held by the minority shareholders. 7
• Cash and Investments = Highly liquid investments,
Some Valuation Approaches

important Base(s) of Valuation

Concepts
in Premise(s) of Valuation
Valuation
 VALUATION APPROACHES
IVS 105
Consideration must be given to the relevant and appropriate valuation approaches. The three
approaches described and defined below are the main approaches used in valuation.
The goal in selecting valuation approaches and methods for an asset is to find the most
appropriate method under the particular circumstances. No one method is suitable in every
possible situation.
Valuation Approaches
Income
Based Market Based Approach Cost Approach
(or Relative Valuation ) (or Asset Based Approach)
Approach
Discounted Comparab Guideline Replace Reproduc Summati
Cash Flow le Publicly ment tion Cost on
Methods Transactio Traded Cost Method Method
ns Comparable
The Method
Method Indicates Calculates
forecasted Utilises
cash flow is info on Utilises info Indicates value by the value
discounted transactio on publicly- value by calculatin of an
back to the ns traded calculatin g the cost asset by
valuation involving comparables g the cost of the
date, assets that are the of a recreating addition
resulting in that are same or similar a replica of the 9
 PREMISE(S) OF VALUE / ASSUMED USE
IVS 104
Premise of Value or Assumed Use describes the circumstances of how an asset or liability
is used. Different bases of value may require a particular Premise of Value or allow the
consideration of multiple Premises of Value. Some common Premises of Value are:

PREMISE(S) OF VALUE
Current
Highest & Best Use / Orderly
Forced Sale
Use (HBU) Existing Liquidation
Use
From a participant Current Describes the Often used in
perspective, that use/existing value of a group of circumstances where a
which would use is the assets that could seller is under compulsion
produce the highest current way be realised in a to sell and that, as a
value for an asset. an asset, liquidation sale, consequence, a proper
The HBU must be liability, or given a reasonable marketing period is not
physically possible, group of period of time to possible and buyers may
financially feasible, assets find a not be able to undertake
legally allowed and and/or purchaser(s), with adequate due diligence.
result in the highest liabilities is the seller being If applicable, it will be
value. If different used. The compelled to sell necessary to clearly
from the current current use on an as-is, where- identify the reasons for the
may be, but is basis. 10
use, the costs to constraint on the seller.
is not
 BASES OF VALUE-1
(Or Standards of Value)
IVS 104
Bases of value (sometimes called standards of value) describe the fundamental premises on which
the reported values will be based. It is critical that the basis (or bases) of value be appropriate to the
terms and purpose of the valuation assignment, as a basis of value may influence or dictate a
valuer’s selection of methods, inputs and assumptions, and the ultimate opinion of value.
BASES OF VALUE
Equitable Investment Synergistic
Market Value Market Rent
Value Value Value
The estimated The estimated The estimated The value of an Synergistic
amount for amount for price for the asset to a Value is the
which an asset which an transfer of an particular or result of a
or liability interest in real asset or liability prospective combination of
should property should b/w identified owner for two or more
exchange on be leased on the knowledgeable individual assets or
the valuation valuation date and willing investment or interests
date b/w a b/w a willing parties that operational where the
willing buyer lessor and a reflects their objectives.. combined
and a willing willing lessee on respective It reflects the value is more
seller in an appropriate interests. circumstances than the sum
arm’s length lease terms in It requires the and fin obj of of the separate
transaction, an arm’s length assessment of the entity for values.
after proper transaction, the price that is which the If the
marketing and after proper fair b/w two valuation is synergies are
where the marketing and specific, being produced. 11
only available
parties had where the
 BASES OF VALUE-2
(Or Standards of Value)
IVS 104
Bases of value (or standards of value) describe the fundamental premises on which the reported
values will be based. It is critical that the basis (or bases) of value be appropriate to the terms and
purpose of the valuation assignment, as a basis of value may influence or dictate a valuer’s selection
of methods, inputs and assumptions, and the ultimate opinion of value.
BASES OF VALUE
OBV - FMV
OBV – Fair Fair Market OBV – FMV – US
Liquidation Value (Legal /
Value (IFRS) Value (OECD) IRS
Statutory)
The amt that would IFRS 13 The OECD For US tax Many
be realised when an defines Fair defines Fair purposes, Regln national,
asset or group of Value as the Market Value §20.2031-1 state and
assets are sold on a price that as the price a states: “The fair local agencies
piecemeal basis. LV would be willing buyer market value is use Fair Value
should take into a/c received to would pay a the price at as a basis of
the costs of getting sell an asset willing seller which the value in a
the assets into or paid to in a property would legal context.
saleable condition transfer a transaction change hands The
and the cost of liability in an on the open between a definitions
disposal orderly market. willing buyer and can vary
transaction a willing seller, significantly
Two premises : between OECD and may be
neither being
(a) an orderly market guidance is under any the result of
transaction with a participants used in many compulsion to legislative
normal marketing at the engagements buy or to sell and action or12
period or measuremen for both having those
Valuation Process
Determine the purpose of valuation
Define the standard of value
Select the premise of value
Carry out historical analysis
Carry out environment scan
Select appropriate valuation approaches
Select appropriate methods
Calculate value
Carry out reconciliation and reasonableness check
Value value conclusion
 SITUATION SPECIFIC VALUATION – (Contd)
Start-up Entities Valuation
• STARTUP ENTITIES’ VALUATION – WHAT’S DIFFERENT ?
•No past track record – financial / operational / cash flows etc – to rely upon
•Many a times – may also not have an “industry” or “business models” - so to speak – “only an idea”
•Innovative, Very high risk of failure ~ impact on cost of equity / WACC / Discounting rates
•Dependent on Family & Friends for early fund raising, Angel Investors / VCs / Private Equity in later stages
•Illiquid Investments, multiple claims on equity due to repeated rounds of fund-raising. Early investors’ stakes can
get diluted with later stage fund-raises

