in the business world, the rearview mirror always clearer

Due Diligence, Legal andRegulatory Valuation aspects

“In the business world, the rearview mirror is always clearer than the windshield”

Warren Buffett

FEMA – Valuation aspect (FDI & ODI)and

Registered Valuer under Companies Act – 2013

Particulars Pg. No.

What and Why 3

How 10

When and Who 22

FEMA Valuation Guidelines 25

Registered Valuer 40

Tricky Issues 46

EOK Study Circle - ICAI22/11/2013

WHAT & WHY


Value & Valuation

Value is* An Economic concept;

An Estimate of likely prices to be concluded by the buyer and seller of a good or

service that is available for purchase;

Not a fact.

Valuation is the process of determining the “Economic Worth” of an Asset or

Company under certain assumptions and limiting conditions and subject to the

data available on the valuation date.

* Source -International Valuation Standard Council


Key Facts

PRICE IS NOT THE SAME AS VALUE

TRANSACTION CONCLUDES AT NEGOTIATED PRICES

VALUATION IS HYBRID OF ART & SCIENCE

VALUE VARIES WITH PERSON, PURPOSE AND TIME


S Standard of Valuation

T Thesis of Valuation

E Economics of Valuation

M Methodologies of Valuation


FAIR MARKET VALUE

INTRINSIC VALUE FAIR VALUE

INVESTMENT VALUE

Standard of Valuation

Thesis of Valuation Economics of Valuation

Methodologies of Valuation

Standard of Value is the hypothetical conditions under which a business is valued.

While selecting the Standard of Value following points is to be taken care of

Subject matter of Valuation;

Purpose of Valuation;

Statute;

Case Laws;

Circumstances.

Types of Standard of Value:





Thesis of Value is Premise of value which relates to the assumptions upon which

the valuation is based.

Premise of Value

Going Concern – Value as an ongoing operating business enterprise.

Liquidation – Value when business is terminated . It could be ‘forced’ or ‘orderly’.

Value-in-use

Value-in-exchange


Growing Cos.

Turnover/Profits: Increasing still Low

Proven Track Record: Limited

Valuation Methodology: Substantially on Business Model

Cost of Capital: Quite High

High Growth Cos.

Turnover/Profits : Good

Proven Track Record: Available

Valuation Methodology: Business Model with Asset Base

Cost of Capital: Reasonable

Mature Cos.

Turnover/Profits: Saturated

Proven Track Record: Widely Available

Method of Valuation: More from Existing Assets

Cost of Capital: May be High

Declining Cos.

`

Turnover/Profits: Drops

Proven Track Record: Substantial Operating History

Method of Valuation: Entirely from Existing Assets

Cost of Capital: N.A.

Turnover/Profits: Negligible

Proven Track Record: None

Valuation Methodology: Entirely on Business Model

Cost of Capital: Very High

Start Up Cos.

Turn

ove

r /

Pro

fits

Time

Valuation across business cycle follow the law of economics





HOW


Enterprise / Business Value

Ente

rpris

e Va

lue

Net Debt#

Equity#

Fixed Assets#

Net Current Assets#

Intangibles#

Stakeholders Assets

Valu

e of

Bus

ines

s

# Based on Market Values





Valuation Approaches

Income Based Method

Asset Based Method

Capitalization of Earning Method

(Historical)

Discounted Cash Flow Method

(ProjectedTime Value)

Market Based Method

Comparable Companies Market Multiples Method

(Listed Peers)

Comparable Transaction Multiples

Method(Unlisted Peers)

Market Value Method (For Quoted Securities)

Book Value Method

Liquidation Value Method

Replacement Value Method

Contingent Claim Valuation

(Option Pricing)

Price of Recent Investment Method

Rule of Thumb(Multiples:

Customers, Rooms, Seats, No. of visitors

etc.) - Depends upon Industry


Fundamental Method Relative Method

Other Method

While concluding Value, all the methodologies must be considered and then weights applied

as per the facts of the case. In other words, Value conclusion should be based on the

Professional Judgement and Simple Average should best be avoided while concluding

Value.

Need of several valuation methods?

