Investment Valuation in India

Applicability: Section 138 shall apply only to such class or classes of companies as may be prescribed. As per Rule 13 of The Companies (Accounts) Rules, 2014, following class of companies shall be covered under section 138: Every listed company Every unlisted public company having-  Paid up share capital of Rs. 50 crore or more during the preceding financial year; or Turnover of Rs. 200 crore or more during the preceding financial year; or Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year; or Outstanding deposits of Rs. 25 crore or more at any point of time during the preceding financial year. Every Private company having -  Turnover of Rs. 200 crore or more during the preceding financial year; or Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the p...

Section 202 of the Companies Act, 2013 deals with Compensation for loss of office of managing director (MD) or whole-time director (WTD) or manager Reasons for payment of compensation: (a) for loss of office; or (b) as consideration for retirement from office; or (c) in connection with such loss or retirement. Compensation can be paid only to : (a) MD; or (b) WTD; or (c) Manager. Amount of compensation: Permissible period: Lower of- Ø   The unexpired tenure of directorship; or Ø   3 years. Basis: ‘ Average remuneration’ actually earned during- Ø   3 years immediately preceding the date of cessation of office; or Ø   Such shorter period for which the director has held his office. Prohibition of compensation in certain cases: (a) reconstruction or amalgamation of company takes place. As a result of such reconstruction or amalgamation, the director resigns from the company, but is appointed as MD or manager or any oth...

The Lok Sabha, the lower house of the Parliament, has passed the Companies (Amendment) Bill, 2014, which will make it easier for corporates to do business and to ensure severe punishment for illegal money pooling activities, among other things. The amendments have been proposed in order to address some concerns raised by stakeholders. The major concerns raised by the stakeholders included protecting confidentiality of board resolutions, as well as the provision of auditors being required to report suspected frauds at the companies audited by them. Under the new norms, frauds beyond a certain threshold would need to be mandatorily reported by the auditors to the government, while cases below this threshold will be reported to the audit committee of the company’s board. Also, the corporates have been exempted from the need of obtaining approvals of shareholders in the case of related party transactions valued lower than Rs. 100 or 10 percent of net worth. As per the ...

The provisions related to rotation of auditor are applicable to those companies which are prescribed in Companies (Audit and Auditors) Rules, 2014, which prescribes the following classes of companies excluding one person companies and small companies , namely: (a) all unlisted public companies having paid up share capital of rupees ten crore or more ; (b) all private limited companies having paid up share capital of rupees twenty crore or more ; (c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more . As per section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as mentioned above, shall appoint or re-appoint- (a) an individual as auditor for more than one term of 5 consecutive years; and (b ) an audit firm as auditor ...

According to Companies Act, 2013, no person including any director or key managerial personnel (KMP) of a company shall enter into insider trading.  However, as usual, n othing contained shall apply to any communication required in the ordinary course of business or profession or employment or under any law. Meaning of ‘insider trading’- a) An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or KMP or any other officer of a company either as principal or agent if such director or KMP or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company, or b) An act of counselling about, procuring or communicating directly or indirectly any non-public price sensitive information to any person. Price Sensitive Information refers to  any information which relates, directly or indirectly, to a c...

Elementary valuation theories focus on dividends as the base for valuing equity shares. It represents the cash flow to the shareholders which is discounted to arrive at the value of shares. However, not all companies distribute dividends and we us other valuation methods to value shares of companies which do not distribute dividends. However, consider this. Dividend theories suggest that if the company believes that reinvesting dividends would lead to better shareholder wealth maximisation, dividends should not be distributed but should be reinvested instead. Accordingly, generally in emerging economies such as India, dividends have a much lower impact on valuation as companies prefer to reinvest the profits or distribute only a small part of the profits to shareholders. This leads to better capital appreciation for the investors and leads to higher valuation for the companies – particularly when the markets are ‘bullish’. Dividend Payout Policies are sensitive for the companies ...

A brief overview of Cash Flow Statement under IFRS along with implications for Indian entities under Ind AS. Courtesy: The Institute of Computer Accountants

Here's a brief overview of IAS 1 - Presentation of Financial Statements Courtesy: The Institute of Computer Accountants.