14
Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges Aswath Damodaran Stern School of Business, New
 SITUATION SPECIFIC VALUATION – (Contd)
START-UP VALUATIONS - ISSUES IN APPLYING DCF METHODS

• EXISTING / GROWTH • DISCOUNT RATES • TERMINAL VALUES • VALUE OF EQUITY

ASSETS CLAIMS
• Traditionally – CoE is • Not uncommon to see
• Absence of historical data estimated by starting 90% /100% or even more • Start-ups funding tends
makes it difficult to use with a risk-free rate than 100% of the value to happen in sequential
existing assets as a basis applicable to the of a startup to come “rounds” – often with
of estimating future company’s bonds – and from Terminal Value equity holders of
revenues ~ at best 1 year adding β times the risk different rounds having
• Hence – assumptions
data premium different “rights” – anti-
about when will the
dilution / board seats /
• Expenses are often a mix • Most young companies startup reach the “stable
exit rights etc. Hence
of “current revenue do not have traded growth” state – are very,
value of equity cannot
expense” and bonds – so the “risk-free” very critical. Questions
be uniformly distributed
“investments for future”. base estimation is like –
across these classes
It is important to separate difficult • will the startup reach
these – e.g. S,G&A costs the steady growth • One may also have to
• β may not be valid as it is stage ? split the value of equity
• Bulk of a start-up’s value
based on assumptions • When will it reach that across preference and
comes from “Growth
about “market-risk” – i.e. steady / stable growth ordinary equity holders –
Assets” – difficult to
where diversifiable risks stage requiring separate cash
estimate revenues from • What will the firm look
are not present. This flow estimations
these – again – due to
may not be true for a like in it’s steady
lack of historical data • Finally – a lack of
startup and investors growth state ?
• More important that may look for liquidity would need to
revenue / earnings growth compensation for “firm-
Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges Aswath Damodaran Stern School of Business, New be University
York factored in as exit
May 2009
– it is the quality of the specific risks” also options are limited 15
 SITUATION SPECIFIC VALUATION – (Contd)
Valuation of Cyclical (& Commodities) Companies - ISSUES