Each has strengths and weaknesses

Different methods useful in different situations

Each gives a different “take” on the value of the company’s stock

Provides a range of valuations instead of point estimates

Helps in Sanity Check

Sources of Information for Valuation

Sources of Information

Historical financial results –Income Statement, Balance

Sheets and Cash Flows

Data available in Public Domain – Stock Exchange /

MCA/SEBI/Independent Report

Data on comparable companies – SALES/EV-

EBITDA/ PAT/BV

Promoters and Management background

Data on projects planned/under implementation including future

projection

Discussion and Representation with/by the management of the

Company

Industry and Regulatory trends


CASH FLOWInvestor assign value based on the cash flow they expect to receive in the future- Dividends / distributions- Sale of liquidation proceedsValue of a cash flow stream is a function of - Timing of cash Receipt- Risk associated with the cashflow

ASSETSOperating Assets

- Assets used in the operation of the business including working capital, Property, Plant & Equipment & Intangible assets

- Valuing of operating assets is generally reflected in the cash flow generated by the business

Non - Operating Assets- Assets not used in the operations including excess cash balances, and assets held for

investment purposes, such as vacant land & Securities- Investors generally do not give much value to such assets and Structure modification

may be necessary

Key drivers of valuation

That’s why DCF is most

prominent valuation

method

Need for RestructuringEOK Study Circle - ICAI22/11/2013

• Mergers

• IPO

• RBI

• Income Tax• ESOP

• Companies Act

• SEBI

• Stock Exchange

Purpose Regulatory Accounting

• Purchase Price Allocation

Dispute Resolution

• Company Law Board/ Courts

• Impairment / Diminution

• Arbitration

• Mediation• Acquisitions / Investment

• Voluntary Assessment

Value Creation

• Equity Research

• Credit Rating

• Corporate Planning

Valuation depends upon


Choice of Valuation Approaches

“Value in Valuation is a question,

and

Your choice of Method is the first step

towards answer”

Applicability of a particular approach depends upon:

On whose behalf? – one buyer vs another buyer, buyer vs seller;

For what purpose? – independent strategic acquisition, group company consolidation, cross

border transaction;

When? – distress situation, industry downturn, boom etc;


Choice of Valuation Approaches

• In General, Income Approach is preferred;The dominance of profits for valuation of share was emphasised in “McCathies case” (Taxation,

69 CLR 1) where it was said that “the real value of shares in a company will depend more on the

profits which the company has been making and should be capable of making, having regard to

the nature of its business, than upon the amount which the shares would realise on liquidation”.

This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s

case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.)

(122 ITR 38).

• However, Asset Approach is preferred in case of Asset heavy companies

and on liquidation;

•Market Approach is preferred in case of listed entity and to evaluate the

value of unlisted company by comparing it with its listed peers;


Company Specific Factors

• Management, Promoter Group

It is the alignment of

Company’s value via-a-

vis to its external

environment

• Operating, Capital and Corporate Finance Strategies• Competitive advantages and cost position• Product / Service offering / differentiation / pricing power•Scale & Diversification•Customer / Supplier concentration•Corporate Governance•Future prospects / Growth potential•Industry peer group•Regulatory environment


Industry Risk Analysis

• Good vs. Difficult industry

• Porter’s 5 forces

• Industry life cycle (growth)

• Industry cyclicality (earnings quality)

• Leading indicators

• Competition (ROIC)

• Pricing dynamics; Demand vs. Supply (ROIC)

• Changing business environments

• Regulation (ROIC)

• Product characteristics (earnings quality)

• Capital intensity and cost base (ROIC)

• Event risk

Following factors are required to

be considered:


Rule of Thumb

A rule of thumb or benchmark indicator is used as a

reasonableness check against the values determined by the

use of other valuation approaches.

