Company valuation is the process of estimating the fair value of a business or its shares. In India it is more than a commercial exercise: several corporate actions legally require a valuation by an independent expert, and using the wrong valuer or an out-of-date report can invalidate an allotment or invite tax scrutiny. Founders raising capital, issuing ESOPs, or restructuring should identify which law applies before they price a single share.
When a valuation is legally required
The most common statutory triggers under the Companies Act, 2013 and allied laws are:
- Sweat equity shares — Section 54 read with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014.
- Preferential allotment / further issue of shares — Section 62(1)(c) and Rule 13; an unlisted company must obtain a registered valuer's report to fix the issue price.
- Mergers, demergers and schemes of arrangement — Sections 230–232, including the share-swap (exchange) ratio.
- Slump sale, buy-back and reduction of capital.
- Issue or transfer of shares to or from non-residents — pricing under Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019.
- Income-tax purposes — Rule 11UA / 11UAA for shares issued or received, and Section 50CA on transfer of unquoted shares.
- ESOP accounting and financial reporting under Ind AS 102.
Who is authorised to value
A costly and frequent error is assuming a single professional can sign every report. The authority depends entirely on the governing law:
| Purpose | Governing law | Who must certify |
|---|---|---|
| Sweat equity, preferential allotment, mergers | Companies Act, 2013 | IBBI Registered Valuer |
| Shares issued/transferred with non-residents | FEMA (NDI) Rules, 2019 | CA, SEBI Cat-I Merchant Banker or practising Cost Accountant |
| Income-tax valuation (Rule 11UA, Sec 50CA) | Income-tax Act, 1961 | Merchant Banker (DCF); Merchant Banker/CA (NAV) |
| ESOP / financial reporting | Ind AS 102 | Registered Valuer / Merchant Banker |
A registered valuer is an individual or entity holding a certificate from the Insolvency and Bankruptcy Board of India (IBBI) under Section 247 and the Companies (Registered Valuers and Valuation) Rules, 2017, for the relevant asset class — usually Securities or Financial Assets.
Common valuation methods
- Discounted Cash Flow (DCF): present value of projected future cash flows — preferred for startups with a short history but strong growth.
- Comparable Company Multiples: benchmarking against similar listed peers (EV/EBITDA, P/E, revenue multiples).
- Precedent Transactions: pricing implied by comparable M&A deals.
- Net Asset Value (NAV): book or fair value of net assets — suited to asset-heavy or holding companies.
- Market price: for listed companies, based on quoted market capitalisation.
Angel tax: the current position
Section 56(2)(viib) — the "angel tax" that taxed share premium received above fair market value — has been abolished for share issues made on or after 1 April 2024 (that is, from Assessment Year 2025-26 onwards). For FY 2026-27, an unlisted company can therefore raise funds at a negotiated premium without that specific charge. Valuations remain necessary, however, for FEMA pricing, Companies Act allotments, and Section 56(2)(x) in the investor's hands.
Practical tips and common mistakes
- Watch the report's shelf life — for FEMA share pricing the valuation must not be more than 90 days old on the date of allotment; a delayed allotment needs a fresh certificate.
- Match the valuer to the law: a CA's NAV certificate will not satisfy a Companies Act allotment that requires an IBBI registered valuer.
- Document and defend your DCF assumptions (growth rate, discount rate) — this is where assessing officers challenge the number.
- Obtain the valuation report before passing the board and shareholder resolutions, not afterwards.