• CYCLICAL COMPANIES’ VALUATION –

WHAT’S DIFFERENT ?
• We saw in economics that capitalist economies go
through “Business Cycles” of Expansion, Peak,
Contraction, Depression & Recovery
• Unique thing about “Cyclical” companies is that their
Valuation is more dependent on the movement of a
single macro-economic variable. Commodity
companies also are exposed to this effect.
• Housing, Autos, Cement, Steel, Oil are a few examples
of cyclical businesses
• Natural that the “timing” of the valuation exercise
needs to factor in this aspect – else a blind
extrapolation of current economic environment can
lead to serious under / over valuation of the company
in question (e.g. an oil company to oil prices – with oil
prices themselves tied to world GDP growth )
• Besides making a mistake of ignoring economic cycles
in valuing cyclical companies – the second major
mistake if often in “Trying to forecast the next cycle is
not only futile but dangerous and that it is far better to
normalize earnings and cash flows across the cycle”$ $ Ups and Downs – Valuing Cyclical & Commodity
16
• Major areas impacted by economic cycles Companies: Aswath Damodaran Stern School of Business,
 SITUATION SPECIFIC VALUATION – (Contd)
CYCLICAL COMPANIES’ VALUATION – METHODS OF DEALING - NORMALIZATION

• ABSOLUTE AVERAGE • RELATIVE AVERAGE • SECTOR AVERAGES

OVER TIME OVER TIME • If the company being valued
• One approach is to normalize • By this method – instead of does not have historical
revenues and earnings over the relying on absolute averages figures needed for the
duration of the cycle – so as not – we can use average ratios – previous two methods – one
to pick up “peak” numbers or profitability, capex, working can use sectoral averages
“trough” numbers – and use capital investments etc
these absolute average figures
• These averages can then be
for valuation (times revenue,
applied to the most recent
times EBIDTA)
revenue – to estimate
normalized earnings, capex
• Advantage of this method is it’s
& working capital
simplicity
investments
• Drawback of this method is that
it depresses earnings and
revenues – even the “real”
growth due to capacity
expansions / acquisitions /
17
productivity
Valuing improvements
Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges Aswath Damodaran Stern School of Business,
 SITUATION SPECIFIC VALUATION
Distressed Assets / Companies Valuation

• DISTRESSED ASSET VALUATION – WHAT’S DIFFERENT ?

• Traditional valuation techniques are built on the assumption of a going concern, I.e., a firm
that has continuing operations and there is no significant threat to these operations.

• In discounted cashflow valuation, this going concern assumption finds its place most
prominently in the terminal value calculation, which usually is based upon an infinite life and
ever-growing cashflows

• In relative valuation, this going concern assumption often shows up implicitly because a firm
is valued based upon how other firms - most of which are healthy - are priced by the market
today

• When there is a significant likelihood that a firm will not survive the immediate future (next
few years), traditional valuation models may yield an over-optimistic estimate of value. 18
 SITUATION SPECIFIC VALUATION – (Contd)
DISTRESSED ENTITES VALUATION – FEW COMMON ERRORS & THEIR COUNTER*

• EXISTING / GROWTH ASSETS • RESPONSE

• The firms we value are large market-cap firms
that are traded on major exchanges. The chances
of these firms defaulting is minimal…
• The discount rate (costs of equity and capital) can
be adjusted for the likelihood of distress. In
particular, the beta (or betas) used to estimate
the cost of equity can be estimated using the
updated debt to equity ratio, and the cost of debt
can be increased to reflect the current default risk
of the firm.
• The expected cashflows can be adjusted to reflect
the likelihood of distress. For firms with a
significant likelihood of distress, the expected
cashflows should be much lower.
• Enron and Kmart….
• This adjusts for the additional volatility in the
cashflows but not for the truncation of the
cashflows.
• Easier said than done. Most DCF valuations do not
consider the likelihood in any systematic way. Even
if it is done, you are implicitly assuming that in the
event of distress, the distress sale proceeds will be
equal to the present value of the expected cash
flows.

