Valuation Certificate
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A valuation certificate serves the purpose of providing an official estimate of the value of a given asset/property, which is usually prepared by a qualified valuer after taking into account several factors and regulations for ex. market conditions, comparable sales, etc.
The certificate includes details about the appraiser, the date of valuation and a comprehensive analysis supporting the assigned value. It serves as a crucial tool in numerous scenarios, including real estate transactions, insurance claims, estate planning and financial reporting. The accuracy and credibility of a valuation certificate are vital to ensure transparency and fairness in determining the worth of an asset.
In India, the requirement for a valuation certificate is governed by various laws and regulations. The following are some of the key legislations that necessitate the use of valuation certificates in specific scenarios:
Valuation certificates in India are prepared using various approaches and methods that are recognised and accepted by regulatory authorities, professional bodies and industry standards. Some of the common approaches are:
A valuation report typically covers the following details:
Provide a concise description of the company or business being valued, including its name, industry, key operations and any other relevant details.
Clearly state the nature and purpose of the proposed transaction for which the valuation is being conducted, for ex. merger, acquisition, etc.
Present an overview of the key financial information of the valuation subject, including revenue, profitability, assets, liabilities and other financial indicators. This helps in understanding the historical performance and financial position of the company.
Outline the capital structure of the company, including details of equity shares, preference shares, debt and any other relevant securities. Highlight any changes anticipated in the capital structure as a result of the proposed transaction.
Describe the existing shareholding pattern of the company, including the ownership stakes of promoters, financial institutions and other significant shareholders. Discuss any anticipated changes in the shareholding pattern due to the proposed transaction. It is common to include a table comparing the shareholding pattern before and after the transaction.
Provide information on the high, low and average market volumes and prices of the company's shares over the last six months. This data is particularly relevant if the valuation involves publicly traded securities.
Address any related party issues or transactions associated with the proposed transaction. This includes disclosing any potential conflicts of interest or transactions involving related parties.
The purpose of a valuation certificate can be summarised as follows:
The eligibility criteria for becoming a valuer comprises of the following:
Proper and Fit Person:
Qualifications and Experience:
Membership in Registered Valuer's Organisation:
Clearing Examinations:
The following documents are necessary for obtaining a valuation certificate:
1. Basic Information Documents:
2. Details about Company Promoters
3. Key Management professionals of the Company
4. Memorandum of Association
5. Articles of Association
6. Prospectus
7. Prior three years' financial statements
Copy of the valuation engagement with the client.
Copy of the previous valuation report of the subject matter, if available.
Documents pertaining to assumptions and limiting conditions in the valuation assignment.
Information gathered and analysed to understand factors affecting the value of the subject interest.
Documents related to the selection of the valuation approach, including rationale and supporting data.
Any restrictions or limitations on the scope of the valuer's work or data available for analysis.
Documents indicating the basis for using specific valuation assumptions during the engagement.
Any other relevant documentation considered important by the valuer for the engagement.
It's important to note that the specific documents required for a valuation exercise may vary depending on the nature of the assignment and the regulations or standards applicable to the valuation profession in India.
The procedure adopted in carrying out a valuation typically involves the following steps:
Understand the scope and purpose of the valuation. Determine the applicable valuation standards and regulations. Choose the appropriate valuation method based on market factors and local jurisdiction.
The valuation expert requests relevant information and documents from the company or entity being valued. This includes financial statements, contracts, agreements and other pertinent data necessary for the valuation process.
Analyse the provided information and make adjustments as necessary. This may involve normalising financial statements, adjusting for non-recurring items or considering any specific factors impacting the value of the asset.
Analyse market trends and factors affecting the valuation. Consider the available valuation approaches and determine the most suitable method to apply. Take into account global valuation principles and evaluate the effectiveness of the chosen method.
Apply the selected valuation method. This could include using the Income Method, Market Method or Asset Method, depending on the nature of the asset being valued and the circumstances of the valuation.
Conclude the valuation process by determining the final valuation price or value. Document the valuation report, including the methodology used, assumptions made, analysis conducted and supporting data. Ensure compliance with reporting requirements and applicable valuation standards.
Valuation methods are used for more than just figuring out how much a share or security is actually worth. It is also employed in court valuation, typical merger and acquisition (M& A) transactions and the valuation of specific securities transferred from one person to another. In addition to the aforementioned, appraisal is done as part of a due diligence procedure.
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