WHETHER VALUATION OF SHARES IS REQUIRED FOR A RIGHTS ISSUE?

 

WHETHER VALUATION OF SHARES IS REQUIRED FOR A RIGHTS ISSUE?

Whether valuation report is necessary for rights issue of share ( at premium) face value 100 and premium 260 so issue price at 360. As per income tax act, valuation report needed.

The existing shareholders have a right to participate in the rights issue partly or fully. In the event the shares are offered to persons other than the existing shareholders, there will be a cause for concern to the existing shareholders whether the shares are being allotted less than the market price of the shares and thus a valuation report is the only report which will protect the interest of the existing shareholders, like in the case of preferential issue under Section 62(1)(c) of the Companies Act, 2013, a valuation report is necessary. But for Rights Issue there is no requirement of a Valuation Report of Shares.

But for Rights Issue there is no requirement of a Valuation Report of Shares.

UNDER THE COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014H

The Companies (Share Capital and Debentures) Rules, 2014 which contains the procedure and conditions for issue of Rights issue did not prescribe any valuation of shares.

UNDER THE FOREIGN EXCHANGE MANAGEMENT ACT

Central Government vide notification dated 17th October, 2019 prescribed the Foreign Exchange Management (Non-debt instrument) Rules, 2019 (FEMA) that prescribe the provisions related to investment made by non-resident in India in the non-debt instrument. The non-debt instrument refers to equity shares issue. Hence , FEMA requires a valuation report in case shares are issued to non-residents .

RULE 21 OF FEMA

Under the Articles of Association of the Company Sub-rule 2 mentions that

ii)                          the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm's length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the SEBI or a Practicing Cost Accountant, in case of an unlisted Indian Company"

Hence, it can be said that in the event the shareholders entitled for rights issue as well as the renouncees are resident in India there is no requirement for valuation.

In view of the above FEMA rules, in the event the Indian shareholders renounce their rights to person resident outside India, then Valuation is required under FEMA Rules.

COMPANY’S ARTICLES OF ASSOCIATION

In the event, the Company's Articles of Association did not contain any provisions relating to valuation of shares in case the Company comes out with Rights Issue of Shares or for renouncement of rights shares then there is no requirement for valuation.

PREFERENTIAL ALLOTMENT

As against the Rights Issue, Valuation Report is mandatory for making preferential allotment under Section 62(1)(c) of the Companies Act, 2013. Further, as per Rule 13(2)(g) & Rule 13(3), the price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer. In case of preferential allotment as per Rule 12(7), it is mandatory to attach the valuation report with PAS-3 Form, which is filed with the Registrar of Companies.

CONCLUSION

Ordinarily, for a Rights Issue of shares a Valuation Report is not required. In the event, the Indian shareholders to whom the rights issue has been offered are renounced to persons resident outside India, then FEMA Rule will apply and as per FEMA Rule, a Valuation Report is required even for a rights issue.

In view of the above, there is no valuation of shares required for a company to issue rights issue of shares under the Companies Act, 2013.

Courtesy : Sri T V Ganesan / Taxmann