• Unlikely, even for assets-in-place, because of the

• Firms that default will be able to sell their assets need to liquidate quickly.
(both in-place and growth opportunities) for a fair 19
marketFirms
*Valuing value, which- Aswath
in Distress shouldDamodaran
be equal to the
 SITUATION SPECIFIC VALUATION – (Contd)
What are Investment Entities ? Valuation Issues wrt such entities

• WHAT IS AN INVESTMENT
ENTITY ?
• An investment entity is an
entity that:
a) Obtains funds from one or more
investors for the purpose of
providing those investor(s) with
professional investment
management services;
b) Commits to its investor(s) that
its business purpose is to invest
funds solely for returns from
capital appreciation, investment
income or both; and
• c) Measures
Under IFRS-10 and evaluates
/ Ind-AS theentity gets classified as an Investment Entity – it is exempted from the need
110 – if an
performance of substantially
to present consolidated all of
Financial Statements for it’s investee companies
its investments on a fair value
• Investment Entities generally will not be valued using the Income Method, but most often using Assets Method
basis.
• Holding companies’ generally get valued at discounts to the aggregate value of the underlying 20
assets that they hold
 SITUATION SPECIFIC VALUATION – (Contd)
HOLDING / INVESTMENT COMPANIES’ VALUATION – ADJUSTMENTS REQUIRED

• LIQUIDATION DISCOUNT • DISCOUNT FOR LACK • DISCOUNT FOR LACK

• One reason for the holding OF CONTROL OF MARKETABILITY
company being valued at a • Unless the holding company • A group holding company
discount over the aggregated owns a majority stake in the will generally – not be
value of underlying assets – is investee firms – a discount looking to sell the
that if it’s holdings were to be for lack of control would also investments in it’s
liquidated – capital gains taxes be applicable – as the subsidiaries
would need to be paid holding company will not be
• In such a situation – a
• The size of the discount would able to influence decision
discount for lack of
be dependent on the holding making in it’s investee
marketability will apply
period, and the tax rates companies

• • The size of the discount

It is noteworthy that this
discount is applicable, even
if no liquidation is being
planned
would be dependent on the
shareholding % age – a 40%
holding attracts a lower
discount as compared to a
15% holding

• https://www.economist.com/business/2019/11/07/hard-times-for-softbank article
explains the difficulties faced in the valuation of Softbank
21
 Misc Valuation Concepts
Venture Capital Method of Valuation for Startups
• Venture Capital Method
• The VC Method, first made popular by Harvard Business School Professor Bill Sahlman, works its way to pre-
money valuation after first determining the post-money valuation using industry metrics. By applying the VC
Method to solve for the pre-money valuation of a startup it’s important to know the following equations:
• Post-money valuation = Terminal value ÷ Expected Return on Investment (ROI)
• Pre-money valuation = Post-money valuation — Investment
• We will use these formulas to ultimately work out the pre-money valuation, but first we need to find the terminal
value. The terminal value is the anticipated value of an asset on a certain date in the future. The typical
projection period is between four to seven years. Due to the time value of money the terminal value must be
translated into present value to be meaningful. For the purposes of this example, we’ll be solving for the pre-
money valuation by using two separate exit multiple approaches
• Approach 1
• By researching the average sales of established companies within the same industry (at the end of the projection
period) and multiplying the figure by a multiple of two, we can calculate the terminal value. For example, lets
assume your startup is raising $500K and expecting to be generating $20M when you sell the company in five
years.
• Terminal Value = $20M x 2 = $40M
• The statistical fail rate for angel investments is over 50% so investors typically target 10x-30x ROI on
each individual investment. To be conventional, we’ll set the anticipated ROI at 20x for the pre-revenue startup.
Knowing you’re raising $500K, we’ll then work the math backwards to calculate the pre-money valuation
• Post-money valuation = $40M ÷ 20x = $2M
• Pre-money valuation = $2M — $500K = $1.5M 22
 Misc Valuation Concepts
Venture Capital Method of Valuation for Startups
• Venture Capital Method
• Approach 2

