With effect from 1st February 2019, Companies Act, 2013 has brought in effect Valuations from Registered Valuers duly registered with Insolvency and Bankruptcy Board of India (IBBI). There are three categories of Valuers and an approximate number of valuers registered with IBBI as on 22nd Feb 2019 are as under:
Plant & Machinery – 90
Land & Building – 599
Securities or Financial Assets – 19
Total – 786
It is seen that there is an acute shortage of Registered Valuers though the number is gradually increasing.
About IBBI Registered Valuers u/s 247 of the Companies Act, 2013
It is prevalent for many years, especially post liberalization of the economy in 1992. However, valuation as a profession was neither under the purview of any authority nor any specific guidelines or standards were issued for the same.
For the first time, Companies Act, 2013 incorporated provisions of Registered Valuers and made mandatory to obtain reports from Registered Valuers w.e.f. 1st February 2019.
In this regards, Ministry of Corporate Affairs (MCA) has issued notification dated 18/Oct/2017 to notify section 247 of the Companies Act, 2013. Section 247 is governing section for Registered Valuers.
MCA has issued The Companies (Registered Valuers and Valuation) Rules, 2017 for procedural matters. Accordingly, IBBI is appointed as Authority to overall supervision, management and registration of Valuers under the Act.
Provisions under Income Tax:
Under Income Tax, three persons can get affected under various provisions of the Income Tax, if Shares are issued or transferred at a consideration less than Fair Market Value (FMV) i.e. Buyer, Seller or Company itself. Examples are given below.
FMV can be calculated under the DCF Method certified by a Merchant Banker or under NAV method with certain adjustments u/r 11UA. Therefore, for every fresh allotment or wherever there is a need to arrive FMV, valuation from Merchant Banker under DCF method shall be required if the party opt the option. As such there shall be 2 separate valuators for the same purpose i.e. Registered Valuer as well as Merchant Banker.
There is thin possibility that both valuations shall be same. Registered Valuer shall arrive the valuation as per Valuation Standards and Methodologies, whereas Merchant Banker shall arrive only under DCF Method. So Companies shall bear unnecessary costs for two valuations for a single transaction.
| Scenario | Transaction | Effect for Company | Effect for Buyer | Effect for Seller |
|---|---|---|---|---|
| 1 | Issue of Additional Shares:Valuation from Registered Valuer –
Rs. 10 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 8 Lakhs |
Company shall pay tax on Rs. 2 Lakhsas Other Income u/s 56. | No Effect | NA |
| 2 | Issue of Additional SharesValuation from Registered Valuer –
Rs. 8 Lakhs i.e. Actual Transaction Value Valuation under Income Tax Rs. 10 Lakhs |
No Issue | Will pay on Rs. 2 Lakhs as additional Income u/s 56. | NA |
| 3 | Transfer of SharesRs. 10 Lakhs i.e. Actual Transaction Value
Valuation under Income Tax Rs. 8 Lakhs |
No Effect | No Effect | Seller shall pay tax on Rs. 10 Lakhs |
| 4 | Transfer of SharesRs. 8 Lakhs i.e. Actual Transaction Value
Valuation under Income Tax Rs. 10 Lakhs |
No Effect | Will pay Tax on Rs. 2 Lakhs as in Other Income u/s 56 | Will pay Capital Gains Tax on a deemed Sales price of Rs.10 Lakhs |
Conflict:
There is a need to align provisions of laws i.e. Companies Act as well as Income Tax so that there is uniformity in the valuation process and Companies do suffer from the extra cost or tax demands.
Registered Valuers are supposed to carry out valuation as per International Valuation Standards and Methodologies including DCF Method. Whereas, under Income Tax, FMV shall be calculated under the DCF method certified by Merchant Banker.