DCF, market & asset methods

Category: Corporate Advisory. From ₹14,999. Typical timeline: 7–14 days.

Overview

Business valuation determines the economic worth of a company or business undertaking using recognised methods — discounted cash flow (DCF), comparable company market multiples, and net asset value — and is required for fundraising, M&A, ESOP pricing, shareholder buyouts, tax compliance and regulatory filings. Kanoons prepares valuation reports through a Registered Valuer or Chartered Accountant as applicable, tailored to the specific purpose and statutory requirement driving the valuation.

Who needs it

• A startup issuing shares to investors and needing a fair value certificate under Section 56(2)(viib) of the Income-tax Act
• A company setting the exercise price for an ESOP scheme
• Promoters buying out a departing shareholder's stake
• A company receiving or making foreign investment where FEMA pricing guidelines require a valuation

Eligibility

• Companies raising equity funding or issuing shares to new investors
• Companies undertaking share transfers, buybacks or ESOP grants requiring a fair value
• Businesses involved in merger, demerger or slump sale transactions
• Companies needing valuation for FEMA compliance on foreign investment/divestment

Documents required

• Audited/provisional financial statements for the last 3 years
• Business plan and financial projections, if valuing on a DCF basis
• Cap table and shareholding pattern
• Details of comparable companies/transactions, if available
• Purpose of valuation (fundraising, FEMA, tax, ESOP, etc.)

Process

1. Scoping — Purpose of valuation (fundraising, tax, FEMA, ESOP) is confirmed as it determines the applicable method and standard.
2. Data collection — Financial statements, projections and business information are gathered from the company.
3. Valuation modelling — DCF, market multiple and/or net asset value methods are applied as appropriate to the business and purpose.
4. Draft report & discussion — A draft valuation with assumptions is shared and discussed with management before finalisation.
5. Final report — A signed valuation report/certificate is issued for use in the relevant filing or transaction.

Government fees

• Registered Valuer empanelment/statutory fees: Nil — no separate government fee, only professional charges apply

Professional fee

Starts at ₹14,999 depending on the size of the business, purpose of valuation and method used; covers data analysis, valuation modelling and the final signed report.

Timeline

A standard valuation is completed in 7–10 working days once financials and projections are received; complex multi-entity or M&A valuations can take up to 14 working days.

Deliverables

• Signed valuation report with methodology and assumptions
• Fair market value certificate for regulatory filing where applicable (e.g. Rule 11UA, FEMA)
• Supporting financial model/workings

Frequently asked questions

Which valuation method is used for a startup with no profits?

The discounted cash flow (DCF) method based on projected future cash flows is most commonly used for early-stage companies, since net asset and earnings-multiple methods are less meaningful without a profit history.

Is a Registered Valuer mandatory for all valuations?

A Registered Valuer under the Companies Act is mandatory for specific purposes like Companies Act share swaps in mergers, while a Chartered Accountant's valuation suffices for many tax and FEMA purposes such as Rule 11UA.

How long is a valuation report valid?

There is no fixed statutory validity, but valuations are generally considered current for the transaction they were prepared for and should be refreshed if there is a material time gap or change in financials.

Common mistakes

• Using unrealistic growth assumptions in DCF projections that are not defensible on scrutiny
• Not aligning the valuation method with the specific statutory requirement (e.g. using DCF where Rule 11UA prescribes NAV)
• Valuing shares without considering FEMA pricing guidelines for foreign investment transactions
• Delaying valuation until after the share issue, missing the compliance window

Penalties for non-compliance

• Share issue at a price not supported by a valid valuation can attract tax under Section 56(2)(viib) on the excess consideration received
• Incorrect FEMA pricing on inbound/outbound investment can attract penalty under FEMA up to three times the sum involved
• A defective or unsubstantiated valuation can be challenged by tax authorities, leading to reassessment and additional tax demand

Legal references

• Income-tax Act, 1961 (Section 56(2)(viib) and Rule 11UA) — governs valuation of unquoted shares for tax purposes
• Companies Act, 2013 (Section 247) — governs Registered Valuers for company law purposes
• FEMA, 1999 and RBI pricing guidelines — governs valuation for cross-border share transactions
• Companies (Registered Valuers and Valuation) Rules, 2017 — governs valuer qualification and conduct