Investment Valuation in India

Introducing the handbook on Valuation of Securities and Financial Assets . This site is being reconstructed to give you a great experience around Valuation. Please stay tuned for more updates on this page.

The Angel Tax imposed on start-ups has been the talk of the town lately. Various start-up founders have received demand notices from the tax authorities which plans to tax the capital receipts in the form of Income when the tax authorities believe that the amount is in excess of the value of the company. What is Angel Tax? In 2012, the then Finance Minister Pranab Mukherjee introduced a tax on unlisted companies which aimed at raising funds from investors (the 'angel investors") who invested in these companies with the objective of gaining significant returns. Since many companies used this route to launder money and raise funds at excessive valuations, the tax was imposed to arrest such money laundering. Angel Tax is a tax payable by the unlisted companies who raise funds via issue of shares where the share price is believed to be in excess of the fair market value of the shares sold. What is a Startup? An entity shall be considered as a Startup: (i). Upto a period o...

Professional Competence and Due Care A valuer shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. A valuer shall carry out professional services in accordance with the relevant technical and professional standards that may be specified from time to time A valuer shall continuously maintain professional knowledge and skill to provide competent professional service based on up-to-date developments in practice, prevailing regulations/guidelines and techniques. In the preparation of a valuation report, the valuer shall not disclaim liability for his/its expertise or deny his/its duty of care, except to the extent that the assumptions are based on statements of fact provided by the company or its auditors or consultants or information available in public domain and not generated by the valuer. A valuer shall not carry out any instruction of the client insofar as they are incompatible with the re...

Business Combination The term ‘business combination’ in Ind AS 103 is a broader term than ‘amalgamation’. It is defined as a transaction in which an acquirer obtains control of one or more businesses. An acquirer may obtain control in a number of ways including, for example, by transferring cash or other assets, incurring liabilities, issuing equity instruments or without transferring consideration. There is a presumption of control if an entity owns more than 50% of the equity shareholding in another entity, though this may not always be the case. Business Ind AS 103 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. A business generally consists of inputs, processes applied to those inputs and the ability to create outputs. For Example, R Ltd....

Despite efficient markets which provide normal returns in the long run, active fund managers and capital market participants such as investors and traders often seek abnormal returns. Given the large pool of securities, market often 'misprices' some securities which provide opportunities to these fund managers to generate abnormal returns. This abnormal return is known as Alpha Return. The amount by which the investment is mispriced by the market becomes part of the total return expected by the manager over the holding period of investment.  We call it ex-ante Alpha and is given by: ex-Ante Alpha = Expected Return - Required Return Note that we use various models to calculate the Required return such as Capital Asset Pricing Model (CAPM) ans represents a fair return expected on similar assets with similar risks. Example: Now Let's see how can we calculate the Expected Return. For example, if an Analyst believes that a security which is currently p...

The Companies Act 2013 has promoted structured business organisation even for individuals. Why run an uncontrolled, unregulated sole proprietorship business when you can be guided and recognised by an Act? Even if you are an individual, you can now create and run a company under Companies Act 2013 - a ONE PERSON COMPANY.  Section 2(62) defines One Person Company as a company which has only one person as a member. Here are some things that you should know about One Person Company: One Person Company (OPC) is a private company   The said member (shareholder) should be a natural person. The words “One Person Company” shall be mentioned in brackets below the name of the company, wherever it is printed, affixed or engraved [Section 12(3) second proviso]. The memorandum of OPC shall indicate the name of the person who shall become the member of the company in the event of the death of the subscriber. The name of such person can also be changed by the member [Sectio...

Under Companies Act 2013, an Associate Company, in relation to another company, means a company in which that other company has a significant influence. - “Significant Influence” means control of at least 20%. of total share capital, or of business decisions under an agreement;  - Associate Company is NOT a Subsidiary Company  - It includes a Joint Venture Company irrespective of the shareholding Further, Control includes:  - right to appoint majority of the directors or  - to control the management or  - policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

In its drive to improve the ease of doing business, The Companies (Amendment) Act 2015 has made some sweeping changes. One of such change is the omission of minimum capital requirement for starting a business in company form. The requirement of having a minimum paid up share capital has been done away with. Going forward, a Private Company would not be required to have a paid up share capital of Rs 1 Lakh. Accordingly, a Public Company would not be required to have a paid up share capital of Rs 5 Lakh.

Employee Stock Option Plans (ESOPs) also known as Equity Incentive Plans is one the commonly used compensation tools by companies. Organisations offer ESOPs to their employees as part retention strategies. Some of the other key drivers for implementing ESOPs are wealth creation for employees, enabling high performance, and instilling a feeling of ownership for the organization amongst employees. What is ESOP? An ESOP is a right to buy shares of the employer company at a pre-determined price. Organisations often grant their key employees an option under the plan that confers a right, but not an obligation, on the employee to buy the shares of their company. Stock options are subject to vesting, requiring continued service (and sometimes performance) over a specified period of time. Upon vesting of options, employees can exercise them to get shares, by paying the pre-determined exercise price. ESOPs can be an important tool for both attracting and retaining good talent in ...

I often come across students and training participants who regret that they can't remember the things they are studying or things that have been discussed during the training. This article appeared on LinkedIn. Read Full Article here

There are various constraints that we come across while making investment decisions. Some of them are: Liquidity:  Liquidity constraints refer to the need of the investor to convert quickly into cash at a price that is closer to the fair market value of the investment. Usually, if an investor purchases a long term asset such as real estate, these are termed as illiquid assets as it usually takes longer to sell such assets and get cash. In case of immediate need for cash, one may have to sell such illiquid assets at an unfavourable price. On the other hand, marketable securities such as Money Market Funds are termed as liquid assets which can be sold and converted into cash almost any time. Investment Horizon: Investment Horizon (also known as Time Horizon) refers to the planned time between making an investment and redeeming such investments. A person (e.g. at the age of 25) would usually have a longer investment horizon if he plans to investment for retirement, daughter's...

