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COMPANY SECRETARY AS REGISTERED VALUER
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What is Valuation..?
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▪ Valuation is the process of determining the “Economic Worth” of an Asset orCompany under certain assumptions and limiting conditions and subject to the dataavailable on the valuation date.
▪ Economic value is a measure of the benefit provided by a good or service to aneconomic agent. It is generally measured relative to units of currency, and theinterpretation is therefore "what is the maximum amount of money a specific agent iswilling and able to pay for the good or service“
▪ Pre-requisite for Intelligent decision making
▪ Reflects the performance of the company-both past and future.
▪ Valuation helps determine underlying value of the asset, while price is what the asset is transacted at.
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▪ Stock
▪ Shares
▪ Debentures
▪ Securities
▪ Goodwill
▪ Net Worth
▪ Liabilities
Valuation of ???
▪ Plant & Machinery
▪ Building
▪ Land
▪ Other Tangible assets
▪ Intellectual Property Rights
▪ Brand
▪ Innovations
▪ Other Intangible assets
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Registered Valuer U/Companies Act, 2013
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▪ The Central Government notified the commencement of Section 247of the Companies Act, 2013 and Companies (Registered Valuers andValuation) Rules, 2017 on 18th October, 2017.
▪ The Central Government, vide a notification dated 23rd October,2017, issued the Companies (Removal of Difficulties) Second Order,2017 to provide that valuations required under the Companies Act,2013 shall be undertaken by a person who, having the necessaryqualifications and experience, and being a valuer member of arecognised valuer organisation, is registered as a valuer with theAuthority. Vide another notification on the same date, the CentralGovernment delegated its powers and functions under section 247of the Companies Act, 2013 to the Insolvency and Bankruptcy Boardof India (IBBI) and specified the IBBI as the Authority under theCompanies (Registered Valuers and Valuation) Rules, 2017.
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REGULATORY AUTHORITIES
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▪ Insolvency and Bankruptcy Board of India (IBBI)
▪ Income Tax Department
▪ Securities and Exchange Board of India
▪ Reserve Bank of India
▪ Stock Exchanges
▪ Courts/ NCLT
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QUALIFICATION & EXPERIENCE
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▪ post- degree, in the specified discipline, from a Universityestablished, recognized or incorporated by law in India and atleast three years of experience in the discipline thereafter;or
▪ a Bachelor’s degree, in the specified discipline, from auniversity established, recognized or incorporated by law inIndia and at least five years of experience in the discipline
thereafter;or
▪ membership of a professional institute set up under an Act ofParliament and at least three years’ experience after suchmembership.
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ELIGIBILITY CRITERIA
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A person shall be eligible to be a registered valuer if he
(a) is a valuer member of a registered valuers organisation;
(b) is recommended by the registered valuers organisation of which he is avaluer member for registration as a valuer;
(c) has passed the valuation examination within three years preceding the dateof making an application for registration
(d) possesses the qualifications and experience
(e) is not a minor
(f) has not been declared to be of unsound mind
(g) is not an undischarged bankrupt, or has not applied to be adjudicated as abankrupt
(h) has not been convicted by any competent court for prescribed period
(i) has not been levied a penalty under section 271J of Income-tax Act, 1961
(j) is a person resident in India
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SKILLS OF REGISTERED VALUER
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Knowledge of relevant accounting standards
Knowledge of taxation aspects
Strong understanding of valuation principles.
Knowledge of prescribed valuation requirements
Understanding of Sectoral dynamics, Trends and fundamentals for industries
Awareness of Market multiples
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Enforcing Provisions
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Section 62(1)(c): Further issue of share capital: Where the shares are further issued, then the price of thoseshares will have to be valued by a registered valuer.
Section 192(2): Restriction on non-cash transaction involving directors: The notice for approval of the resolutionin a general meeting shall be accompanied by the valuation of the assets by the registered valuer.
Section 230(2) & (3): Scheme for corporate debt restructuring: a valuation report with regard to shares, property,assets of the company is necessary.
Section 232(2)(d): The report of the expert with regard to valuation, if any, would be circulated for meeting ofcreditors and members for Merger/Amalgamation.
Section 232(3)(h) : The Valuation report to be made by the tribunal for exit opportunity to the shareholders oftransferor Company –Under the scheme of Compromise/ Arrangement in case the Transferor company is ListedCompany and the Transferee- company is an unlisted Company.
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Enforcing Provisions
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Rule 8 of Companies (Share capital and debentures) Rules, 2014: Issue of sweat equity: the price shall be determined by a registered valuer.