Apple Inc (NASDAQ:AAPL) beat its own record in highest market capitalisation by crossing USD 700 billion markon November 25th, 2014. The shares of the company recently touched USD 118 taking its market capitalisation to a new record high of USD 701 billion. It is already the largest company in the world by market capitalisation. The second largest company Exxon Mobil Corp (XOM) now trails at a market capitalisation of USD 405 billion. The company's CEO Tim Cook has continued to focussed on innovation just like Steve Jobs and has steered the company towards new highs. This has resulted in a 12.4% increase in revenues to USD 182 billion (ttm). Higher valuation for the company is also justified through its high Profit Margin of over 21% and a Return on Equity of 33.6% [Source: Yahoo Finance, 25-Nov-14]. At the product level, the markets have cheered the larger screen iPhones and slimmer iPads launched in September and October respectively. Competing with Samsung, Apple is plann...

Valuation of Goodwill Goodwill has been valued by accountants since ages especially during mergers and acquisitions. Although practically speaking, Value of Goodwill is the difference between the Actual Price paid for the business less the book value of the business. However, there have been some defined approaches to valuation of business by accountants. Goodwill is defined as the super profit earning capacity of the business. A simplified approach to valuation of goodwill is as follows: Goodwill = Super Profit x Number of Years’ Purchase Super Profit = Future Maintainable Profit – Normal Profit Future Maintainable Profit: The buyer of business (or goodwill for that matter) is usually interested in what the business will be able to sustain as profits in future. Accordingly we adjust the historical profits to arrive at future maintainable profits. Take the historical profits for the last few years (e.g. 5 years). Identify if there is a clear trend in profits ...

Here is a Sample Valuation Information Request form that can be sent to the management of the company being valued. This is used for companies who have asked you to value their own company for internal purposes. This can also be used for due diligence by management consultants. COMPANY NAME: VALUATION DATE: If you have any questions, please call at . NOTE:   This is a generalized information request. If the questions are not relevant for you, please mark N/A or let us know where we can get more information. A. Financial Information Financial statements for financial years ending 5 years. Quarterly financial statements for last 8 quarters. Financial projections, if any, for the current year and the next three years. Include any prepared budgets and/or business plans. Central and State Corporate Income Tax Returns and supporting schedules for last 5 financial years. Details of all ESOPs, Pensions, Employee benefit trusts. Explanation of significant no...

There are basically two methods for computing the market values of the future cash flows of risky investment projects - Certainty Equivalent Approach and Risk Adjusted Discount Rate (RADR) method. The RADR method obtains the discount rates from widely used theories of risk and return such as Capital Asset Pricing Model (CAPM) and is thus impractical when Betas of comparison firms are difficult to estimate. In such cases where comparison firms do not exist and risk is required to be estimated, practical considerations suggest that Certainty Equivalent Method is a better valuation tool. The Present Value formula under Certainty Equivalent Method is given by: PV = SUM(Expected Future Cash Flows) - Beta (Risk of Tangency portfolio - Risk Free Rate)                                                          (1+ Risk Free Rate)

In this series of videos I introduce how Revenue is recognised under International Financial Reporting Standards (IFRS). Courtesy: The Institute of Computer Accountants (www.icajobguarantee.com)

In this series of videos I introduce how Revenue is recognised under International Financial Reporting Standards (IFRS).  Courtesy: The Institute of Computer Accountants (www.icajobguarantee.com)

In this series of videos I introduce how Revenue is recognised under International Financial Reporting Standards (IFRS). Courtesy:  The Institute of Computer Accountants (www.icajobguarantee.com)

In this series of videos I introduce how Revenue is recognised under International Financial Reporting Standards (IFRS). Courtesy: The Institute of Computer Accountants (www.icajobguarantee.com)

While evaluating differences between accounting line items for Accounting and Valuation purposes, we do come across some Expenses which are treated as Operating Expenses from an Accounting perspective though they are often treated as Capital Expenses for Valuation purposes. Research & Development Expense (R&D) Expense is a common example where it is treated as Operating Expenses under most Accounting Rules (some rules allow Development Expenses to be capitalised with a lot of conditions attached to them), but for valuation purposes they are treated as Capital Expenses because the benefits of R&D are usually derived over a longer period of time. But what about Advertisement Expenses? Companies usually spend a lot of money acquiring customers by spending huge amount of money on Advertisement. Consumer Goods companies such as Unilever, Procter & Gamble (P&G) and beverage companies such as Coke and PepsiCo are known to be heavy spenders on advertisement to get cus...

