Updated on: Oct 12th, 2021
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2 min read
The Startup India initiative has been launched to provide a platform for startups for networking and growing. Valuation of shares is a process of determining the price per share of the business and it is necessary for determining the health of the business and also for regulatory purposes. A startup must obtain a Valuation Report by a Registered Valuer registered with Insolvency and Bankruptcy Board (IBBI) in the following circumstances:
Exception
A valuation report for issuance of the right shares is not required as the shares are issued at the face value of the company.
Businesses are generally valued based on the following popular methods. However, all the methods do not suit the startups. Detailed below are the valuation methods and their popularity with startups:
This method is widely used under the income-based valuation. The approach is to estimate the business value by calculating the present value of all future cash flows. It is an accepted method by businesses.
This method takes the net value of the business by reducing the liabilities from the assets. This is not a popular method for startups as investments in startups are generally low however they have huge growth potential.
The market value method is valuing a company based on its price on the stock market. However, this does not go well with startups as they are not listed companies and cannot be found on any stock market.
As clearly evident, the Discounted Cash Flow method is the only viable method for the valuation of startups and hence also recommended by the Income Tax Rules for valuation of fresh issue of shares.
Particulars | Fresh Issuance | Transfer |
Applicable Section and rule | Section 56 (2) (viib)read with Rule 11UA(2)(a) | Section 56 (2) (x) read with Rule 11UA (1)(c)(b) |
Valuation Method | Discounted Cash Flow Method (DCF) or Book Value method | Book Value Method |
Valuer | Merchant Banker | Not prescribed |
Book value method prescribed under Rule 11 UA(2)(a) of Income Tax Rules, 1962.
Fair Market Value (FMV) = (A-L) * (PV)/(PE)
Where,
A = Book Value of assets adjusted as follows
L = Book value of Liabilities not including the following
PV = Paid-up value of such equity share
PE = Total amount of paid-up capital (equity) as per balance sheet
Valuation Date = Date on which the property/ consideration is received by the taxpayer
An audited balance sheet as on the date of valuation must be considered. If the balance sheet on the valuation date is not available, then the balance sheet adopted and accepted by in the AGM, drawn on the date immediately preceding the valuation date must be considered.
Book value method prescribed under Rule 11UA (1)(c)(b) of the Income Tax Rules 1962.
FMV = (A+B+C+D-L)* (PV)/(PE)
A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet —
B = Fair value of jewellery and artistic work on the basis of valuation report from a registered valuer
C = fair market value of shares and securities as per rule 11UA;
D = Stamp value of immovable property;
L = Book value of Liabilities not including the following
PV= the paid-up value of such equity shares;
PE = total amount of paid-up share capital (equity) as shown in the balance sheet
Valuation Date = Date on which the property/ consideration is received by the taxpayer
To conclude startups are a unique and emerging sector of the Indian economy and hence the provisions related to the valuation of shares of a startup company find their place in Section 56 (2) (viib)read with Rule 11UA(2)(a) for the fresh issue of shares and Section 56 (2) (x) read with Rule 11UA (1)(c)(b) for transfer of shares.
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The Startup India initiative aims to provide a platform for startup growth. Valuation of shares is crucial for a startup's health and regulatory purposes, with the Discounted Cash Flow method deemed most suitable. Requirements for Valuation Reports and methods such as DCF, NAV, and MV are discussed, along with valuation processes for both fresh issuance and transfer of shares under Income Tax Rules.