Due Diligence, Legal and Regulatory Valuation aspects Valuation - - PowerPoint PPT Presentation
In the business world, the rearview mirror is always clearer than the windshield Warren Buffett Due Diligence, Legal and Regulatory Valuation aspects Valuation under Companies Act 2013 Particulars Pg. No. What and Why 3 How
always clearer than the windshield”
Valuation under Companies Act – 2013
Particulars
What and Why 3 How 10 When and Who 22 Registered Valuer 25
13/12/2013 Indian Institute of Corporate Affairs (IICA)
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Value & Valuation
Value is*
service that is available for purchase;
Valuation is the process of determining
the “Economic Worth” of an Asset or Company under certain assumptions and limiting conditions and subject to the data available on the valuation date.
* Source -International Valuation Standard Council
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Key Facts
PRICE IS NOT THE SAME AS VALUE TRANSACTION CONCLUDES AT NEGOTIATED PRICES VALUATION IS HYBRID OF ART & SCIENCE VALUE VARIES WITH PERSON, PURPOSE AND TIME
13/12/2013 Indian Institute of Corporate Affairs (IICA)
13/12/2013 Indian Institute of Corporate Affairs (IICA)
FAIR MARKET VALUE INTRINSIC VALUE FAIR VALUE INVESTMENT VALUE Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation
Standard of Value is the hypothetical conditions under which a business is valued.
While selecting the Standard of Value following points is to be taken care of
Subject matter of Valuation; Purpose of Valuation; Statute; Case Laws; Circumstances. Types of Standard of Value:
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation Thesis of Value is Premise of value which relates to the assumptions upon which the valuation is based.
Premise of Value
– Value when business is terminated . It could be ‘forced’ or ‘orderly’.
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Growing Cos.
High Growth Cos.
Mature Cos.
Declining Cos.
`
Operating History
from Existing Assets
Start Up Cos. Turnover / Profits Time
Valuation across business cycle follow the law of economics
Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation
13/12/2013 Indian Institute of Corporate Affairs (IICA)
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Enterprise / Business Value
Enterprise Value
Net Debt# Equity# Fixed Assets# Net Current Assets# Intangibles# Stakeholders Assets
Value of Business
# Based on Market Values
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation
Valuation Approaches
Income Based Method Asset Based Method
Capitalization of Earning Method (Historical) Discounted Cash Flow Method (Projected Time Value)
Market Based Method
Comparable Companies Market Multiples Method (Listed Peers) Comparable Transaction Multiples Method (Unlisted Peers) Market Value Method (For Quoted Securities) Book Value Method Liquidation Value Method Replacement Value Method Contingent Claim Valuation (Option Pricing) Price of Recent Investment Method Rule of Thumb (Multiples: Customers, Rooms, Seats, No. of visitors etc.) - Depends upon Industry
Fundamental Method Relative Method Other Method
While concluding Value, all the methodologies must be considered and then weights applied as per the facts of the case. In other words, Value conclusion should be based on the Professional Judgement and Simple Average should best be avoided while concluding Value.
Need of several valuation methods? Each has strengths and weaknesses Different methods useful in different situations Each gives a different “take” on the value of the company’s stock Provides a range of valuations instead of point estimates Helps in Sanity Check
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Sources of Information for Valuation
Sources of Information
Historical financial results – Income Statement, Balance Sheets and Cash Flows Data available in Public Domain – Stock Exchange / MCA/SEBI/Independent Report Data on comparable companies – SALES/EV- EBITDA/ PAT/BV Promoters and Management background Data on projects planned/under implementation including future projection Discussion and Representation with/by the management of the Company Industry and Regulatory trends
13/12/2013 Indian Institute of Corporate Affairs (IICA)
CASH FLOW
Investor assign value based on the cash flow they expect to receive in the future
Value of a cash flow stream is a function of
ASSETS
Operating Assets
Equipment & Intangible assets
business
Non - Operating Assets
investment purposes, such as vacant land & Securities
may be necessary
Key drivers of valuation
That’s why DCF is most prominent valuation method Need for Restructuring
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Purpose Regulatory Accounting
Allocation Dispute Resolution
Board/ Courts
Diminution
Investment
Assessment Value Creation
Planning
Valuation depends upon
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Choice of Valuation Approaches “Value in Valuation is a question, and Your choice of Method is the first step towards answer”
Applicability of a particular approach depends upon:
On whose behalf? – one buyer vs another buyer, buyer vs seller; For what purpose? – independent strategic acquisition, group company consolidation, cross border transaction; When? – distress situation, industry downturn, boom etc;
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Choice of Valuation Approaches
The dominance of profits for valuation of share was emphasised in “McCathies case” (Taxation, 69 CLR 1) where it was said that “the real value of shares in a company will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amount which the shares would realise on liquidation”. This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.) (122 ITR 38).