Industry Valuation Parameters

Hospital EV/Room

Engineering Mcap/Order Book

Mutual Fund Asset under management

OIL EV/ Barrel of equivalent

Print Media EV/Subscriber

Power EV/MW, EBITDA/Per Unit

Entertainment & Media EV/Per screen

Metals EBITDA/Ton, EV/Metric ton

Textiles EBITDA depend upon capacity utilization Percentage & per spindle value

Pharma Bulk Drugs New Drug Approvals , Patents

Airlines EV/Plane or EV/passenger

Shipping EV/Order Book, Mcap/Order Book

Cement EV/Per ton & EBITDA/Per ton

Banks Non performing Assets , Current Account & Saving Account per Branch

However, Exclusive use of Rule of Thumb is not recommended


WHEN & WHO


Valuation in Indian Regulatory Environment


Inbound Investment DFCF

Gift of Unquoted Equity Shares (Min)

NAV

Outbound Investment Valuer Discretion

Gift of Unquoted Shares other than Equity Shares

Price it would fetch if sold in open market

Takeover Code/ Delisting -Infrequently Traded

Only Parameters Prescribed – Return on Net Worth, EPS,

NAV vis-a vis Industry Average

Takeover Code/ Delisting -Frequently Traded Based on Market Price

Reserve Bank of India

ESOP Tax Valuer Discretion

ESOP Accounting Option – Pricing Model

Income Tax

SEBI

CA / MB

>5Mn$ - MB, otherwise CA/MB

-

MB

MB

-

CA/MB

-

Stock ExchangesPreferential Allotment to

promoters / their relatives for consideration other than

cash

Valuer Discretion

Companies Act, 1956 Sweat Equity Valuer Discretion

CA / MB

-

Transactions Prescribed Methodologies Mandate to be done by

SNAPSHOT OF REGULATORY VALUATIONS IN INDIA

Gift of Unquoted Equity Shares from Resident

(Max)

DCF (Valuation Based on Assets, Business & Intangibles is also

acceptable)FCA / MB

Preferential Allotment to Others

Based on 26 weeks / 2 weeks Market Price -

Companies Act, 2013

any property, stock, shares, debentures, securities or

goodwill or any other assets or the net worth of the

Company or its liabilitiesTo be prescribed REGISTERED VALUER

FEMA Valuation Guidelines


FDI VALUATION

• Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time deals

with Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside

India) Regulations, 2000.

•In terms of Schedule 1 of the Notification, an Indian company may issue equity

shares/compulsorily convertible preference shares and compulsorily convertible debentures

(equity instruments) to a person resident outside India under the FDI policy, subject to inter alia,

compliance with the pricing guidelines.

•The price/ conversion formula of convertible capital instruments should be determined upfront

at the time of issue of the instruments.

Particulars Valuation before April 21, 2010 Valuation after April 21, 2010Guidelines in Force CCI Guidelines In case of FDI Transactions:

Listed Company: Market Value as per SEBI Preferential Allotment Guidelines

Unlisted Company: DFCF

In case of ODI Transactions:No method has been prescribed

Methods Prescribed Net Assets Value (NAV)Profit Earning Capacity Value(PECV)Market Value (in case of Listed Company)

Discount 15% Discount has been prescribed on account of Lack of Marketability

No such Discount has been prescribed

Historical / Futuristic It is based on Historical Values It is based on Future Projections

Possibility of variation in Value Conclusion

As valuation is more Formulaebased, final values came standardized

As valuation is more dependent on Assumptions and choice of factors like Growth Rate, Cost of Capital etc, value conclusion may vary significantly.

FEMA Guidelines to Valuation

Note: Valuation guidelines do not apply to SEBI registered venture capitalEOK Study Circle - ICAI22/11/2013

22/11/2013

Discounted Free Cash Flow Method (DFCF)

Approaches to FDI Valuation

RBI has prescribed DFCF as the only valuation method in case of FDI (excluding for

initial subscription); but has not provided any guidance on its technical aspects.

Though DFCF is one of the most acceptable Valuation methods used by Business

valuers worldwide; however DFCF for all FDI transactions-excluding for initial

subscription (like minority stake/start up valuation etc) may not yield Fair Value in

line with the Commercial understanding. However Law being such, suitable Logical

adjustments may be necessary on a case to case basis.

