Valuation of Equity Shares is a critical financial exercise used for mergers, private placements, ESOPs, buybacks, investment rounds, FEMA compliance, and regulatory filings under the Companies Act and Income Tax Act.
For startups, private companies, and growing enterprises, accurate valuation ensures transparency, builds investor confidence, and helps comply with statutory requirements.
This Saving Mantra guide provides a detailed process, valuation methods, documentation needs, and best practices for conducting a professional equity share valuation.
1. What is Equity Share Valuation?
Equity share valuation is the process of determining the fair market value (FMV) of a company’s shares.
It is required in situations such as:
- Private equity funding
- Issue of shares at premium
- Buyback of shares
- ESOP execution
- Transfer of shares
- Merger or demerger
- FEMA compliance for foreign investors
- Income Tax Act Section 56 and Rule 11UA compliance
Accurate valuation protects stakeholders and ensures compliance with regulators such as MCA, RBI, and Income Tax Department.
2. Methods of Valuing Equity Shares
Valuation professionals usually adopt one or more of the following methods:
a) Net Asset Value (NAV) Method
Used when assets and liabilities determine the company’s value.
Formula:
Equity Value = Total Assets – Total Liabilities
b) Discounted Cash Flow (DCF) Method
Popular for startups and growth-stage companies.
Future cash flows are projected and discounted back to present value using the discount rate.
c) Market Approach
Valuation is based on comparable companies or market multiples (P/E ratio, P/BV, EV/EBITDA).
d) Comparable Transaction Method
Uses valuation of similar companies involved in recent transactions.
e) Earnings Capitalization Method
Values the business based on sustainable profits capitalized at a suitable rate.
A registered valuer selects the method based on industry, company stage, and purpose of valuation.
3. Step-by-Step Process for Valuation of Equity Shares
Step 1: Define the Purpose of Valuation
This is the most important step and includes:
- Compliance (MCA, FEMA, Income Tax)
- Fundraising / Investor entry
- Transfer of existing shares
- Buyback or ESOP issuance
- Business restructuring
Each purpose requires specific assumptions, valuation methods, and documentation.
Step 2: Appoint a Registered Valuer
Under Rule 11U & 11UA (Income Tax) and Companies Act, valuation must be conducted by:
- Registered Valuer (IBBI) for Companies Act purposes
- Merchant Banker / CA for Income Tax purposes
Choosing the correct valuer ensures legal validity.
Step 3: Collect Required Documents & Financial Data
The company must provide:
- Last 3 years’ audited financial statements
- Management Representation Letter (MRL)
- Shareholding pattern
- Capital structure details
- Business plan and financial projections
- Details of assets & liabilities
- Industry analysis and market data
Accurate records ensure reliable valuation output.
Step 4: Analyze Financial Performance
The valuer reviews:
- Revenue growth trends
- Profitability ratios
- Working capital cycle
- Cash flow stability
- Debt levels
- Asset utilization
This step guides the selection of the appropriate valuation method.
Step 5: Apply Suitable Valuation Method(s)
Based on company stage, industry, and purpose, the valuer adopts:
- NAV for asset-heavy businesses
- DCF for startups/high-growth companies
- Market approach for listed comparables
Multiple methods may be applied to cross-verify the results.
Step 6: Arrive at the Fair Market Value (FMV)
The valuer computes:
- FMV per share
- Pre-money and post-money valuation (for fundraising)
- Control premium or minority discount (if applicable)
- Enterprise value vs. equity value
The final FMV becomes the legally acceptable value for regulatory filings.
Step 7: Prepare Valuation Report
The Registered Valuer issues a detailed report covering:
- Background of assignment
- Valuation methodology
- Assumptions used
- Calculations & formulas
- FMV per share
- Compliance references (Rule 11UA, Companies Act)
The report is digitally signed and valid for use in MCA, Income Tax, and RBI filings.
Step 8: Use the Valuation for Regulatory Filings
Depending on the transaction, the valuation report may be required for:
- PAS-3 for issue of shares
- SH-8 / SH-9 for buyback
- ESOP compliance
- FEMA filings for foreign investors
- Income Tax submissions under Section 56
This ensures transparency and regulatory compliance.
4. Documents Required for Equity Share Valuation
Company Documents
- Certificate of Incorporation
- MOA & AOA
- Shareholder registers (Register of Members)
- Cap table
Financial Documents
- Last 3 years audited financials
- Management projections (3–5 years)
- Asset details and schedules
Business Information
- Industry reports
- Competitor analysis
- Details of major contracts
Compliance Documents
- Board Resolution authorizing valuation
- Previous valuation reports (if any)
5. When Should a Company Get Its Shares Valued?
A valuation is needed for:
- Private placement under Section 42
- Rights issue
- Preferential issue
- ESOP allotment
- Share transfer at premium/discount
- Foreign investment or exit
- Merger/Demerger under Companies Act
- Buyback of shares
Failing to obtain valuation can lead to penalties, taxation issues, and regulatory objections.
6. Benefits of Professional Share Valuation
- Ensures compliance with MCA, RBI & Income Tax
- Enhances investor confidence
- Helps during negotiations
- Avoids future tax penalties
- Provides transparent and independent assessment
Conclusion
Valuation of Equity Shares is not just a financial exercise—it is a compliance-critical process that protects the company, shareholders, and investors. Following a structured approach with a qualified valuer ensures accuracy, transparency, and regulatory compliance.
The information provided in this blog is for general informational and educational purposes only and should not be construed as legal, tax, or professional advice. While every effort has been made to ensure accuracy and compliance with the applicable provisions of the Companies Act, 2013 and related rules, laws and regulations may change over time and interpretations may vary based on specific facts and circumstances. All services are subject to applicable laws, rules, and government approvals prevailing at the time of execution.