• The Price/Earnings ratios ( P/E ratio) could also be used as the multiple for valuing your pre-
revenue startup. If your expected after-tax earnings are 15% upon exit in five years, this leaves
you with $3M ($20M x 15%). Then you need to multiply this value by the P/E ratio which is backed
by industry benchmarks of similar public startups. Lets say the P/E ratio is 15x with the same
expected ROI of 20x.
• Terminal Value = $3M x 15x = $45M
• Post-money valuation = $45M ÷ 20x = $2.25M
• Pre-money valuation = $2.25M — $500K = $1.75M

• Investors typically calculate both multiples and take the average of the two. Therefore, the pre-
money valuation of your startup is roughly $1.625M. This is a very simple introduction for
entrepreneurs to the VC Method as it does not account for multiple rounds of investment
and anticipated dilution. If future rounds of funding are expected to create dilution of
50%, then reduce the current pre-money valuation by 50% to $812,500

23
 Misc Valuation Concepts
Berkus Method of Valuation for Pre-Revenue Startups
• Berkus Method
• According to super angel investor, Dave Berkus himself, the Berkus Method, “assigns a number, a financial valuation, to each major element of risk faced
by all young companies — after crediting the entrepreneur some basic value for the quality and potential of the idea itself.”
• The Berkus Method uses both qualitative and quantitative factors to calculate a valuation based on five elements:
• Sound Idea (basic value)
• Prototype (reduces technology risk)
• Quality Management Team (reduces execution risk)
• Strategic Relationships (reduces market risk)
• Product Rollout or Sales (reduces production risk)

• But the Berkus Method doesn’t stop with just qualitative drivers — you must assign monetary value to each.
• In particular, up to $500K. $500K is the maximum value that can be earned in each category, giving the
opportunity for a pre-money valuation of up to $2M-$2.5M.
Berkus sets the hurdle number at $20M (in fifth year in business) to “provide some opportunity
for the investment to achieve a ten-times increase in value over its life.”
• Below is an assessment of a fictitious pre-revenue startup illustrating the general rules of the
Berkus Method:

• Above, with $500K as the maximum value per category, I assigned the greatest value to the quality of the management team ($350K) because the founders have deep
domain expertise in their respective field. The quality team reduces execution risk. (After all, ideas are easy, but execution is everything.) With so much risk undertaken
by the investor, the startup’s management team must be fully capable of achieving long term success. The startup’s prototype ($300K) is sound, having minimal
technology risk. Ultimately, I gave the startup a pre-money valuation of approximately $1.2M. 24
 Misc Valuation Concepts
Scorecard Method of Valuation for Pre-Revenue Startups
• Scorecard Method
• The Scorecard Valuation, also known as the Bill Payne valuation method, is one of the most preferred
methodologies used by angels. This method compares the startup (raising angel investment) to other funded startups
modifying the average valuation based on factors such as region, market and stage
• The first step is to determine the average pre-money valuation for pre-revenue startups. Angel groups tend
to examine pre-money valuations across regions as a good baseline. For instance, Bill Payne published
a Scorecard Valuation Methodology Worksheet where he surveyed 13 angel groups in 2010, displaying a
pre-money valuation range between $1M-$2M. Competition in different regions can vary sometimes leaning
to higher valuations so the data could be skewed at the upper range of the data set. The value that appeared
most often in Payne’s set of data was $1.5M which he uses as the average pre-money valuation.
• The next step is to compare the startup to the perception of other startups within the same region using factors such as:
• Strength of the Management Team (0–30%)
• Size of the Opportunity (0–25%)
• Product/Technology (0–15%)
• Competitive Environment (0–10%)
• Marketing/Sales Channels/Partnerships (0–10%)
• Need for Additional Investment (0–5%)
• Other (0–5%)
• The ranking of these factors is highly subjective, but the main emphasis besides scalability is on the team. Payne states,
“In building a business, the quality of the team is paramount to success. A great team will fix early product flaws….”
• Lastly, you calculate the percentage weights. A table that Payne uses in his worksheet:
• Payne assumes the team is strong (125% comparison) with a huge market opportunity
(150% comparison). However, the startup is playing in a highly competitive
environment (75%).
By multiplying the sum factor (1.0750) by the average pre-money valuation ($1.5M) 25
we arrive with a pre-money valuation of roughly $1.6M for the target startup.
INDIAN SCENARIO – IBC, RVOs & REGD VALUERS
 INDIAN SCENARIO – IBC, RVOs & REGD VALUERS
A “Code” is a collection of laws, rules or