DFCF expresses the present value of the business as a function of itsfuture cash earnings capacity. In this method, the appraiser estimates thecash flows of any business after all operating expenses, taxes, and necessaryinvestments in working capital and capital expenditure is being met. Valuingequity using the free cash flow to stockholders requires estimating only freecash flow to equity holders, after debt holders have been paid off.


Forward Looking and focuses on cash generation

Recognizes Time value of Money

Allows operating strategy to be built into a model

Incorporates value of Tangible and Intangible assets

Only as accurate as assumptions and projections used

Works best in producing a range of likely values

It Represents the Control Value

Major Characteristics of DFCF Valuation


DFCF Valuation Process

Understand Business Model

Identify Business Cycle

Analyze Historical Financial Performance

Review Industry and Regulatory Trends

Understand Future Growth Plans (including Capex needs)

Segregate Business and Other Cash Generating Assets

Identify Surplus Assets (assets not utilized for Business say

Land/Investments)

Create Business Projections (Profitability statement and Balance Sheets)

Discount Business Projections to Present (Explicit Period and Perpetuity)

Add Value of Surplus Assets and Subtract Value of Contingent Liabilities


Free Cash Flows- Value Trend

Terminal Value is calculated for the Perpetuity period based on the Adjusted last year cash flows of the Projected period.


Free cash flows to firm (FCFF) is calculated as

EBITDA

Taxes

Change in Non Cash Working capital

Capital Expenditure

Free Cash Flow to

Firm

Note that an alternate to above is following (FCFE) method in which thevalue of Equity is directly valued in lieu of the value of Firm. Under thisapproach, the Interest and Finance charges is also deducted to arrive at theFree Cash Flows. Adjustment is also made for Debt (Inflows and Outflows)over the definite period of Cash Flows and also in Perpetuity workings.

Theoretically, the value conclusion should remain same irrespective of themethod followed (FCFF or FCFE), (Provided, assumptions are consistent).

FREE CASH FLOWS

Free Cash Flow calculation


DISCOUNT RATE – WEIGHTED AVERAGE COST OF CAPITAL

Where:D = Debt part of capital structureE = Equity part of capital structureKd = Cost of Debt (Post tax)Ke = Cost of Equity

(Kd x D) + (Ke x E)

(D + E)

In case of following FCFE, Discount Rate is Ke and Not WACC

WACC

Cost of Capital calculation


DISCOUNT RATE - COST OF EQUITY

Where:Rf = Risk free rate of return (Generally taken as 10-year Government BondYield)B = Beta Value (Sensitivity of the stock returns to market returns)Ke = Cost of EquityRm= Market Rate of Return (Generally taken as Long Term average returnof

Stock Market)SCRP = Small Company Risk PremiumCSRP= Company specific Risk premium

Mod. CAPM Modelke = Rf + B ( Rm-Rf) + SCRP + CSRP

The Cost of Equity (Ke) is computed by using Modified Capital Asset Pricing

Model (Mod. CAPM)

Cost of Equity calculation


PERPETUITY FORMULA– Usually comprises a Large part of Total Value and is sensitive to small

changes

– Capitalizes FCF after definite forecast period as a growing perpetuity;

– Estimate Terminal Value using Terminal Value Multiplier applied on last year cash flows

– Gordon Formula is often used to derive the Terminal CashFlows by applying the last year cash flows as a multiple of the growth rate and discounting factor

– Estimated Terminal Value is then discounted to present day at company’s cost of capital based on the discounting factor of last year projected cash flows

(1 + g)

(WACC – g)

IMPORTANT TIP- It is advised to do Sanity check by applying Relative Valuation Multiples to the Terminal Year Financials and also doing Scenario Analysis.

Terminal value calculation


Pre Money or Post Money: If the effect of the money coming in Company is

taken in Projections, the Expanded capital base should be considered or else the

Equity Value should be reduced by the inflow amount to reconcile with the existing

capital base.

Terminal growth rate: Since it is tough to estimate the perpetual growth rate of a

company, it is preferred to take the perpetuity growth rate factoring in long term

estimated GDP of the Country and Historical/Projection Inflation of the Country.