Investment decisions often rely on Cash flows rather than profits. While profits are the key measure of financial success from an accountant’s perspective, finance professionals (especially investment analysts) prefer evaluating investment decisions based on cash flows. One may wonder that while studying Accounting (which is the first step in understanding finance) we were first introduced the concept of Cash Basis of Accounting where all receipts and payments were recorded, then we were told that the right measure of evaluating business performance was through Accrual Accounting. However, we’re again talking about Cash Flows – which is a subset of or is similar to Cash Basis of Accounting. Well, let’s not get into that right now as Life is hard to understand. But the concept of Cash flows is not. Let’s understand how the cash flows and profits are related First, as we have discussed already, Profits are arrived at based on Accrual basis of accounting. Revenues are reco...

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One of the various methods of valuing businesses, is the Income Capitalisation Method. Income Capitalisation Method assumes that the business will continue in operation even after it is sold. It projects the future income of the business based on historical performance adjusting for estimated changes. Historical financial statements and estimates are used for projecting the future financial statements. Capitalisation rate - The capitalisation rate is the rate of return required to take on operating the business – higher risk leads to higher capitalisation rate. Capitalisation rates are determined based in on the riskiness of the business as well as based on capitalisation rates of comparable companies. Comparable Capitalisation Rate can be calculated as Net income / Market Value. This would give us the capitalisation rate for comparable companies. Net Income / Earnings – The Net Income or the Earnings are used for calculating the Market Value of the company. It is ...

In the largest e-commerce deal in India so far, homegrown e-retailer and marketplace owner Flipkart has acquired online fashion retailer Myntra in an estimated Rs 2,000 crore deal.  Flipkart has been good at replicating established models and strategies. Flipkart founders - Bansals- were ex-Amazon employees and started Flipkart selling books online - just what Amazon did in its early days. Even in case of acquisition of Myntra, the strategy is the same as that of why Facebook acquired WhatsApp - kill competition. Fashion & Apparel has the largest potential in the e-commerce space and India is set to become the largest E-commerce market in the world - in terms of volume. As the urban (metro, Tier I and Tier II) population is getting more awareness and is getting exposed to E-commerce, India is slowly increasing its online spend. Apparel has been slow (it all began with books, to gift items to electronics - and now apparel) but has huge potential. Myntra has been a forerunner...

Method of Depreciation - Straight Line or Written Down Value (WDV) / Double Declining Balance Method The new Companies Act 2013 prescribes the Useful life of assets (Schedule II) as opposed the rate of depreciation in the Companies Act 1956. The plain reading of the act implies that the Ministry of Corporate Affairs (MCA) expects the companies to follow the Straight Line Method of Depreciation as opposed to the Written Down Value of Depreciation. Although it is not prescribed which method of depreciation is required to be used. If this implication is drawn, this may impact the financial statements significantly as this would result in change of depreciation method for all companies. Moreover, the change in depreciation method would imply retrospective application which can change the financial statements significantly. There is a breather though. Companies can still opt to continue the Written Down Value Method of Depreciation under the New Companies A...

Generally speaking, value is often used to refer to the "price" at which the asset is sold in the market. However, particularly, in case of investment analysis, the price of the asset is different from its intrinsic value. Let's understand this in simple terms. If you've been walking in the desert without water for 2 days, you'd be dying of thirst. In such situation, a glass of water would be invaluable for you. Although the price of a water bottle is Rs 20, you could be willing to pay even Rs 100 for this bottle. So for you, while the price is Rs 20 but its value could be as high as Rs 100. The Investment characteristics of the asset are major determinants of value. The Intrinsic Value of any asset is the value of the asset assuming that the valuer (analyst or investor) has complete understanding of the asset's investment characteristics. For any investor, the intrinsic value reflects his true value of the asset.