The regulations that are systematically arranged.

IBC came with amendments to about 11

Code THE IBC ECOSYSTEM existing laws

Insolvency & Bankruptcy Board of

India
National Company Law
tribunal (Adjudicating

Informatio
RVOs IPAs n Utilities
Authority)

(IUs)
Insolvency
Professionals
(IPs)
Register
ed Committee of
Valuers Creditors
(RVs) RVOs (Registered Valuers Organizations) –
inter-alia - conducts educational courses on
Valuation, grants membership, conducts CPE
Insolvent Unit events, monitors and reviews the quality of
work of Valuers who are it’s members and
addresses grievances against them
WHEN IS A VALUATION BY A REGISTERED VALUER NEEDED ?
Section-wise Requirements Under the Indian Companies Act, 2013

28
 Valuations – Current Indian Scenario under different laws
• Further Issue of Share
When required ?
Capital u/s 62
• As per Section 247 (IBC)
Who can Value ? IBBI Registered Valuer
Rights issues to existing
Other Notes shareholder in same proportion valuations)
does not need valuation from
registered valuer
For IT assessments. Shares
issued below FMV can be
treated as “Income” to
the issuer (Angel Tax)
SEBI Regd Merchant
Banker
(wef 24-May-2018 CAs
not
DIPPallowed for these
recognized start-ups
exempted from taxability
for excess of issue price
over FMV
When shares are being
issued to a Non-Resident
by a resident / vice-versa
i) SEBI registered Merchant
Banker
ii) Practicing Chartered Accountant
iii) Practicing
Share issue toCost
NRs Accountant
cannot happen
BELOW Fair Value, Share sale by NRs
to residents cannot happen ABOVE
Fair Value
INDIAN SCENARIO – IBC, RVOs & REGD VALUERS
Who can become a Registered Valuer ?
An individual shall have the following qualifications and experience to be eligible for registration
under rule 4, namely:-
• i. Chartered Accountant, Cost Accountant, Company Secretary, MBA/ PGDBM in Finance and
an individual having post graduate degree in finance and
• ii. Having at least three years’ experience after possessing qualification as mentioned
in (i) above.
• A person shall be eligible to be registered valuer, if
• i. is a valuer member of a registered valuers organisation;
• Explanation.─ For the purposes of this clause, “a valuer member” is a member of a registered valuers organisation who
possesses the requisite educational qualifications and experience for being registered as a valuer;
• ii. is recommended by the registered valuers organisation of which he is a valuer member for registration as a valuer;
• iii. has passed the valuation examination under rule 5 within three years preceding the date of making an
application for registration under rule 6;
• iv. possesses the qualifications and experience as specified in rule 4;
• v. is not a minor;
• vi. has not been declared to be of unsound mind;
• vii. is not an undischarged bankrupt, or has not applied to be adjudicated as a bankrupt;
• viii. is a person resident in India;
• ix. has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding
six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of
expiry of the sentence:
• Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a
period of seven years or more, he shall not be eligible to be registered;
• x. has not been levied a penalty under section 271J of Income-tax Act, 1961 (43 of 1961) and time limit for filing appeal
 VALUATION – WAY FORWARD