Section 236(2) : Valuation of equity shares held by the Minority Share Holders
In case an acquirer or person acting in concert with the acquirer acquire 90% or more of the equity capital in a company, they can offer to the minority shareholder (or the minority shareholder can offer to the acquirer) to acquire the minority shareholding at a valuation determined by the Registered Valuer
Section 281(1): Valuing assets for submission of report by liquidatorA valuation of assets of the company prepared by the Registered Valuer is required in case of winding up, voluntarily or otherwise.
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WHO WILL APPOINT REGISTERED VALUERS
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▪ Registered Valuers will be appointed by ;
▪ The Audit Committee; or
▪ The Board of Directors of the company, if AuditCommittee is absent; or
▪ The Insolvency Resolution Professional, in caseof company is under Insolvency proceedings.
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DUTIES OF REGISTERED VALUERS
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▪ The valuer appointed shall:
▪ make an impartial, true and fair valuation of any assets;
▪ exercise due diligence while performing the functions as valuer; and
▪ Shall not undertake valuation of any assets in which he has a direct
▪ or indirect interest or becomes so interested at any time during or after the valuation of assets
▪ Upon contravention▪ Fine – 25,000 to 100,000
▪ With intention to defraud▪ Imprisonment upto 1 year and▪ Fine- 1,00,000 to 5,00,000
▪ Additionally upon contravention, to refund remuneration received and also liable fordamages.
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Valuation Process
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• Purpose of Valuation
Why
• Business Model of Company
Who• Select
Appropriate Valuation Model
Which
• Convert Forecasts to a Valuation
How• Apply the
Valuation Conclusion
What
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Approaches to Valuation
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Asset Approach
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This method determines the worth of a business by the assets itpossesses.
Not perceived as a true Indicator of the business Value.
Viable for mature companies.
Generally used as the minimum break-up value for the transactionsince this methodology ignores the future return the assets canproduce and is calculated using historical accounting data that doesnot reflect how much the business is worth to someone who maybuy it as a going concern
Viable for companies having strong Asset base.
Viable for companies not in operational.
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Income Based Approach
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The Income approach methods determine the value of a businessbased on its ability to generate desired economic benefit for theowners.
Generally used for valuing business that are expected to continueoperating for the foreseeable future. (Going-Concern Assumption)
Viable for Early Stage and growing Company
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Capitalisation of Earning Method-PECV 17
Past profit are assumed to be representable of future maintainableprofits and accordingly capitalized as follows:
▪ Appropriate past period considered (usually 3 years)
▪ Normalised by adjustment for:
‒ Non-recurring transactions
‒ Changes in circumstances (product-market environment)
‒ Income and expenses related to non-operational assets
• Appropriate weights assigned
• Adjusted for contingent liabilities, surplus assets, controlpremium
• Capitalisation Rate
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▪ The discounted cash flow method is designed to establishthe present value of a series of future cash flows.
▪ Present value information is useful for investors, under theconcept that the value of a cash flow right now is worth morethan the value of that same cash flow that is only available at alater date.
▪ An investor will use the discounted cash flow method to derivethe present value of several competing investments, and usuallypicks the one that has the highest present value.
DISCOUNTED CASH FLOW METHOD
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CASH FLOWS
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Factors to be considered
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▪ Industry/Company analysis
▪ Company Stage
▪ Installed capacity
▪ Dependency on few customers/suppliers
▪ Capital Expenditure
▪ Working Capital
▪ Legal framework
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Key Components of DCF
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▪ Free cash flow (FCF) – Cash generated by the assets of thebusiness (tangible and intangible) available for distributionto all providers of capital. FCF is often referred toas unlevered free cash flow, as it represents cash flowavailable to all providers of capital and is not affected bythe capital structure of the business.
▪ Terminal value (TV) – Value at the end of the FCF projectionperiod (horizon period).
▪ Discount rate – The rate used to discount projected FCFsand terminal value to their present values
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Steps in DCF Analysis22
The following steps are required to arrive at a DCF valuation:
▪ Project Free Cash Flow to the Firm (FCFs)
▪ Calculate the Terminal Value
▪ Apply a discount rate and calculate Net Present Value of Future Cash Flows to the explicit period and Terminal Value.
▪ Calculate the enterprise value (EV) which is the sum of present value of the cash flows of the explicit period and terminal value.
