Do valuation reports come with an expiry date?

This is a common question from companies that are especially involved in early stage funding.

A valuation report is a document from a valuer reflecting the fair market value of a company’s securities, and is required for specific transactions under the Companies Act, 2013. For instance, section 62(1)(c), that pertains to a company increasing its subscribed capital by issuing shares on a preferential basis requires a valuation report from a registered valuer. Rule 14 of the Companies (Prospectus and allotment of securities) Rules, 2014 read with Section 42 that deals with private placement of securities requires that the explanatory statement to the notice for shareholders approval inter alia contain the name and address of the valuer.  

A valuer is a suitable person meeting certain specified requirements and registered with the IBBI. You may also refer to an earlier article on the necessity for a valuation report. Certain laws mandate a valuation report from a merchant banker registered with SEBI.

There are several ways one can carry out valuations, depending on the nature of the business such as: (a) Discounted Cash Flow (DCF)[1] method; (b) Net Asset Value (NAV)[2] method; (c) Earnings Multiplier method[3].

The RBI, in its master directions specifies that any valuation certificate issued by a chartered accountant or a SEBI-registered merchant banker or a practicing cost accountant is not to be more than 90 days as on the date of the investment (excluding use cases where the price is determined in accordance with SEBI guidelines.

While there is no explicit expiry period set in the Companies Act, 2013, through an amendment to the Income Tax Rules on 25th September 2023, a period of maximum 90 days from the date of valuation report has been introduced as deemed to be the valuation date[4].

For unlisted entities however with no foreign investor element, more so since the Companies Act, 2013, is silent, it’s advisable to err on the side of caution and follow the more recent practice of referring to valuation reports with data sets relating to a maximum of 90 days. Perhaps to avoid confusion, it’s advisable for IBBI to lay explicit guidelines to standardize aspects.

With inputs from Sahil Salve

[1] https://www.investopedia.com/terms/d/dcf.asp

[2] https://www.investopedia.com/terms/n/nav.asp

[3] https://corporatefinanceinstitute.com/resources/valuation/earnings-multiplier/#:~:text=The%20earnings%20multiplier%2C%20or%20the,with%20that%20of%20similar%20companies.

[4] https://www.ey.com/en_in/technical/alerts-hub/2023/09/cbdt-notifies-new-valuation-rules-for-equity-and-compulsorily-convertible-preference-shares-for-angel-tax-provisions