Valuation of start-ups while raising funds Companies Act, 2013
There is a saying that startup valuation is more of an art than science. It is extremely hard to determine the accurate value of a company while it is in its infancy stages as its success or failure remains uncertain.
Meaning and definition of Valuation
Valuation is just an estimation of the worth of something. Section 247 of The Companies Act, 2013 provides statutory backing to the Valuation. It is required that in respect of the valuation of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provisions of this Act, it should be valued by a person having such qualification and experience and registered as valuer in such manner, on such terms and conditions as prescribed under these rules.
Who can issue valuation report?
As per Rule 11 of The Companies (Registered Valuers and Valuation) Rules, 2017 only a Registered Valuer registered with IBBI (Insolvency and Bankruptcy Board of India) may render valuation services under the Companies Act w.e.f. 1st February 2019. The registered valuers are also required to obtain a valid certificate of practice as per the guidelines, if any, specified by their respective Registered Valuers Organisation before issuing Valuation Report.
How to appoint Registered Valuer?
As per the provisions of the section 247(1) of the Companies Act, 2013 Registered Valuers (RVs) must be appointed by the Board of Directors of that Company [Audit committee, if any]
Valuation Standards to be followed by Registered Valuer
The Registered Valuer shall make valuation as per certain standards which have to be mentioned in the Valuation Report -
Contents of Valuation Report
- Background information of asset being valued.
- Purpose of valuation and appointing authority.
- Identity of the valuer and other experts involved in the valuation.
- Disclosure of valuer interest or conflict, if any.
- Date of appointment, valuation date and date of report.
- Inspections and/or investigations undertaken.
- Nature and sources of the information used or relied upon.
- Procedures adopted in carrying out the valuation and valuation standards followed.
- Restrictions on use of the report, if any.
- Major factors that were taken into account during the valuation.
- Conclusion and Limitations and disclaimers, if any
Certain Important terms defined
Relevant date for valuation: The price of the securities should be arrived at as of a date which is at least 30 days prior to the scheduled date of the general meeting approving the issuance.
Valuation Date: The date on which the Registered Valuer values the company.
Valuation Report Date: The date of issue of report by Registered Valuer.
Date of appointment: The date on which Board of Directors appoints the Registered Valuer.
Every successful venture was once a startup. However, when investing in a startup, investors largely look at their own gains where valuation plays a major role.
Disclaimer:"The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation."
Radhika H S
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Ankit C Shetty