Projection Validation via-a-vis Industry: Need to have Sanity check of the

projections with the trend of the industry.

Beta of Unlisted Company: It is calculated on relative basis by adjusting the

average beta of its comparable companies for differences in Capital Structure of the

unlisted company with the listed peers.

Risk Free Rate: Yield of a Zero Coupon Bond or Long Term government Bond yield

should be taken as the risk free rate since it does not have any reinvestment risk .

Tricky issues in DFCF


Adjustment of Company Specific Risk Premium or Small Company Risk

Premium: Small Companies are generally more risky than big companies. CAPM

model does not take into consideration the size risk and specific company risk as

Beta measures only systematic risk and Market Risk Premium (generally

pertaining to Sensex Companies). These risks should also be taken into account

while computing the cost of equity.

Length of Projections: The Projected Cash Flows should factor in the entire

Business Cycle of a Company.

Notional/Actual Tax: Actual Tax Liability may be worked out and replaced for the

Notional Tax Liability

Investments: Investments should be valued separately based on their

Independent Cash Flows

Surplus Assets: The Value of Surplus Assets (not being utilized for Business

purposes) should be added separately and their cash flows should be ignored

while computing the Free Cash Flows.

Tricky issues in DFCF (Cont.)


22/11/2013

Registered ValuerCompanies Act, 2013


Registered Valuers

Registered Valuers

Financial Valuer Technical Valuer

• A Chartered Accountant,

Company Secretary or Cost

Accountant in whole time

practice or retired member

of Indian Corporate law

Service or any other person

as prescribed.

• A Merchant Banker

registered with SEBI and

which has in employment

under it CA/CS/CWA for

carrying out (signing)

Valuation by such qualified

persons.

• Member of the Institute

of Engineers or Member

of the Institute of

Architects in whole time

practice.

• A person or firm or LLP or

Merchant Banker

possessing both

qualifications may act in

dual capacity.

Shall have 5 Yearsof ContinuousExperience, PostQualification

Shall have 5Years ofContinuesExperience,PostQualification

Stock, Shares, Debentures, Securities, Goodwill

Property

Persons eligible to apply for being Registered as Valuer

RegisteredValuer to beappointed byAudit Committeeor in its absenceby the Board ofDirectors.22/11/2013

Registered Valuers

Registered Valuer

Further Issue of Shares

Compromise and

Arrangements

Winding up / Liquidation

Non Cash Transactions

with Directors

Exit to Minority

Shareholders

Corporate Debt

Restructuring

Registered Valuers (Financial Valuation)

Value

Responsibilities• Valuer to make impartial, true and fair

valuation• Not undertake valuation if directly or

indirectly interested• Exercise due diligence• Valuation to be done as per rules

Upon contravention• Fine – 25,000 to 100,000

With intention to defraud• Imprisonment upto 1 year and• Fine- 1,00,000 to 5,00,000

Additionally upon contravention, torefund remuneration received and alsoliable for damages.


Section wise Requirement of Registered ValuersSection 62(1)(c) – For Valuing further Issue of SharesSection 192(2) – For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors

Section 230(2)(c)(v) – For Valuing Shares, Property and Assets of the company under a Scheme ofCorporate Debt Restructuring

Section 230(3) and 232(2)(d) – For Valuation including Share swap ratio under a Scheme ofCompromise/Arrangement, a copy of Valuation Report by Expert, if any shall be accompanied

Section 232(3)(h) - Where under a Scheme of Compromise/Arrangement the transferor company is a listed

company and the transferee company is an unlisted company, for exit opportunity to the shareholders of

transferor company, valuation may be required to be made by the Tribunal

Section 236(2) – For Valuing Equity Shares held by Minority Shareholders

Section 260(2)(c) – For preparing Valuation report in respect of Shares and Assets to arrive at the ReservePrice or Lease rent or Share Exchange Ratio for Company Administrator

Section 281(1)(a) – For Valuing Assets for submission of report by Company LiquidatorSection 305(2)(d) – For report on the Assets of the company for preparation of declaration of solvency

under voluntary winding upSection 319(3)(b) – For Valuing the interest of any dissenting member of the transferor company who did

not vote in favour of the special resolution, as may be required by the Company Liquidator

