What Approaches are Used in Valuation?
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:
- Market Approach: This approach involves comparison of the asset with similar ones that are recently sold in the market. Factors like location, size, condition and market demand are taken into consideration. Analysts study data on comparable sales and market trends to arrive at a fair market value.
- Income Approach: In the case of income-generating assets for ex. rental properties, commercial buildings or businesses, the Income Approach comes in handy. In this approach the focus is on estimating the future income which can be expected from the asset to generate. Appropriate capitalisation or discount rates are applied to determine its present value.
- Asset-Based Approach: The Asset-Based Approach centres around assessing the underlying assets of a business or entity. It involves valuing individual assets and liabilities and calculating a net asset value. This approach is commonly applied in situations such as liquidation, bankruptcy or financial reporting.
What does a Valuation Report Include?
A valuation report typically covers the following details:
- Brief Particulars of the Valuation Subject:
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.
- Capital Structure and Changes:
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.
- Shareholding Pattern and Changes:
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.
- Market Volumes and Prices:
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.
What is the Purpose of Valuation Certificate?
The purpose of a valuation certificate can be summarised as follows:
1. Understanding Real Value:
- Valuation is carried out to determine the true value of an entity, business ownership, securities or intangible assets. It provides a clear understanding of their worth in the market.
2. Expert Advice:
- Valuation requires the expertise of professionals who can provide insights into the value of assets, especially those subject to market fluctuations. Their advice helps in making informed decisions.
3. Price Determination:
- Valuation methods help avoid issues related to price determination by providing a fair and objective assessment of the value of the asset. It ensures transparency and accuracy in pricing.
4. Avoiding Assumptions:
- Proper valuation approaches eliminate the need for assumptions in determining prices. It relies on well-established methodologies to arrive at a reliable valuation figure.
5. Business Practices:
- Valuation services are a crucial aspect of business practices used by companies worldwide. They follow standardised approaches and principles to ensure consistency and reliability.
6. International Standards:
- Valuation services must adhere to globally accepted standards. By doing so, companies demonstrate their commitment to fair practices and gain investor confidence.
7. Investor Confidence:
- Through valuation services, investor confidence improves as companies demonstrate transparency, accuracy and adherence to international valuation standards. It fosters trust and credibility.
8. Corporate Governance:
- Valuation approaches contribute to raising the standards of corporate governance within organisations. By valuing assets accurately and transparently, companies ensure good governance practices.
Who is Eligible to be a Valuer?
The eligibility criteria for becoming a valuer comprises of the following:
Proper and Fit Person:
- The individual seeking to become a valuer be a proper and fit person, which ensures their suitability and integrity for the role.
Qualifications and Experience:
- The individual must possess the necessary qualifications and experience relevant to the field of valuation. This typically includes a background in finance, accounting or a related discipline.
Membership in Registered Valuer's Organisation:
- The individual must be a member of a registered valuer's organisation. These organisations are recognised bodies that regulate and govern the profession of valuation.
- The individual must successfully clear examinations conducted by the Insolvency and Bankruptcy Board of India (IBBI). These examinations assess the knowledge and competency of valuers.