and on liquidation;
value of unlisted company by comparing it with its listed peers;
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Company Specific Factors
It is the alignment of Company’s value via-a- vis to its external environment
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Industry Risk Analysis
Following factors are required to be considered:
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Rule of Thumb
A rule of thumb or benchmark indicator is used as a reasonableness check against the values determined by the use of other valuation approaches.
Industry Valuation Parameters Hospital EV/Room Engineering Mcap/Order Book Mutual Fund Asset under management OIL EV/ Barrel of equivalent Print Media EV/Subscriber Power EV/MW, EBITDA/Per Unit Entertainment & Media EV/Per screen Metals EBITDA/Ton, EV/Metric ton Textiles EBITDA depend upon capacity utilization Percentage & per spindle value Pharma Bulk Drugs New Drug Approvals , Patents Airlines EV/Plane or EV/passenger Shipping EV/Order Book, Mcap/Order Book Cement EV/Per ton & EBITDA/Per ton Banks Non performing Assets , Current Account & Saving Account per Branch
However, Exclusive use of Rule of Thumb is not recommended
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Valuation Methodologies and Value Impact
Major Valuation Methodologies Ideal for Result Net Asset Value Net Asset Value (Book Value) Minority Value Equity Value Net Asset Value (Fair Value) Control Value Comparable Companies Multiples (CCM) Method Price to Earning , Book Value Multiple Minority Value Equity Value EBIT , EBITDA Multiple Enterprise Value Comparable Transaction Multiples (CTM) Method Price to Earning , Book Value Multiple Control Value Equity Value EBIT , EBITDA Multiple Enterprise Value Discounted Cash Flow (DCF) Equity Control Value Equity Value Firm Enterprise Value
13/12/2013 Indian Institute of Corporate Affairs (IICA)
13/12/2013 Indian Institute of Corporate Affairs (IICA)
13/12/2013 Indian Institute of Corporate Affairs (IICA)
Inbound Investment DFCF Gift of Unquoted Equity Shares (Min) NAV Outbound Investment Valuer Discretion Gift of Unquoted Shares other than Equity Shares Price it would fetch if sold in open market Takeover Code/ Delisting - Infrequently Traded Only Parameters Prescribed – Return
Industry Average Takeover Code/ Delisting - Frequently Traded Based on Market Price Reserve Bank of India ESOP Tax Valuer Discretion ESOP Accounting Option – Pricing Model Income Tax SEBI CA / MB >5Mn$ - MB, otherwise CA/MB
MB
Preferential Allotment to promoters / their relatives for consideration other than cash Valuer Discretion Companies Act, 1956 Sweat Equity Valuer Discretion CA / MB
Prescribed Methodologies Mandate to be done by
SNAPSHOT OF REGULATORY VALUATIONS IN INDIA
Gift of Unquoted Equity Shares from Resident (Max) DCF (Valuation Based on Assets, Business & Intangibles is also acceptable) FCA / MB Preferential Allotment to Others Based on 26 weeks / 2 weeks Market Price
2013 any property, stock, shares, debentures, securities or goodwill
worth of the Company or its liabilities To be prescribed REGISTERED VALUER Transfer Pricing Arm Length Price
Companies Act, 2013
Registered Valuers
Registered Valuers
Financial Valuer Technical Valuer
Chartered Accountant, Company Secretary or Cost Accountant in whole time practice or retired member
Indian Corporate law Service or any other person as prescribed.
Merchant Banker registered with SEBI and which has in employment under it CA/CS/CWA for carrying
(signing) Valuation by such qualified persons.
the Institute
Architects in whole time practice.
Merchant Banker possessing both qualifications may act in dual capacity. Shall have 5 Years
Continuous Experience, Post Qualification Shall have 5 Years
Continues Experience, Post Qualification
Stock, Shares, Debentures, Securities, Goodwill Property
Persons eligible to apply for being Registered as Valuer Registered Valuer to be appointed by Audit Committee
by the Board of Directors.