Section 325(1)(b) – For valuation of annuities and future and contingent liabilities in winding up of

insolvent companyEOK Study Circle - ICAI22/11/2013

Registered Valuers (Draft Rules) – Methods of ValuationI. Before adopting methods, decide Valuation Approach-• Asset Approach

• Income Approach

• Market Approach

II. Valuer to consider following points while undertaking Valuation-

• Nature of the Business and the History of the Enterprise from its inception

• Economic outlook in general and outlook of the specific industry in particular

• Book Value of the stock and the Financial condition of the business

• Earning Capacity of the company

• Dividend-Paying Capacity of the company.

• Goodwill or other Intangible value

• Sales of the stock and the Size of the block of stock to be valued

• Market prices of stock of corporations engaged in the same or a similar line of business

• Contingent Liabilities or substantial legal issues, within India and Abroad, impacting business

• Nature of Instrument proposed to be issued, and nature of transaction contemplated by parties

Relates to IRS Revenue Ruling (1959-60),USA

Registered Valuers (Draft Rules) – Methods of ValuationIII. Registered Valuer shall make valuation of any asset in accordance with any one or more of the following methods-

a. Net Asset Value Method (NAV)

b. Market Price Method

c. Yield Method / PECV Method

d. Discounted Cash Flow Method (DCF)

e. Comparable Companies Multiples Method (CCM)

f. Comparable Transaction Multiples Method (CTM)

g. Price of Recent Investment Method (PORI)

h. Sum of the parts Valuation Method (SOTP)

i. Liquidation Value

j. Weighted Average Method

k. Any other method accepted or notified by RBI, SEBI or Income Tax Authorities

l. Any other method that valuer may deem fit provided adequate justification for use of suh method (and not

any of the above methods) is provided

IV. Registered Valuer shall make valuation of any asset as on the Valuation date and in accordance with applicable standards, if any stipulated for this purpose.

V. Contents of Valuation report shall contain information as contained in Form 17.3

Registered Valuers (Forms) – Contents of Valuation report

1) Description of valuation engagement

(a) Name of the client:

(b) Other intended users:

(c) Purpose for valuation:

(2) Description of business/ asset / liability being valued

(a) Nature of business or asset / liability

(b) Legal background

(c) Financial aspects

(d) Tax matters

(3) Description of the information underlying the valuation

(a) Analysis of past results

(b) Budgets, with underlying assumptions

(c) Availability and quality of underlying data

(d) Review of budgets for plausibility

(e) Statement of responsibility for information received

Registered Valuers (Forms) – Contents of Valuation report (4) Description of specific valuation of assets used in the business:

(a)Basis or bases of value

(b) Valuation Date

(c) Description of the procedures carried out

(d) Principles used in the valuation

(e) The valuation method used and reasoning

(f) Nature, scope and quality of underlying data and

(g) The extent of estimates and assumptions together with considerations underlying them

(5) Confirmation that the valuation has been undertaken in accordance with these Rules

(6) Further it is certified that valuation has been undertaken after taking into account relevantconditions/regulations/rules/notifications, if any, issued by the Central/State Government(s) from time to time.

(i) The valuation report must clearly state the significant assumptions upon which the value is based.When reporting there may be instances, where there are confidential figures, these must besummarized in a separate exhibit

(ii) In his valuation report, the registered valuer must set out a clear value or range of values along withthe reasoning

(ii) In case the valuer has been involved in valuing any part of the subject matter of valuation in thepast, the past valuation report(s) should be attached and referred to herein. In case a differentbasis has been adopted for valuation (than adopted in the past), the valuer should justify thereason for such differences

Some Specific Tricky Issues


Discounts

• Discount for Entity Level

Discounts & Premiums come into picture when there exist difference between the

subject being valued and the Methodologies applied. As this can translate control value

to non-control and vise versa , so these should be judiciously applied.

