Who can sign a share premium valuation report for an Indian startup? Registered valuer, CA or merchant banker, by purpose, plus a checklist for founders.
The share premium valuation report, in the case of a preferential allotment by an unlisted company under Section 62(1)(c) of the Companies Act, 2013 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, is required to be prepared by a registered valuer i.e. an individual or entity registered with the Insolvency and Bankruptcy Board of India (IBBI) in the securities or financial assets class, whereas the pricing certificate for an issue of shares to a non-resident under FEMA can be issued by a chartered accountant, a SEBI registered merchant banker or a practising cost accountant. The valuation under Rule 11UA for the purposes of angel tax, which was obtained from a merchant banker or an accountant, does not apply to fresh issues of shares, though it continues to be relevant for the past years which are pending in assessment.
Take the case of a Gurugram based SaaS startup which has received a term sheet from a Singapore fund for an investment of Rs. 6 crore by way of equity shares of face value Rs. 10 each priced at Rs. 800 per share, which works out to a premium of Rs. 790 per share. In such a case the provisions of the Companies Act as well as FEMA would both apply, and the company may therefore be required to obtain two separate documents from two different categories of professionals, unless one person is qualified to issue both, the most convenient arrangement being a chartered accountant who is also registered with IBBI as a valuer in the appropriate class, since in that event there is one engagement, two documents and one set of assumptions.
Share premium is the amount received by the company over and above the face value of the share, and inasmuch as the issue price is examined under three different sets of rules, it is necessary that the price so arrived at is capable of being defended. As per Rule 13, an unlisted company making a preferential allotment under Section 62(1)(c) is required to price the shares on the basis of the report of a registered valuer, and the said report is to be annexed to the notice for passing the special resolution. Under FEMA, shares cannot be issued to a non-resident at a price below the fair value determined under the pricing rules, and the authorised dealer bank calls for the certificate at the time the issue is reported.
For a preferential allotment, whether to resident or foreign investors, the report is to be signed by an IBBI registered valuer in the securities or financial assets class. In respect of an issue to a non-resident, the certificate is to be issued by a chartered accountant, SEBI registered merchant banker or practising cost accountant adopting an internationally accepted pricing methodology under the FEMA non-debt instrument rules, and the same professionals can also certify the price on a transfer of shares between a resident and a non-resident, though in the case of a cross-border share swap the valuation is required to be done by a merchant banker. For angel tax assessments of the old years i.e. share issues up to FY 2023-24, the report was to be obtained from a merchant banker or an accountant depending on the method adopted under Rule 11UA, whereas a valuation for investor or lender due diligence is usually obtained from a CA or valuer agreed with the investor, which is a commercial requirement and not a legal one.
A registered valuer is an individual or entity enrolled with IBBI through a Registered Valuers Organisation for a specific asset class, which for shares is the class of securities or financial assets, and it may be noted that a valuer registered only for land and building is not competent to sign a valuation of shares. Chartered accountants, company secretaries, cost accountants and other professionals can qualify as registered valuers in the event they meet the conditions as to experience and examination, however it is the registration and not the professional title which is relevant for this purpose.
Independence of the valuer is mandatory and the valuer cannot value a company wherein he, his relative or his firm has an interest. It is therefore advisable that the IBBI registration number be obtained and verified as being active and as covering the appropriate asset class before the engagement letter is signed.
Rule 8 of the Companies (Registered Valuers and Valuation) Rules, 2017 lays down the contents of the report, which inter alia include the details of the person who appointed the valuer and the purpose of the valuation, the identity of the valuer alongwith disclosure of any conflict of interest, the valuation date, the sources of information, the method adopted and the main factors considered therein, and the caveats, and the valuer is also required to follow the valuation standards notified under the said rules. Where a draft report does not contain any of these particulars, the matter ought to be taken up with the valuer before the report is placed before the board.
Startups, more often than not, do not have a steady track record of profits and hence the method adopted assumes considerable importance, and the valuer is expected to record in the report the reasons for choosing the same. The discounted cash flow (DCF) method is suitable in the case of companies having projections which are capable of being defended, though in the event the projections cannot be supported the report becomes vulnerable to challenge, whereas the net asset value method is suitable for asset heavy or very early stage companies having no forecasts, it being noted that in the case of a technology startup the said method usually understates the value. The market multiples method can be applied where comparable listed companies or transactions are available, and the price of a recent round at arm's length can also serve as an anchor, though the valuer would still be required to test whether the same holds good, while in the case of pre-revenue companies valuers often adopt a scenario weighted DCF or place reliance on the last independent round, and whatever be the method adopted, the assumptions are to be set out in the report.