The report must deal with all the matters agreed between the client and the valuer
in the Terms of Engagement and include the foll minimum information, except
where the report is to be provided on a form supplied by the client

i. Identification of the client

ii. Purpose of the Valuation
iii. Subject of the valuation
iv. The Interest to be valued
v. The type of property and how it is used, or classified by the client
vi. The basis or bases of valuation
vii. The date of the valuation
viii. The status of the valuer and the disclosure of any previous involvement
ix. Where appropriate – any currency that has been adopted

https://economictimes.indiatimes.com/news/economy/policy/bankruptcy-government-hints-at-new-law-for-register
ed-valuers/articleshow/65451698.cms

https://economictimes.indiatimes.com/news/economy/policy/govt-mulls-national-institute-for-valuers/articleshow/
69700487.cms

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 VALUATION STANDARDS
INTERNATIONAL VALUATION STANDARDS
These are issued by the International Valuation Standards
Council (IVSC)
General Standards
These set forth requirements for the conduct of all valuation
assignments including establishing the terms of a valuation
engagement, bases of value, valuation approaches and
methods, and reporting. They are designed to be applicable
to valuations of all types of assets and for any valuation
purpose.
• IVS 101 Scope of Work
• IVS 102 Investigations and Compliance
• IVS 103 Reporting
• IVS 104 Bases of Value
• IVS 105 Valuation Approaches and Methods
Asset Standards
The Asset Standards include requirements related to specific
types of assets. These requirements must be followed in
conjunction with the General Standards when performing a
valuation of a specific asset type.
• IVS 200 Business and Business Interests
• IVS 210 Intangible Assets
• IVS 300 Plant and Equipment
• IVS 400 Real Property Interests
ICAI VALUATION STANDARDS
As per ICAI.. “These ICAI Valuation Standards will be
applicable for all valuation engagements on mandatory
basis under the Companies Act 2013@. In respect of
Valuation engagements under other Statutes like
Income Tax, SEBI, FEMA etc, it will be on
recommendatory basis for the members of the Institute.
These Valuation Standards are effective for the
valuation reports issued on or after 1st July, 2018”
These ICAI Valuation Standards will be effective till
Valuation Standards are notified by the Central
Government under Rule 18 of the Companies
(Registered Valuers and Valuation) Rules, 2017.
•VS 101 - Definitions
•VS 102 - Valuation Bases
•VS 103 - Valuation Approaches & Methods
•VS 201 - Scope of Work, Analyses and
Evaluation
• VS 202 - Reporting and Documentation
• VS 301 - Business Valuation
• VS
@ These 302 - are
standards Intangible Assets
to be mandatorily followed
by • VS 303 - Financial Instruments
i. Members of the ICAI RVO 32
ii. Members of the Institute of Chartered
 RECAP – WHAT WE HAVE LEARNT
• Relationship between Management Accounting and Valuation
• The inherent nature of Business Valuation – is it a science or is it an art ? Or an applied science ..?
• When is Valuation required by individuals & businesses
• Principles of Valuation & the role and meaning of Free Cash Flows including FCFE and FCFF
• Meaning of Enterprise Value – it’s components and method of calculation
• Some important concepts in Business valuations –
• Valuation Approaches – Income Approach, Market Approach & Cost Approach
• Premises of Valuation – Highest & Best Use / Liquidation Value etc
• Bases of Valuation – Market Value / Market Rent / Synergistic Value
• Some unique situations in Business Valuations
• Startup Valuations
• Valuing Cyclical companies
• Valuing companies in distress
• Valuing Pre-revenue startups – Berkus Method, Scorecard Method, Venture Capital Method
• Role of Valuation and Registered Valuers under the Insolvency & Bankruptcy Code (IBC) – 2016
• Under current Companies Act – when is a valuation required by a Registered Valuer ?
• Situation under different laws today – Companies Act –vs – Income Tax Act –vs- FEMA
• How to become a Registered valuer & the Road Ahead for the valuation profession in India
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THANK YOU

Questions ??

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