IBBI Registered Valuer: Understanding Valuation for Funding and Valuation under Income Tax

An IBBI Registered Valuer plays a key role in determining the fair market value (FMV) of assets for various financial, regulatory, and taxation purposes. Valuation is essential in funding transactions, tax assessments, mergers, acquisitions, insolvency proceedings, and financial reporting. Two major areas where valuation is required are Valuation for Funding and Valuation under Income Tax, both governed by regulatory frameworks to maintain accuracy and transparency.

This article explains the role of an IBBI Registered Valuer, the methods used in funding and taxation-related valuations, and the compliance requirements involved.

Who is an IBBI Registered Valuer?

The Insolvency and Bankruptcy Board of India (IBBI) is the regulatory body that registers and governs Registered Valuers under the Companies (Registered Valuers and Valuation) Rules, 2017. Only those registered with IBBI can perform valuations required under various laws, including:

• The Companies Act, 2013
• The Insolvency and Bankruptcy Code, 2016 (IBC)
• Income Tax Act, 1961
• SEBI regulations for listed companies

Registered valuers specialize in different asset categories, including land & building, plant & machinery, and securities & financial assets.

Valuation for Funding: Role of IBBI Registered Valuer

Why is Valuation Important in Funding?

For any business raising funds through equity, debt, or venture capital, valuation is a key factor in determining investment terms. Startups and enterprises require professional valuation to:

• Determine the pre-money and post-money valuation for investors.
• Justify the share price in funding rounds.
• Establish the financial worth of assets or intellectual property (IP).
• Support negotiations with private equity (PE), venture capital (VC), or angel investors.

Methods Used for Valuation in Funding

An IBBI Registered Valuer applies different methods based on company performance, financial projections, and industry trends. The key approaches include:

a) Discounted Cash Flow (DCF) Method

• Suitable for startups and high-growth companies.
• Future cash flows are projected and discounted to present value using a risk-adjusted discount rate.

b) Market Approach (Comparable Company or Transaction Method)

• The company's valuation is compared with similar businesses in the market.
• Uses price-to-earnings (P/E) ratio, revenue multiples, or EV/EBITDA ratios.

c) Asset-Based Valuation

• Used when a company has high tangible assets such as real estate, machinery, or intellectual property.
• Net Asset Value (NAV) method is applied for determining intrinsic worth.

Compliance Requirements for Funding Valuation

• SEBI regulations require a valuation report from merchant banker for pricing in listed companies.
• Private and unlisted companies require valuation reports under Companies Act, 2013 for issuing shares at a fair price.
• The report must be submitted to investors and regulators before finalizing funding rounds.

Valuation Under Income Tax: Compliance and Methods

When is Valuation Required Under Income Tax?

Valuation is essential for tax compliance in cases such as:

• Issue of shares at a premium (Section 56(2)(viib)) - If shares are issued at a price higher than FMV, the excess amount is treated as income and taxed.
• Transfer of unlisted shares (Capital Gains Taxation) - FMV is required to calculate capital gains when selling shares.
• Gift taxation under Section 56(2)(x) - When shares, securities, or assets are transferred without adequate consideration, FMV is used to determine tax liability.
• Valuation of business assets in restructuring, mergers, or demergers.

Valuation Methods Under Income Tax

The Income Tax Act prescribes specific valuation methods for different assets, primarily under Rule 11UA of the Income Tax Rules, 1962.

a) Valuation of Unlisted Equity Shares

The valuation of unlisted shares is conducted using:

• Net Asset Value (NAV) Method - Based on the book value of assets and liabilities.
• Discounted Cash Flow (DCF) Method - Required for companies with unpredictable earnings or high future growth potential.

b) Valuation of Land & Building

For real estate transactions, the FMV is determined by a Registered Valuer based on:

• The latest circle rate or stamp duty value.
• The actual sale consideration if higher than the government-notified rate.

c) Valuation of Intangible Assets

Intellectual Property (IP), trademarks, patents, goodwill, and brand value are assessed based on:

• Royalty income models.
• Comparable market transactions.
• Historical financial data of the asset's contribution to revenue.

IBBI Registered Valuer's Role in Tax Compliance

• Preparing valuation reports for share transactions, buybacks, and mergers.
• Certifying FMV under Rule 11UA for tax filings.
• Assisting businesses in justifying share premium valuations to tax authorities.
• Preventing tax disputes by providing fair and logical valuation conclusions.

Valuation Report by IBBI Registered Valuer

An IBBI Registered Valuer must follow professional standards while preparing a valuation report. The report typically includes:

1. Purpose of valuation - Funding, taxation, merger, or regulatory compliance.
2. Valuation methodology applied - DCF, NAV, Market approach, etc.
3. Financial projections and assumptions used.
4. Supporting documents and justifications for valuation conclusions.
5. Certifications and declarations as per IBBI guidelines.

A valuation report is a legally valid document that is submitted to investors, tax authorities, stock exchanges, or regulatory bodies as required.

Challenges in Business Valuation

While valuation is based on financial models and projections, several challenges exist:

• Market Volatility - Fluctuations in financial markets impact valuation outcomes.
• Regulatory Compliance - Different rules apply under the Companies Act, SEBI, FEMA, and Income Tax, requiring alignment across multiple laws.
• Subjectivity in Projections - Future earnings and cash flows involve assumptions that can vary among valuers.
• Tax Disputes - Valuation under Income Tax is often challenged by authorities, requiring additional justifications.

To address these challenges, an IBBI Registered Valuer must conduct detailed financial analysis, use industry benchmarks, and follow professional valuation standards.

Conclusion

An IBBI Registered Valuer plays an important role in Valuation for Funding and Valuation under Income Tax, ensuring accurate and fair pricing of assets. Businesses need professional valuation to comply with Valuation of funding regulations, tax laws, and corporate transactions. Whether raising capital, selling assets, or fulfilling tax obligations, an expert valuation helps in maintaining transparency and avoiding financial disputes.