The Discount Rate is a general term referring to any rate that is used in finding the present value of a future cash flow. it reflects the return or compensation required by an investor for a) delaying consumption (represented by the risk free rate) and b) assuming risk of cash flow Different discount rates may be used for different expected future cash flows. This is possible due to varying rates of inflation and other factors that may affect the future cash flows. However, for simplicity, generally a single discount rate (required rate of return) is used in most cases to discount future cash flows to appear at the present value of future cash flows.

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Sec 42 of the Companies Act 2013 talks about PRIVATE PLACEMENT and SHARE APPLICATION AND ALLOTMENT. The section will have huge impact on a number of private companies who have been exploiting the share applications and transfers. Private Placement offer for maximum 200 persons in a financial year; Special resolution to be passed at a Members General Meeting for each offer; Issue Price justification required in Explanatory Statement to the Notice of Meeting; Minimum share application from each person to be Rs.20,000/- face value of shares; Fresh offer not allowed until allotment of previous offer completed; Share application Money cannot be received in cash; Separate bank account should be operated for receipt of share application money; Share Application money cannot be utilized for any purpose other than allotment; Allotment to be made within 60 days of receipt of share application money, or else to be refunded within 15 days of expiry of 60 days; In case of delay in r...

The financial statements would include Cash Flow Statements and A Statement of Changes in Equity. Sec 2(40) of the Companies Act defines Financial Statements as follows: “ financial statement ” in relation to a company, includes— (i) a Balance Sheet as at the end of the financial year; (ii) a Profit and Loss Account, (Income and Expenditure Account for not-for-profit companies) for the financial year; (iii) Cash Flow Statement for the financial year; (iv) a Statement of Changes in Equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): One Person Company, Small Company, Dormant Company are NOT required to prepaare Cash Flow Statement. Sec 2(85) defines Small Companies as: ‘‘small company’’ means a company, other than a public company,— (i) Paid-Up Share Capital does not exceed Rs 50 Lakhs   [or such higher amount as may be prescribed which shall not be more than ...

MCA has clarified that the financial statements (and documents required to be attached thereto), auditors report and Board's report in respect of financial years that commenced earlier than 1st April, 2014 shall be governed by the relevant provisions/Schedules/rules of the Companies Act. 1956.

Sec 130 of the Companies Act 2013 prescribes that a company may apply to the Central Government / SEBI / Income Tax authorities or any other statutory regulatory body to re-open and re-cast the financial statements if: a) the relevant earlier accounts were prepared in fraudulent manner or b) the affairs of the company were mismanaged in the relevant period, casting a doubt on the reliability of financial statements If the competent court or tribunal passes an order to re-open and recast the financial statements, the company may do so. The accounts so revised or recast shall be final. #CompaniesAct2013

Sec 12 (3) of the Companies Act 2013 prescribes that every company shall...  ( a ) paint or affix its name, and the address of its registered office, and keep the  same painted or affixed, on the outside of every office or place in which its business is  carried on, in a conspicuous position, in legible letters, and if the characters employed  therefor are not those of the language or of one of the languages in general use in that  locality, also in the characters of that language or of one of those languages; ( b ) have its name engraved in legible characters on its seal; ( c ) get its name, address of its registered office and the Corporate Identity  Number  (CIN) along with telephone number, fax number, if any, e-mail and website addresses,  if any, printed in all its business letters, billheads, letter papers and in all its notices and  other official publications; and ( d ) have its name printed on  hundies , promissory not...

The importance of internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (CARO 2003), pursuant to which auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations. However, CARO 2003 did not mandate that an internal audit should be conducted by the internal auditor of the company. CARO 2003 acknowledged that an internal audit can be conducted by an individual who is not in appointment by the company. The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who shall either be a chartered accountant (CA) or a cost accountant (CMA), or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The class or classes of companies which shall be required to mandatorily appoint an internal auditor as per the draft ...