Registered Valuers
Registered Valuer Further Issue
Compromise and Arrangements Winding up / Liquidation Non Cash Transactions with Directors Exit to Minority Shareholders Corporate Debt Restructuring
Registered Valuers (Financial Valuation)
Value
Responsibilities
valuation
indirectly interested
Upon contravention
With intention to defraud
Additionally upon contravention, to refund remuneration received and also liable for damages.
Indian Institute of Corporate Affairs (IICA)
Section wise Requirement of Registered Valuers
Section 62(1)(c) – For Valuing further Issue of Shares Section 192(2) – For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors Section 230(2)(c)(v) – For Valuing Shares, Property and Assets of the company under a Scheme of Corporate Debt Restructuring Section 230(3) and 232(2)(d) – For Valuation including Share swap ratio under a Scheme
Compromise/Arrangement, a copy of Valuation Report by Expert, if any shall be accompanied Section 232(3)(h) - Where under a Scheme of Compromise/Arrangement the transferor company is a listed company and the transferee company is an unlisted company, for exit opportunity to the shareholders of transferor company, valuation may be required to be made by the Tribunal Section 236(2) – For Valuing Equity Shares held by Minority Shareholders Section 260(2)(c) – For preparing Valuation report in respect of Shares and Assets to arrive at the Reserve Price or Lease rent or Share Exchange Ratio for Company Administrator Section 281(1)(a) – For Valuing Assets for submission of report by Company Liquidator Section 305(2)(d) – For report on the Assets of the company for preparation of declaration of solvency under voluntary winding up Section 319(3)(b) – For Valuing the interest of any dissenting member of the transferor company who did not vote in favour of the special resolution, as may be required by the Company Liquidator Section 325(1)(b) – For valuation of annuities and future and contingent liabilities in winding up of insolvent company
Indian Institute of Corporate Affairs (IICA)
Registered Valuers (Draft Rules) – Methods of Valuation
Relates to IRS Revenue Ruling (1959-60),USA
Registered Valuers (Draft Rules) – Methods of Valuation
following methods- a. Net Asset Value Method (NAV) b. Market Price Method c. Yield Method / PECV Method d. Discounted Cash Flow Method (DCF) e. Comparable Companies Multiples Method (CCM) f. Comparable Transaction Multiples Method (CTM) g. Price of Recent Investment Method (PORI) h. Sum of the parts Valuation Method (SOTP) i. Liquidation Value j. Weighted Average Method k. Any other method accepted or notified by RBI, SEBI or Income Tax Authorities l. Any other method that valuer may deem fit provided adequate justification for use of suh method (and not any of the above methods) is provided
with applicable standards, if any stipulated for this purpose.
Registered Valuers (Forms) – Contents of Valuation report
1) Description of valuation engagement (a) Name of the client: (b) Other intended users: (c) Purpose for valuation: (2) Description of business/ asset / liability being valued (a) Nature of business or asset / liability (b) Legal background (c) Financial aspects (d) Tax matters (3) Description of the information underlying the valuation (a) Analysis of past results (b) Budgets, with underlying assumptions (c) Availability and quality of underlying data (d) Review of budgets for plausibility (e) Statement of responsibility for information received
Indian Institute of Corporate Affairs (IICA)
Registered Valuers (Forms) – Contents of Valuation report
(4) Description of specific valuation of assets used in the business: (a)Basis or bases of value (b) Valuation Date (c) Description of the procedures carried out (d) Principles used in the valuation (e) The valuation method used and reasoning (f) Nature, scope and quality of underlying data and (g) The extent of estimates and assumptions together with considerations underlying them (5) Confirmation that the valuation has been undertaken in accordance with these Rules (6) Further it is certified that valuation has been undertaken after taking into account relevant conditions/regulations/rules/notifications, if any, issued by the Central/State Government(s) from time to time. (i) The valuation report must clearly state the significant assumptions upon which the value is based. When reporting there may be instances, where there are confidential figures, these must be summarized in a separate exhibit (ii) In his valuation report, the registered valuer must set out a clear value or range of values along with the reasoning (ii) In case the valuer has been involved in valuing any part of the subject matter of valuation in the past, the past valuation report(s) should be attached and referred to herein. In case a different basis has been adopted for valuation (than adopted in the past), the valuer should justify the reason for such differences
Chander Sawhney, Vice President Corporate Professionals Capital Pvt. Ltd. SEBI registered merchant banker Email : chander@indiacp.com Mobile: 9810557353; Direct: 40622252 www.corporatevaluations.in; D-28, South Extension, Part-I, New Delhi-110049