– Impact on entity as a whole

Key Person Discount Discount for Contingent Liability Discount for diversified company Discount for Holding Company

• Discount for Shareholders Level – Impact on specific ownership interest Discount Lack of Control (DLOC) Discount Lack of Marketability (DLOM)

• Size of distribution or dividends• Dispute• Revenue / Earning – Growth / Stability• Private Company

Tax Payout

• % stake & special rights

• Shareholders Agreement caveats

Global Studies over the years on diversified

companies and holding companies has shown

that companies trade at a discount in the range

of 20%. to 40% each.

DLOM: As per CCI Guidelines, 15%

discount has been prescribed; however

practically DLOM and DLOC depends upon

following factors:


Premium

•Control Premium - An investor seeking to acquire control of a company is typically

willing to pay more than the current market price of the

company. Control premium is an amount that a buyer is usually

willing to pay over the fair market value of a publicly traded

company to acquire controlling stake in a company

Research has shown that the control premium in

India has ranged from 20% to 37% in the past few

years.


Excess Cash and Non Operating Assets

Excess cash is defined as ‘total cash (in balance

sheet) – operating cash (i.e. minimum required cash)

to sustain operations (working capital) and manage

contingencies

Key Issue: Estimation of Excess Cash ?

Non operating Assets are the Surplus assets which are not used in operations of the business and does not

reflect its value in the operating earnings of the company. Therefore the fair market value of such Assets should be

separately added to the value derived through valuation methodologies to arrive at the value of the company.

One of the solutions is to estimate average

cash/sales or total balance sheet size of the

company’s relevant Industry and then estimate if

the company being valued has cash in excess of the

industry’s average.

What is an asset is not yielding adequate returns ?


Cross Holding and Investments

Holdings in other firms can be categorized into:

Types of Cross Holding Meaning

Minority, Passive Investments If the securities or assets owned in another firm represent less

than 20% of the overall ownership of that firm

Minority, Active Investments If the securities or assets owned in another firm represent

between 20% and 50% of the overall ownership of that firm

Majority, Active Investments If the securities or assets owned in another firm represent more

than 50% of the overall ownership of that firm

Investment Value

Ways to value Cross Holding and Investments:

Dividend Yield Capitalization or DCF based on expected dividends

Seperate Valuation (Preferred)

By way of Shareholders

Agreement even less %

holding may command

control valueEOK Study Circle - ICAI22/11/2013

Accounting Practices and Tax issues

Most of the information that is used in

valuation comes from financial statements.

which in turn are made on certain

Accounting practices considered

appropriate.

• Cash Accounting v/s Accrual Accounting

• Operating Lease v/s Financial Lease

• Capitalization of Expenses

• Notional Tax vs. Actual Tax

• Treatment of Intangible Assets

• Companies Paying MAT

• Treatment of Tax benefits and Losses


Valuation Methodologies and Value Impact

Major Valuation Methodologies Ideal for Result

Net Asset Value

Net Asset Value (Book Value) Minority ValueEquity Value

Net Asset Value (Fair Value) Control Value

Comparable Companies Multiples (CCM) Method

Price to Earning , Book Value MultipleMinority Value

Equity Value

EBIT , EBITDA Multiple Enterprise Value

Comparable Transaction Multiples (CTM) Method

Price to Earning , Book Value MultipleControl Value

Equity Value

EBIT , EBITDA Multiple Enterprise Value

Discounted Cash Flow (DCF)

Equity Control Value Equity Value

Firm Enterprise Value


Thank YouChander Sawhney, Vice President

Corporate Professionals Capital Pvt. Ltd.

SEBI registered merchant bankerEmail : [email protected]

Mobile: 9810557353; Direct: 40622252www.corporatevaluations.in;

D-28, South Extention, Part-I, New Delhi-110049

Disclaimer:This presentation contains information in summary form and is therefore intended for general guidance only. It is not intended to be asubstitute for detailed research or the exercise of professional judgment. Neither corporatevaluations.in nor any other member of theCorporate Professionals organization accept any responsibility for loss occasioned to any person acting or refraining from action as aresult of any material in this presentation. On any specific matter, reference should be made to the appropriate advisor.

© 2013, Corporate Professionals. All rights reserved


mailto:[email protected]

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