Most corporates in India carried out company valuations only when regulations mandated it. Thus far, it was mostly only the RBI and SEBI which required company valuations, for exchange control (FEMA) and shareholder protection respectively.
Historically therefore just a handful of companies were impacted. However the regulatory landscape is changing fast. Changes include:
- An increased focus on company valuations in the Indian Income Tax Act, 1961 which routinely undergoes amendments. In the last few years, the Indian Income Tax Act has introduced new clauses taxing the issuer or recipient of shares (or both) depending on the price paid for subscription. A “bargain purchase” attracts capital gains tax and normal income tax for both the buyer and the seller.
- Transfer pricing authorities now also request intellectual property valuations in certain assessments, for example when brand royalty is paid to a group company.
- An increasing focus on company valuations in the Companies Act. This has undergone a major overhaul in 2013 and amendments continue to be passed.
- New financial reporting requirements as companies transition from Indian GAAP to Ind-AS. (Ind-AS is a modification of IFRS that has been made mandatory for large companies in India.)
- Private equity (PE), venture capital (VC) and investment management (IM) firms becoming subject to regulations that require an expert to carry out investment valuations
- Reporting requirements of overseas companies that have interests in India, due to IFRS, US GAAP or respective local GAAP
- Greater focus on the value of sweat equity and equity stock option plans (ESOPs) in start-ups
- Some global tax jurisdictions requiring a “tax cost base” for every investment, which is meant to be at fair value rather than actual cost. This creates the need for company valuations even between group companies.
What this means
These changes point towards valuations being required even on an ongoing basis in every business, for issues such as carrying value of investments, goodwill impairment assessments, etc. For example, if impairment is to be tested for each CGU annually, this creates a need to carry out a CGU-wise valuation annually and compare it to the carrying value (book value) of the CGU’s assets.
Similarly, most financial firms that are involved in investments in equity are required to mark their investments to market, and to accept an impairment if the market value falls below cost. Companies that have historically purchased a company through the purchase combination method are required to constantly re-evaluate whether the goodwill on purchase has been impaired.
What passed muster five years ago does not pass muster now, simply because both the regulations and the regulators have evolved. For a more detailed look on valuation regulations and how they might impact your organisation, please download: September 2017 Knowledge Update on Valuations for Businesses and Assets.