The documents generally called for by the valuer include the latest audited financial statements and management accounts, the business plan alongwith projections for 3 to 5 years and the underlying assumptions, the current cap table and shareholder agreements, and the term sheet setting out the number of shares and the price. The valuer would also require the Memorandum and Articles of Association, the details of earlier funding rounds and information as regards patents, key contracts and customers.
As regards the procedure, the purpose of the valuation i.e. Companies Act, FEMA or both, and the category of investor are first to be ascertained, whereafter a qualified professional is to be appointed after verifying the registration and independence, and the documents are to be shared alongwith a walkthrough of the projections. The draft report is thereafter to be reviewed and any assumption which the management is not in a position to explain ought to be questioned, and the board resolution and the special resolution are then to be passed with the report forming part of the explanatory statement. The allotment is to be made at or above the valuation price, keeping the date of the report close to the date of allotment, and it is pertinent to note that many authorised dealer banks look for a report dated within about 90 days of the issue, which period should be confirmed with the bank and the company secretary, whereafter the post-allotment forms and the foreign investment reporting are to be filed within the time allowed.
The mistake most frequently noticed is the engagement of the wrong category of valuer, inasmuch as a FEMA certificate issued by a CA does not satisfy the requirement under the Companies Act where the CA is not a registered valuer. Other common lapses include a report dated after the allotment or allowed to become stale prior thereto, an issue to a non-resident below the valuation price which constitutes a breach of the FEMA pricing rules requiring regularisation, a DCF based on optimistic numbers with no explanation, delayed allotment and foreign investment filings resulting in penalties and compounding, and the failure to preserve the working papers supporting the valuation.
The levy of angel tax under Section 56(2)(viib) has been removed vide the Finance (No. 2) Act, 2024 w.e.f. 1st April 2025, and hence premium in excess of the fair market value is not taxable in respect of new rounds. Share issues of the earlier years can still be under assessment and the valuation reports of those years may be examined, and it is therefore advisable that the said reports alongwith the workings be preserved, more so since the valuation file also assists where the Assessing Officer questions the source of the investor's money. It may further be noted that the Income-tax Act, 2025, applicable from tax year 2026-27, renumbers many provisions, the provision for unexplained credits which was earlier Section 68 being now Section 102, and the current section numbers ought accordingly to be used.
Read More: Angel Tax Under Section 56(2)(viib): How Startups Can Defend an Old-Year Notice
Disclaimer: The contents of this article are for general information only.
A valuation report is required for a preferential allotment under the Companies Act and for any issue to a non-resident under FEMA, however a rights issue to the existing shareholders in proportion to their holdings does not require a registered valuer under the Companies Act, though the FEMA pricing rules continue to apply where any of the said shareholders is a non-resident.
The statutory auditor may not be in a position to do so inasmuch as the rules as to independence may stand in the way, more so where the same person is also required to act as the registered valuer, and the conflict rules ought therefore to be examined before the appointment is made.
A valuation report prepared by the founder, the CFO or any other person in the management of the company is not acceptable inasmuch as the Companies Act and the FEMA pricing rules contemplate that the valuation be carried out by an independent professional possessing the requisite registration or qualification for the purpose.
There is no single statutory period applicable in every case, however banks and company secretaries usually expect the report to be dated close to the date of allotment and often within 90 days thereof, and the period should accordingly be confirmed with the authorised dealer bank.
DPIIT recognition had granted tax relief to startups in the past, however the said recognition does not dispense with the valuation requirements under the Companies Act and FEMA, which continue to apply to a recognised startup in the same manner as to any other company.
A valuation usually takes a few weeks depending upon the company and the method adopted, and it is advisable that the process be initiated before the term sheet is finalised so that the report is available in time for the board and shareholder approvals.
DSRV & Co. LLP has advised businesses on tax, FEMA and cross-border matters since 1987. We're an ICAI-registered, peer-reviewed CA firm in Gurugram. Tell us about the round and we'll map which reports you need, who should sign them and the FEMA filings that follow.
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