Introduction
Under the SEBI Takeover Code, shares are categorized based on their trading volume as Frequently Traded or Infrequently Traded shares. This classification plays a crucial role in determining the valuation methods applicable to each category, particularly in the context of share acquisition and financial reporting.
Classification of Shares under SEBI Takeover Code
Frequently Traded Shares
- Valuation is determined using the volume-weighted average market price over the 60 trading days preceding the public announcement. The data is sourced from the stock exchange that exhibits the highest trading volume during this period.
Infrequently Traded Shares
- Valuation in this category is decided by the acquirer and the manager of the open offer. Factors taken into consideration include:
- Book value
- Comparable trading multiples
- Other accepted valuation parameters
Income Tax Law on Share Acquisition
Valuation Methods for Shares
-
Quoted Shares:
- Valued at the market price on a recognized stock exchange as of the valuation date. If no trading occurs on that date, the price from the last trading day is used.
-
Unquoted Equity Shares:
- Transfer of Shares: The Adjusted Book Value method is employed, necessitating a fair value evaluation of assets such as land, buildings, jewelry, shares, and securities, especially for investment and finance companies.
- Issue of Shares: Valuation may utilize the Discounted Free Cash Flow (DCF) method, Net Asset Value (NAV) method, or another recognized method. DCF valuations must be conducted by a SEBI-registered Category I merchant banker.
-
Unquoted Shares (not including equity shares):
- Valued based on the price they would attain in the open market through any validated valuation method.
Company Law on Share Acquisition
For new share issues, valuation must be performed by a valuer registered with the Insolvency and Bankruptcy Board of India (IBBI) in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017. Additionally, for preferential allotment of shares in listed companies, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 apply.
Purchase Price Allocation (PPA) for Financial Reporting
In PPA, the acquirer is responsible for allocating the purchase price to the assets and liabilities of the target company as per Ind AS 103. This process includes:
- Identifying, measuring, and valuing both tangible and intangible assets.
- Requires a comprehensive understanding of the acquired business and applicable valuation methodologies.
Major Types of Intangible Assets
-
Marketing-related:
- Brands, trademarks, trade names, internet domain names, non-compete agreements.
-
Customer-related:
- Customer lists, backlog, customer contracts.
-
Artistic-related:
- Plays, books, films, music.
-
Contract-related:
- Licensing and royalty agreements, service or supply contracts, lease agreements, permits, broadcast rights, servicing contracts, employment contracts, non-compete agreements, natural resource rights.
-
Technology-based:
- Patented technology, computer software, unpatented technology, databases.
Common valuation methods for intangible assets include:
- Royalty Relief method (for brands and trademarks)
- Multi-period Excess Earnings method (for customer relationships)
- Cost method for assembled workforce
- DCF methods
Conclusion
Valuation is a vital aspect of any financial transaction, demanding rigorous analysis and expertise. Inaccurate valuations can result in unfair gains or losses, causing market distortions and inefficient resource allocation, which can hinder economic growth. Notably, the Indian government aims to establish a National Institute of Valuers and standardize valuation practices through the Draft Valuers Bill, 2020.
Independent and expert valuations facilitate efficient market operations, ultimately benefiting businesses, governments, and stakeholders alike.