▪ Calculate the equity value by subtracting net debt from EV
▪ Review the results
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Weighted Average Cost of capital
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➢ Companies often run their business using the capital they raise
through various sources. They include raising money through equity,
or by issuing interest-paying bonds/debentures or taking
commercial loans (debt). All such capital comes at a cost, and the
cost associated with each type varies for each source.
➢ WACC is the weighted average of the after-tax cost of acompany’s debt and the cost of its equity.
➢ WACC analysis assumes that investors (both debt and equity) in
any given industry require returns to compensate the perceived
riskiness of their investment.
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How to Determine WACC24
▪ WACC = (Cost of Equity x Equity to Capitalization) + (Post tax Cost of Debt x Debt to Capitalization)
▪ Cost of EquityThe cost of equity is computed using the Capital Assets Pricing Model using the formula shown below.
▪ Ke = Rf + Beta (Rp)▪ Ke = Cost of Equity,▪ Rf = Risk Free Return▪ Beta = Beta is the measure of volatility in the stock. ▪ Rp = Market Risk Premium
▪ Cost of Debt = Interest Expense x (1 - Tax Rate)
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FCFF FCFE▪ Free Cash Flow available to all
Investors of firm.
▪ It excludes the impact ofleverage, hence referred to asunlevered cash flow.
▪ Mainly used to CalculateEnterprise value
▪ Uses Weighted Average Cost ofCapital to incorporate the cost ofall capital sources in the entirecapital structure of the Company
▪ Free Cash Flow available to commonEquity Shareholders of firm.
▪ It includes the impact of leverage as itsubtracts interest payment to arrivethe cash flows, hence referred aslevered cash flows.
▪ Mainly used to Calculate Equity value
▪ Uses Cost of Equity with free cash flowavailable only to equity shareholders
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FCFF Vs FCFE
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The Market Based Approach
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▪ The value of a business is determined by comparing the company’saccounting ratios with another company’s of the same nature and size.
▪ This approach is used, where the value of a stock is estimated based upon itscurrent price relative to variables considered to be significant to valuation,such as earnings, cash flow, book value, or sales of various business of thesame nature.
▪ Business appraisal includes comparative transaction method and publiclytraded company method. Through this, it derives a relationship betweenperformance, revenues and selling price.
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Frequently Used Approach
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Most Transactions in capital Markets / M&A Transactions are market based
1. Comparable Companies Market Multiple Method (CCM)
2.Comparable Transaction Multiple Method (CTM)
3. Market Value Method (For quoted Securities)
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Comparable Companies Market Multiple Method
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▪ It uses the valuation ratios of a publicly traded company and appliesthat ratio to the company being valued
▪ The valuation ratio typically expresses the valuation as a function of ameasure of financial performance
▪ This methodology is based on current market stock price of the peers.
▪ The difficulty here is selection of a comparable company.
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Comparable Transaction Multiple Method (CTM)
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▪ This method is used for valuing a company based upon the Multiplesimplied in similar transactions.
▪ Difficult to get similar transaction having same size, industry andfinancial stability.
▪ There is no rule of thumb for the appropriate age of a comparabletransactions.
▪ The more recent the transaction, the better this technique with all thethings into recent scenario.
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Market Value Method – Quoted Securities
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▪ This Method is generally the most preferred method in case offrequently traded equity shares of companies.
▪ Market value of listed equity shares over an appropriateperiod of time takes into account the true potential of anycompany.
Company Life Cycle and Valuation Approaches
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Where We can play Role32
▪ Financial Modeling
▪ Business Valuation
▪ Merger/Amalgamation Valuation/Swap ratio
▪ ESOP Valuation
▪ Sweat Equity Shares
▪ Goodwill valuation
▪ Market value of listed equity shares over an appropriate period of timetakes into account the true potential of any company.
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CONCLUSION33
After all this discussion we all can conclude that how much importance has beengained by the registered valuer in this new era and immense opportunities areupcoming in this new field for our professionals. In the field of valuation, whereearlier only Chartered Accountants and Merchant Bankers were ruling is nowbeen made open for the Company Secretaries after enactment of Section 247 ofthe Companies Act and the Companies (Registered Valuers and Valuation) Rules,2017.
Price is what you pay, Value is what you get – Warren Buffet
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REGISTERED AND CORPORATE OFFICE
160, (BASEMENT) VINOBA PURI, LAJPAT NAGAR II,
New Delhi- 110024
Ph: 011- 41704066 / 9315705507 / 9212650228
Email- [email protected] www.ccvindia.com