Valuation of a company for Private Placement

Raising capital through a private placement of shares is a strategic decision that requires meticulous planning and adherence to legal mandates. A critical aspect of this process is the valuation of the company, which must be conducted by a registered valuer. This ensures transparency, compliance, and protection of stakeholder interests.

In this Article, CA Manish Mishra talks about the need of valuation under the Companies Act, 2013 in case a company is issuing shares in the private placement under section 42.

Overview of Private Placement of Shares

Private placement involves offering shares to select investors, such as institutions or high-net-worth individuals, rather than the public. It is an efficient way for companies to raise capital without going public.

Role of Valuation in Private Placements

Valuation determines the fair price of shares being issued. It is critical to ensure the offer aligns with the company’s financial health and market potential.

- Legal Mandate for Registered Valuers

The Companies Act, 2013, mandates the use of registered valuers for fair valuation of shares during private placements, ensuring compliance and credibility.

Private Placement

- Definition and Purpose of Private Placement

Private placement is a tailored approach to raising capital, offering flexibility in structuring deals and maintaining control over shareholding.

- Key Features and Advantages of Private Placement

• Limited disclosure compared to public issues.
• Faster and cost-effective fundraising.
• Ideal for startups and small-to-medium enterprises (SMEs).

Regulatory Framework

- Companies Act, 2013 Provisions on Private Placement

Sections 42 and 62 of the Companies Act outline the procedural requirements, including valuation, filing forms, and issuing offer letters.

- SEBI Guidelines for Listed Companies

Listed companies must comply with additional SEBI regulations for private placement, ensuring investor protection.

- Valuation Rules under Section 62 and Section 42

The valuation must adhere to internationally accepted standards and align with the Companies (Registered Valuers and Valuation) Rules, 2017.

Role of Registered Valuers

- Who is a Registered Valuer?

A registered valuer is a certified professional authorized to determine the fair value of assets or shares as per regulatory requirements.

- Eligibility and Registration Process

Professionals such as Chartered Accountants, Cost Accountants, or professionals with finance qualifications can apply for registration through the Insolvency and Bankruptcy Board of India (IBBI).

- Key Responsibilities in Share Valuation

• Conduct independent and unbiased valuation.
• Prepare detailed valuation reports.
• Address queries from regulators and stakeholders.

Methods of Valuation

- Overview of Share Valuation Methods

Valuation methods are chosen based on the company’s nature, stage, and financial metrics.

- Asset-Based Valuation

Calculates the net asset value of the company, ideal for asset-heavy businesses.

- Income-Based Valuation

Focuses on future cash flows, often using the Discounted Cash Flow (DCF) method.

- Market-Based Valuation

Benchmarks the company against comparable businesses in the industry.

Steps in Valuation for Private Placement

- Gathering Financial and Operational Data: Collect audited financials, business forecasts, and market research.

- Selecting an Appropriate Valuation Method: Choose the most suitable method based on the company's characteristics.

- Preparing the Valuation Report: Document the valuation approach, assumptions, and conclusions.

Importance of Valuation Report

- Compliance with Legal and Regulatory Requirements

A valuation report is mandatory for filing with the Registrar of Companies (RoC) during private placements.

- Ensuring Transparency and Credibility

It assures investors that the share price is fair and unbiased.

- Protecting Stakeholder Interests

Accurate valuation prevents disputes and safeguards the interests of existing shareholders.

Documents Required for Valuation

• Audited Financial Statements.
• Projected Cash Flows and Business Plans.
• Details of Shareholding Patterns.
• Information on Recent Transactions and Investments.

Valuation Adjustments

- Discounts and Premiums in Valuation

Adjustments for control premiums or minority discounts are applied based on ownership stakes.

- Adjustments for Marketability and Control

These factors account for the liquidity of shares and the influence of stakeholders.

Challenges in Valuation

- Handling Complex Business Models

Startups and innovative businesses often lack historical data, complicating valuation.

- Managing Uncertainties in Projections

Valuers must address risks and assumptions in financial forecasts.

- Addressing Regulatory Scrutiny

Complete documentation and justifications are required to satisfy regulators.

Role of Professionals

- Importance of Engaging Certified Valuers

Certified valuers bring expertise, ensuring compliance and accuracy.

- Coordination Between Valuers and Legal Advisors

Close collaboration ensures that the valuation aligns with legal documentation.

Recent Changes in Valuation Regulations

- Updates in Companies (Registered Valuers and Valuation) Rules, 2017

Recent amendments emphasize stricter adherence to valuation standards.

- Implications for Private Placement Transactions

Companies must engage qualified valuers and provide detailed disclosures.

Checklist for Private Placement Valuation

- Verify eligibility and registration of the valuer.

- Compile necessary documents and data.

- Choose an appropriate valuation method.

- Prepare and review the valuation report.

- File required forms with the RoC.

Benefits of Accurate Valuation

• Attracts credible investors with realistic pricing.
• Avoids disputes over share value.
• Minimizes regulatory risks.

Case Studies

• Successful Placement: A startup raised capital using DCF valuation, attracting global investors.
• Valuation Failure: Overvaluation led to investor mistrust and withdrawal from a major deal.

FAQs

- Is valuation mandatory for all private placements? Yes, as per the Companies Act, 2013, valuation by a registered valuer is required.

- What is the cost of engaging a registered valuer? The cost depends on the complexity of the valuation but typically ranges between ₹50,000 and ₹5,00,000.

- How long does the valuation process take? It usually takes 2-4 weeks, depending on the data availability and complexity.

- What happens if the valuation report is challenged? Detailed documentation and adherence to standards protect against challenges.

- Can a company use its internal valuation? No, external registered valuers are mandatory for private placements.

- What are the penalties for non-compliance in valuation? Companies face fines and legal consequences under the Companies Act.

Conclusion

Valuation is a cornerstone of private placement, ensuring fairness, compliance, and trust in the investment process. Engaging a registered valuer safeguards your company against regulatory risks and builds investor confidence. Always prioritize accuracy and transparency in your valuation practices. Feel free to contact us if you have any query, and one of our registered valuer team will connect with you.