Valuation is an important part of litigation in Mergers & Acquisitions and involves an element of subjectivity that often gets challenged. More so, as in India, there are not many regulatory standards for business valuation specifically for unlisted and private companies, so in many cases the valuation lacks the uniformity and generally accepted global valuation practices. Even limited judicial guidance is available over the subject in India. Further, absence of any stringent course of action and non-regulation under any statute is also leading to loose ends. Institute of Chartered Accountants of India (ICAI) has developed and recommended Business Valuation Practice Standards (BVPS) aiming to establish uniform principles, practices and procedures for valuers performing valuation accounting services in India.
Justifying the value of businesses has grown more complex and challenging as it has been accepted that valuation is not an exact science and depends upon a number of factors like purpose, stage of business, past financials, industry scenario, management and promoters strengths, etc.
Business Valuation is the process of determining the ‘Economic Worth’ of a company. This is based on certain assumptions and limiting conditions subject to the data available on the valuation date. It is an important concept in corporate finance and business management. Supposing a business is for sale, how does one know what is the real value that business is worth? More basically, how does a business owner know the net value of his business, or how is valuing a business for sale accomplished?
Relevance of Act and Laws
The Finance Act, 2012 introduced Section 56(2)(viib) , which provides that where a closely held company receives from a resident person any consideration for the issue of shares that exceeds the FMV of such shares, the same shall be chargeable to tax in the hands of the share-issuing company as ‘income from other sources’. An exemption is currently provided for shares issued to venture capital companies/funds.
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