Here are some valuation updates that have been reported in the global media. Stripe Payments services startup Stripe, founded by brothers Patrick and John Collison has taken another round of funding from Visa. The companies enables the apps and online stores to take payments from anybody, anywhere. It works with online companies that accepts payments through Credit cards while being totally invisible to end users. Visa has bought a stake in Stripe that values the company at $5 Billion and will leverage on Stripe's technical expertise to work on new kinds of digital payments. This is at a time when Visa is facing competition from organisations which are more mobile friendly when it comes to digital payments. On the other hand, Stripe will leverage on Visa's security systems to protect the users' financial information.   

Valuation Ratios help us value a company in the simplest manner. This method of valuing companies is also called Relative Valuation. A valuation ratio is a measure of how cheap or expensive a security (or business) is, compared to some measure of profit or value. A valuation ratio is calculated by dividing a measure of price by a measure of value, or vice-versa. The point of a valuation ratio is to compare the cost of a security (or a company, or a business) to the benefits of owning it. The most widely used valuation ratio is the PE ratio which compares the cost of a share to the profits made for shareholders per share. The EV/EBITDA compares price to profits, but in a somewhat more complex manner. It compares the cost of buying the businesses of a company free of debt, to profits. Because someone buying a company free of debt would no longer have to pay interest, the profit measure used changes to profit before interest. It is also adjusted for non-cash items. Price...

A bond carries a specific rate of interest which is also called the Coupon Rate. For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be Rs 100 x 8% = Rs 8 per annum. Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value. Interest paid would be tax deductible for the issuer.

The Face Value of a Bond is the stated value on the face of the bond and is also known as Par Value. It represents the amount of borrowing by the firm which it specifies to repay after a specific period of time i.e. at the time of maturity. For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be Rs 100 x 8% = Rs 8 per annum. Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value.

Finally India is all set to adapt to IFRS through its revised set of Accounting Standards (Ind AS) which are the converged accounting standards with IFRS starting next year. The Ministry of Corporate Affairs (MCA) has issued a notification dated 16 February 2015 announcing the Companies (Indian Accounting Standards) Rules, 2015 for the applicability of the IndAS in a phase wise manner. The applicability has been liked to the Net Worth and listing status of the companies. Starting 1-Apr-2016 all companies having a Net Worth of Rs 500 crore or more will be required to present the Financial Statements under Ind AS. This will also require comparative Ind AS information for the period of 1-Apr-15 to 31-Mar-16. [Net Worth: Net Worth will be determined based on the standalone accounts of the company as on 31-Mar-14 or the first audited period ending after that date. Net Worth calculation would be as per Sec 2(57) of Companies Act 2013 which means: Paid Share Capital...

Section 180 of the Companies Act, 2013 corresponds to section 293 of the companies Act, 1956 . Section 293 of the Companies Act, 1956 was applicable only to public companies i.e. private limited companies were exempted from this requirement and therefore they could borrow any sums of money up to any limit without the need of seeking any approval from the members of the company. Now, Section 180 is applicable to all companies i.e. public as well as private. So now onwards even private companies have to seek the approval of their members if they are intending to borrow monies in excess of their paid up share capital and free reserves.  According to section 180(1)(c) – The Board of directors of a company shall exercise the following power only with the consent of the company by a Special Resolution (SR): Borrowing of money if – Money already borrowed, together with moneys proposed to be borrowed will exceed the aggregate of paid-up share capital and free rese...

REPORTING OF FRAUD BY AN AUDITOR [Section 143(12) to (15) of the Companies Act, 2013] The Companies (Amendment) Bill 2014 was passed by Lok Sabha on December 17’14. According to the amendment, “the auditor would be required to report fraud to the Government above the mandated threshold limit. Any fraud below the threshold limit would have to be reported to the Audit Committee (AC) / Board .” Further, the amendment also provides for the companies whose auditors have reported frauds under this sub-section to the AC or the Board but not reported to the Central Government (CG), shall disclose the details about such frauds in the Board’s report . The threshold limit has not been defined. Time and manner of reporting The auditor shall immediately report the matter to CG within such time and in such manner as may be prescribed i.e. according to Rule 13. No liability of auditor An auditor shall not be deemed to be guilty for breach of any of his duties by reason of his...

Restrictions and legal requirements : No company shall enter into an arrangement by which- (a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or (b) the company acquires or is to acquire assets for consideration other than cash, from such a director or person so connected, unless prior approval for such arrangement is accorded by a resolution of the company in general meeting (GM) and if the director or connected person is a director of its holding company, approval shall also be required to be obtained by passing a resolution in GM of the holding company. Requirements of notice: The notice for approval of the resolution by the company or holding company in GM shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer. Effects of contravent...

Removal of auditor before expiry of his term [Section 140(1)] Resolution: Such removal requires a special resolution (SR) . Approval : Previous approval of Central Government (CG) must be obtained.                 Procedure for obtaining approval of CG and passing SR (Rule 7): Ø   An application shall be made to CG in Form ADT-2. The application shall be accompanied with the prescribed fees. Ø   The application shall be made to CG within 30 days of passing of the Board resolution (BR). Ø   The company shall hold the general meeting (GM) within 60 days of receipt of approval of CG for passing of the SR. Opportunity of being heard : Before taking any action for removal, the auditor shall be given a reasonable opportunity of being heard. Resignation by Auditor [Section 140(2) and 140(3)] When an auditor resigns, he is required to file a Statement in the prescribed form. ...